ShmoopTube

00:00

Principles of finance ah la shmoop operational metrical analysis You

00:10

skimmed through the revenue summary lines a few videos back

00:14

The focus now is on expenses They tell a story

00:17

and in some cases they helped define a company For

00:20

example the battery intellectual property behind blade runner was a

00:23

huge part of its story to the street The fact

00:26

that company made its own at scale better and cheaper

00:29

batteries than the competition Well that was a big part

00:32

of the reason it won the early battles of drone

00:35

wars in a galaxy new nearby So you go through

00:38

this thing line by line again with an expense focus

00:41

Well it's really Just a bunch of random observations here

00:43

The spreadsheets Almost all you know about the company at

00:46

this moment in time and a few powerful trends or

00:48

sticking out yet First the battery's charger systems are going

00:52

down in cost on pretty steadily for the first few

00:54

years here It looks like they've flattened out at thirty

00:57

bucks ish in the last three years Well why have

01:00

they flatten a thirty boxes at a scale issue Like

01:03

if they produce ten million batteries a year I'ii sold

01:06

them to everyone else all their competitors as well And

01:09

every other drone maker maybe even beyond drones with their

01:11

costs then go down to twenty bucks or fifteen or

01:15

have they hit their maximum cheapest price They can make

01:17

it scale here You know to ask that question to

01:20

company management if you're ever able to get a real

01:22

meeting Well the form factor plastics costs have continued to

01:25

decline steadily You wonder about the aftermarket market that is

01:29

Is there a business selling broken blade replacements at a

01:33

three bucks each They can't cost more than a nickel

01:35

each to make its scale And then there's Another weird

01:38

thing you wrestle with here The company really makes two

01:40

products This model breaks out the revenues separately but not

01:44

the costs Why is there maybe just one factory that

01:47

does everything now and then the parts get parcelled out

01:50

The more you think about it that's got to be

01:52

how it's done And it would explain the very high

01:54

depreciation and amortization cost being run through the income statement

01:58

you can't point to otherwise well they probably built a

02:00

big factory to do this when times were good And

02:02

now it's weld appreciation time The plastics thing is an

02:05

interesting nugget here and that the unit costs went from

02:09

fifty two bucks plus danto about forty bucks a year

02:11

in five years That's Twelve dollars more of margin per

02:15

unit for a pretty small element here You wonder how

02:18

much cheaper the plastics part could even get Then there's

02:20

the camera costs Yeah These have clearly followed the computer

02:23

technology cost curve with massive declines in costs Going from

02:27

about sixty bucks a unit in two thousand eighteen Toe

02:30

thirty eight bucks just five years later Well you wonder

02:32

if the trend will continue And you remember your grandfather's

02:35

speech about the four hundred ninety nine dollars he look

02:37

packard calculated that today is a one dollars throw in

02:40

at the airport checkout stand It literally cost less than

02:43

the big twix bar packet next to it Well video

02:46

cameras go the same route You wonder Well the guidance

02:49

system numbers must be lie things that is the cost

02:52

Go from one hundred nine dollars teo Ninety two dollars

02:55

each Nice steady but slow unit cost declines But you

02:59

know that the complexity of guidance systems grew geometrically with

03:03

massive government regulation all around the world Everything today Has

03:06

to be licensed and is carefully regulated in the owners

03:09

in order to get to fly The drones have toe

03:11

personally authenticated identify themselves biometrically on the machines or they

03:15

won't fly but the circuit isn't completed with the faa

03:18

and the thumbprints and eyeball retina and all that stuff

03:21

don't match Well then that day is a no fly

03:24

day You know to yourself that this technology and all

03:26

the loitering behind it couldn't have been chief so the

03:29

fact that the costs went down at all is actually

03:32

surprising to the upside You're guessing that the cost of

03:35

the hardware and software licenses cratered while other costs like

03:38

adding in biometrics made the declines much slower If that's

03:42

the case well then in the next few years from

03:44

here cost should come down fast on the new guidance

03:47

system with no more upgrades needed Okay so now you

03:50

move down past the per unit expenses lines there into

03:53

the overall and a bunch of rough numbers map into

03:56

your head to the four hundred twenty five million ish

03:59

revenue figure you're averaging out from the recent last few

04:02

years of operations Well the quick summary who cares About

04:05

batteries form factors cameras in packaging shipping all of them

04:09

together are barely over ten million dollars in expenses overall

04:13

even if you could reduce them a whopping forty percent

04:16

Well they don't really move the bottom or top line

04:18

much though this just simplified a whole lot of your

04:21

early due diligence on the company You can pretty much

04:24

ignore these line items for your initial walk through especially

04:27

with management guidance systems Yeah they matter more but interesting

04:31

The overall cost there is flat You're guessing that the

04:34

company had a migration away from the bigger more expensive

04:36

drones but the smaller ones in the later years and

04:39

the guidance system basically was the same Whether the drone

04:42

itself was big or small with a big cost here

04:44

Yeah labor it's magically flat at this weird eighty nine

04:48

million dollars ish number It's amazing how they came out

04:52

to the exact same amount of labour costs year after

04:56

year to the dollar even go figure Same deal with

04:59

packaging and shipping What are the odds anyway Labor is

05:03

a biggie here You wonder why it didn't scale meaning

05:05

get cheaper with volume in time and size that is

05:08

you think that a robot e company would take advantage

05:11

of robots in assembling these things Why wouldn't the assembly

05:15

labor costs go down and you think about it qualitatively

05:18

in that labour is about a fourth or fifth of

05:20

the total expenses behind these drones that seems really high

05:24

in the scheme of things you wonder if there's some

05:26

wizard like value add you could bring in here knew

05:29

a stem the cost of labor and you're wondering about

05:32

unions and you've got to ask about those contracts and

05:34

what's going on there The whole notion of value add

05:37

here for you coming into this company is a big

05:39

with any of the really expensive private money management firms

05:43

The cell to the investors putting money into the private

05:46

equity funds is that management are knuckleheads and that the

05:49

real genius kids from stanford's engineering and computer science departments

05:54

will know better how to make the rubber hits the

05:56

road or the blades that the oxygen molecules as it

05:59

were Yeah it works Lots of two percent fees get

06:02

paid on the backs of stanford phds Anyway if you

06:05

look at the total expenses line it hovers like a

06:08

drone strikingly flat in the mid to high one seventy

06:11

zone even though pretty volatile revenue moves here here is

06:14

there just a basic fixed recurring cost to this company

06:18

that their wedded to in the kink it away from

06:20

like a minimum amount of inventory that just has to

06:22

be ordered for the trains to keep on training Ordinarily

06:27

it wouldn't make any sense in a company like this

06:29

there are in fact marginal expenses to building this product

06:33

The opposite would be like a cloud management company who

06:36

has almost no marginal expense other than electricity to run

06:39

it's you know huge clouds of servers We'll gross margin

06:42

here at the drone company moved all over the place

06:44

very much a tail wagged by the revenue dog from

06:47

forty eight percent in two thousand eighteen almost sixty percent

06:50

in the later years when the company really started to

06:52

struggle Well then something seems really off If things were

06:56

going badly wouldn't you expect gross margin to decline Why

07:00

would it go up Makes no sense All right well

07:02

maybe things will start to click more here after her

07:05

fourteenth cup coffee you

Full Transcript