surprised no one knew – where are those sell siders at?? I asked these questions 2 weeks ago, and still wondering (talked to some in the business today and I did not receive satisfactory responses…) 1) what is the best way to model stock based comp? 2) what is the best way to model deferred revenues? 3) what is the best way to model cap ex in a services/subscription driven company? I will post what I did after some replies, if any, manifest.
I appreciate any help, guys – I did not mean for the post to sound condescending…I am just trying to learn like everybody else… I basically did % of sales for 2 and 3 and for kept stock based comp constant/straight lined (but I know that is wrong) - what am I missing???
i’ll take a stab - i’m on sell side but models are generally not that detailed… 1. flow the expense through the P&L and increase your options on issue in the shareholder equity page (if its that detailed). make an adjustment for the non-cash nature of this expense in the cashflow statement. if you are making an assumption of exercise, then flow the exercise cash into the cashflow statement as well 2. deferred revenue you could have it as % of sales which will then impact your accounts receiveables. so changes in deferred revenue % will be captured in your chang in working cap in cashflow 3. 100% of D&A could be another way to look at it. % of sales is fine too. it all depends on how detailed and how much info you have. remember garbage in-garbage out. all i reckon that is important is a sense check…
myzegna Wrote: ------------------------------------------------------- > i’ll take a stab - i’m on sell side but models are > generally not that detailed… > > 1. flow the expense through the P&L OK, but how do I know what the expense will be??? > > 2. deferred revenue you could have it as % of > sales which will then impact your accounts > receiveables. so changes in deferred revenue % > will be captured in your chang in working cap in > cashflow doesnt deferred revenue mean lower A/R and more cash NOW? wha i did was took % of sales and then in the direct CF stmtm I built I said cash collected = net sales - increase in receivable + increase in deferred revs… > > 3. 100% of D&A could be another way to look at > it. % of sales is fine too. it all depends on how > detailed and how much info you have. > > yeah, i took % of sales, but some guy who runs m/a at a fortune 100 said i should be more creative with cap ex modeling. hmmmm anyways, thanks for your input!!!
- well you wouldn’t know unless you have more information. unless u are just willing to make a straight line assumption as a % of sales or if u want to be really detailed u can model compensation based on achieving certain KPIs (but who the hell does that i don’t know) 2. sorry i intepreted deferred revenue wrongly - thought that what you mean was people paying more slowly (hence AR up). if it is revenue received in advance, that’s a liability. i always start at the ebitda line in my cf statement hence i would built in a line called changes in defered revenue which is modelled just like wc. 3. yeah you can get creative all you want but i mean what can you do? it’s based on information that you have. like if you were a grain tolling company or something you could presumably built in expansion capex if you know the cost per tonne for new capacity. but i would find it difficult to say esimate true capex for a service business. i don’t even think it will affect your returns unless you have some really big piece of capex that is forecast to hit - but then the company should disclose that. i believe that in modelling its impt to get the big picture right and make sure everything is sensed checked. the extra value you get from the granularity i feel is not really worth its time from a time-beneift perspective.
myzegna Wrote: ------------------------------------------------------- > 1. well you wouldn’t know unless you have more > information. unless u are just willing to make a > straight line assumption as a % of sales or if u > want to be really detailed u can model > compensation based on achieving certain KPIs (but > who the hell does that i don’t know) let me add that i appreciate you replying to my post. first off, so thanks.% of sales is exactly what I got crap for doing. Is this what you guys do? you said you are on the sell side right? > > 2. sorry i intepreted deferred revenue wrongly - > thought that what you mean was people paying more > slowly (hence AR up). if it is revenue received in > advance, that’s a liability. i always start at the > ebitda line in my cf statement hence i would built > in a line called changes in defered revenue which > is modelled just like wc. > agree…I did that. thanks… > 3. yeah you can get creative all you want but i > mean what can you do? it’s based on information > that you have. like if you were a grain tolling > company or something you could presumably built in > expansion capex if you know the cost per tonne for > new capacity. but i would find it difficult to say > esimate true capex for a service business. i don’t > even think it will affect your returns unless you > have some really big piece of capex that is > forecast to hit - but then the company should > disclose that. > > i believe that in modelling its impt to get the > big picture right and make sure everything is > sensed checked. the extra value you get from the > granularity i feel is not really worth its time > from a time-beneift perspective. okau, thanks. I will leave my model as is and go with % of sales. i agree that in some industries, you have the metrics, like restaurants and that grain exmaple you gave, I was lost on what to do with a svcs company
I agree with myzegna. Treat deferred revenues (as well as other WC accounts) as a % of sales or COGS. Finally, capex is usually modeled as a percent of sales – it’s the best sanity check assuming you know nothing else about the company, as the argument is that a company has a finite ability to expand its sales unless it invests in necessary capital equipment. The whole point of your model is to show that you have some reasonable basis for opinion; its purpose is to provide some fundamental representation for your returns. It’s as much of an art as it is a science, and an exact one at that. For example, there’s nothing wrong with forecasting stock-based compensation as a percentage of its respective P&L item where it is attributable, or holding it essentially flat from quarter to quarter (provided that the company’s trends dictate this). If someone is giving you “crap” for doing this, they don’t understand the point of a model and probably shouldn’t be telling you what to do anyway.
