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Operating Margins

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Re: Operating Margins

#61

Post by corry »

Every other type of business I come across or analyze makes me think "Man, there really is nothing as good as SaaS" and I thank my lucky stars I was here for it.

High 80%+ gross margins; high retention/recurring revenues (if you're doing it right); easily metric'd (CAC, LTV, conv%, etc); capital specialized for deploying into it (most VC of the last decade); alignment with clients w.r.t. value/impact (or they don't renew); straightforward lining up of 'value to customer' and pricing; common benchmarks and shorthands for valuation multiples; etc.

Simple business to understand / run / grow, assuming you have a good product in a good market.

It really is quite the business model.

Re: Operating Margins

#62

Post by Vaslo »

cmiles8 wrote: post #23

“Your margin is my opportunity” Absent a true monopoly or government protection high margin businesses are usually those most ripe for disruption. Someone eventually comes along and, for various reasons, is willing to make far lower margin and then the battle begins. Lots of sleepy high margin businesses out there just waiting to get picked off by a new entrant.

Not when you have a huge lead over your competitors and it’s almost impossible for a new entrant to catch up without excessive funding. Even with that, if you have products that need lots of approval with long duration tests (this materials leeching into food and water over a long time), it can be years before even good products will replace you.

Re: Operating Margins

#63

Post by jimnotgym »

I really hate the terminology of the first sentence

> Divide a company's income by its revenue

How about dividing a companies operating profit by its revenue? Income is a vague term and is just as often equated with revenue... which makes the opening sentence a bit weird.

Going further, most people talking about different sectors having different margins are talking about the gross profit margin. In a retailer gross profit could be the sales minus the cost of the things that got sold and probably the cost of the people in the stores. In a service business it is normally the sales minus the cost of people doing the work that was sold. At a hosting company it could be the sales- minus the electricity, Internet, engineers.

The important distinction is that gp does not normally include 'head office costs', accountants and other parasites, so it is easier to compare the different segments from the amount they are going to contribute towards your fixed costs.

Re: Operating Margins

#64

Post by Sevii »

scott_w wrote: post #59
cmiles8 wrote: post #23

“Your margin is my opportunity” Absent a true monopoly or government protection high margin businesses are usually those most ripe for disruption. Someone eventually comes along and, for various reasons, is willing to make far lower margin and then the battle begins. Lots of sleepy high margin businesses out there just waiting to get picked off by a new entrant.

In theory but not in practice. Apple has massive margins but they're not being disrupted by a slightly cheaper iPhone. In fact, plenty of big tech companies sit in this bucket (thus the reason they've sat on massive cash piles for so long!)

A slightly cheaper iPhone is already in the market (android). In theory Apple shouldn't be able to maintain these high margins.

Re: Operating Margins

#65

Post by coatmatter »

baxtr wrote: post #47
cs702 wrote: post #44

This ignores the capital intensity of different businesses, and the rate of return on that invested capital , which is tied up in the business.[a] -- [a] Warren Buffett has written and spoken extensively about return on invested capital for more than six decades.

Do you mind sharing a link of your linking for (a)? Thank you

https://www.berkshirehathaway.com/letters/letters.html

Re: Operating Margins

#66

Post by jimnotgym »

PopAlongKid wrote: post #43
jddj wrote: post #40

Earlier quoted context omitted.

It skews the other way just as often in my experience. That large clump at 10% has some wildly profitable businesses in it.

The comment you are responding to was "profitable but no cash flow" (due to non-cash deductions). I'm not clear what you mean by "the other way".

If you were "profitable but no cash flow" then you must have non-cash additions to your profit, not deductions.

A classic example of 'profit but no cashflow' might be where you made a profit but spent a lot of money on stock that you haven't sold yet. Or you made a lot of sales that you are yet to be paid for.

In the PE world it is just as likely that you made a profit before interest and tax, but you paid it all in interest. You would then have an operating profit but no cashflow due to a cash item. It could still make it a good business to own, if you didn't need the debt, or wanted to have the interest paid to you.

Maybe you made a profit but paid it all in dividends to a holding company. Then you have a profit but no cash flow due to cash items that don't affect the p&l.

Re: Operating Margins

#67

Post by alexpotato »

k3liutZu wrote: post #53
alexpotato wrote: post #28

This article is very timely as I was just thinking about margins given that I run a couple small websites that use Amazon Affiliate marketing. The margin on most items is 4% (some lower, some higher e.g. luxury items are 10%). 4% is not terrible in and of itself. But then you factor in: - advertising costs - conversion rates on clicks from the above - taxes and you get a real appreciation for how hard it must be to r…

Shouldn't you include the ad costs in your margin calculation?

Yeah, the 4% is really Gross Margin (although COGS here is effectively zero).

Re: Operating Margins

#68

Post by fi-le »

akshayrajp wrote: post #45

Can I just say that your blog's design is so beautiful and readable? Do you mind sharing how you built it?

Thank you! As the other commenters already figured out, I manually write HTML and use tufte.css with some minor customizations.

Re: Operating Margins

#69

Post by jimnotgym »

baxtr wrote: post #47
cs702 wrote: post #44

This ignores the capital intensity of different businesses, and the rate of return on that invested capital , which is tied up in the business.[a] -- [a] Warren Buffett has written and spoken extensively about return on invested capital for more than six decades.

Do you mind sharing a link of your linking for (a)? Thank you

I'll summarise the thinking for you. If you got $1m in profit that sounds great. But if you had to invest $1bn to get it, that sounds less good, because you could have made more by putting the money in the bank at a much lower risk.

Profit only makes sense when considered against the amount of capital required.

Re: Operating Margins

#70

Post by jimnotgym »

kqr wrote: post #9

> Divide a company's income by its revenue If I'm a person who believes income is the same thing as revenue, how would you explain this division to me in a way I'd understand? Or does "income" in this case mean "profit"?

Despite my career in accountancy,including at global companies, and despite the definitions in all the comments below that disagree with you, I have never heard anyone in the real world describe Operating Profit as income. I have heard small business owners describe revenue as income. I agree with you, income was a terrible choice of word for this article.
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