numi Wrote: ------------------------------------------------------- > I agree with myzegna. Treat deferred revenues (as > well as other WC accounts) as a % of sales or > COGS. Finally, capex is usually modeled as a > percent of sales – it’s the best sanity check > assuming you know nothing else about the company, > as the argument is that a company has a finite > ability to expand its sales unless it invests in > necessary capital equipment. agree, I did cap ex as % of sales in b school b/c in b school you can get away with it. but now that i am back in real world, hedge fund mamangers are picking apart my models. one said: cap ex DRIVES sales, so you need to do something other than % of sales. and he said nada mas. guy was gone like kaizer sose. > > The whole point of your model is to show that you > have some reasonable basis for opinion; its > purpose is to provide some fundamental > representation for your returns. It’s as much of > an art as it is a science, and an exact one at > that. For example, there’s nothing wrong with > forecasting stock-based compensation as a > percentage of its respective P&L item where it is > attributable, or holding it essentially flat from > quarter to quarter (provided that the company’s > trends dictate this). If someone is giving you > “crap” for doing this, they don’t understand the > point of a model and probably shouldn’t be telling > you what to do anyway. ouch. my feedback comes from an analyst at a 4B fund. the other feedback came from a guy who runs m/a at a fortune 100. I appreciate your help numi. I know you are on the sell side. i just wanted to get some color from as much people as possible.
No problem. For clarification, I used to be on the sell-side (was there for three years) but am now doing private equity/leveraged buyouts. Still, I think the modeling methodology is pretty similar.
i reckon how i would look at it is to distinguish the maintenance an growth capex. matintenance capex = 100% of d&a just to make sure you maintain your capital stock (alright I know that book depn and real useful life is different - but its a reasoanble assmption). growth capex could drive sales that is true. i guess you could buid in a return on capex (an EBITDA metric) and assume an EBITDA margin to derive your revenue figures. but then again it is all dependent on the scalability factor - like are we constrained by capacity? sure for manufacturing you are constrainted by plant size. but for companies that are operating at quite low capacity or services business, revenue growth is not really driven off capex.
daj224 Wrote: ------------------------------------------------------- > agree, I did cap ex as % of sales in b school b/c > in b school you can get away with it. but now that > i am back in real world, hedge fund mamangers are > picking apart my models. one said: cap ex DRIVES > sales, so you need to do something other than % of > sales. and he said nada mas. guy was gone like > kaizer sose. > > I don’t necessarily agree with what that guy said. While it’s true that capex drives sales, the decision process that management teams go through is often over how much capex is needed to drive sales, as opposed to how much sales can be driven for a certain level of capex. Phrased differently, it’s much more likely that managements will ask themselves, “So, given our sales target of $XX, how much capex is going to be needed in order to drive this top-line growth?” as opposed to “So, let’s buy $YY amount of capital equipment this year…how much sales might come out of that?” It helps to understand how company executives actually think about businesses, which is something I’ve fortunately gotten some exposure to through my interactions with the managements that help run the companies that my firm controls. And as myzegna mentioned, oftentimes the component of capex that drives sales is separated as “growth capex” as opposed to “maintenance capex.” The split between the two ultimately depends on how much operating leverage the particular company has. Frankly, at the end of the day, the chain of causation as far as whether sales drives capex or its converse is not all that relevant for modeling purposes. However, firms always set sales goals or revenue guidance (and less often capex guidance), which is why sales is a much more important determinant than capex at least from the perspective of developing a company’s business plan.
> > It helps to understand how company executives > actually think about businesses, which is > something I’ve fortunately gotten some exposure to > through my interactions with the managements that > help run the companies that my firm controls. And > as myzegna mentioned, oftentimes the component of > capex that drives sales is separated as “growth > capex” as opposed to “maintenance capex.” The > split between the two ultimately depends on how > much operating leverage the particular company > has. > > Frankly, at the end of the day, the chain of > causation as far as whether sales drives capex or > its converse is not all that relevant for modeling > purposes. However, firms always set sales goals or > revenue guidance (and less often capex guidance), > which is why sales is a much more important > determinant than capex at least from the > perspective of developing a company’s business > plan. thanks again. good stuff.
you’re welcome…overall i think you have the right intuition about modeling and it seems like your modeling skills are pretty good. it’s also good that you think critically about these things, as opposed to just taking what someone else says at “face value.” of course, i’m not trying to discredit what your peers in fortune 100 m&a or at some hedge fund are saying – obviously there are different approaches and perspectives on modeling and they’ve been around the street a lot longer than i have. but at the end of the day, my belief is that if your methodology is explainable and has some reasonable basis for use, then it’s as good as anything else.
numi Wrote: ------------------------------------------------------- > you’re welcome…overall i think you have the > right intuition about modeling and it seems like > your modeling skills are pretty good. it’s also > good that you think critically about these things, > . but at the end of the day, my belief > is that if your methodology is explainable and has > some reasonable basis for use, then it’s as good > as anything else. thanks. if you ever want to meet in NY, I am there from time to time. ultimately, i will end up in Boston or NY fill time career wise, right now i am just milking all the leads I got.