The consensus reaction to my last post was that Longtop does not actually provide a cloud based storage service at the petabyte level despite the plain reading of the press release. Readers have argued that what Longtop is saying is that it helps customers (who are largely financial institutions) set up this storage on their own premises using cloud technology. Longtop is thus a system integrator for the bank and probably installs third party equipment for the bank.
Moreover the consensus was that no financial institution customer has a petabyte of data they need full access to. One reader cited this fact: that in 2008 Yahoo claimed the world's largest and most active database at 2 petabyte. This article aslo suggests that the IRS data-mining database is a svelte 0.15 petabyte.
A petabyte of data is possible with extensive video and photo storage (people cited cameras) but whilst banks have some security cameras (eg on ATMs) they generally do not require this data to be stored huge lengths of time or be super-accessible.
Obviously the really big databases (eg Facebook with all those photos) are substantially larger than any needed by a bank or the IRS – but the “petabyte” claim was almost certainly marketing puff.
Marketing puff is not that uncommon in tech-stock land. The geeks even have a word for it: vaporware. Typically however vaporware refers to software that is announced without a release date: in this case it was a vapor-launch (the announcement I quoted was an “official launch”).
But puffery is puffery and does not challenge the fundamental veracity of the accounts. And indeed I have not challenged them (unlike Citron). Instead I just look at wonder at how a business can be that capital efficient.
So how exactly does Longtop use its capital?
How Longtop uses its capital is an important question because Longtop raised 127 million in late 2009 and – according to their accounts – they had no use for the cash. Maybe they planned a big acquisition but they never did one large enough to make a serious dent in their cash hoard.
Longtop currently carries – relative to its expense base which is the right way to measure it – six times as much cash as Microsoft. I went through the numbers in my first post. Longtop is a cash generation machine.
But not only is Longtop a cash generation machine it does not seem to need capital to grow. Its incremental capital efficiency is breathtaking and becoming increasingly so.
Longtop incremental capital efficiency
In the 20F (annual filing) covering March 2009 to March 2010 the company grew nicely. Revenue rose from 106.3 million to 169.1 million – a China-like 59 percent per annum. There had been an acquisition in the year ended March 2009 so the organic growth rate was somewhat smaller but still very large.
Here is the the fixed asset summary from the 20F for the year ended March 2010.
|Fixed assets, net (numbers in USD thousands)|
Equipment and fixtures
Buildings and renovations
Construction in progress
Fixed assets, net
|Equipment held under capital leases had a net book value of $1,292 and $732 at March 31, 2009 and 2010, respectively.|
|Construction in progress at March 31, 2009 consisted of an office building and renovations which were under construction and not ready for use.|
|Total depreciation expense recognized in the years ended March 31, 2008, 2009 and 2010 was $1,780, $2,808 and $3,193, respectively.|
Note that equipment and fixtures rose from $9.65 million to $13.02 million - an increase of 3.37 million. In that time the staff numbers went from 2602 to 4258 - an increase of 1656 employees (63 percent growth).
I want to observe something: the equipment and fixtures - before depreciation - rose by only two thousand dollars per employee.
Lets spell this out: this is a world beating software development firm with world-class economics and enormously fat margins. By its own admission it is critically dependent on the research and development done by its staff. And the incremental capital spend per new staff member would buy good desktop computer and a cheap desk and chair. Given things like power protection, backup servers etc are included in this additional fittings and equipment ($2000 per incremental employee) we can safely conclude that the new employees are treated skint. Very skint.
Whatever, there are no in-house restaurants, basketball courts, table-tennis tables and other splurges on new staff. This is not Silicon Valley. There are probably not even incremental sophisticated computers for them to test their programs on. (And they are writing software for complex environments and things need to be tested...)
I always thought it was hyperbole when Warren Buffett praised Jack Ringwalt for being late to a meeting because he was driving around trying to find a parking meter with unexpired time. But these guys make Ringwalt look like a spendthrift drunk.
This reluctance to spend is - well - amazing. Especially as there is no shortage of cash.
The tight rein on capital expenditure is even more amazing this year
From the most recent 6K revenue is up more than 40 percent since last year. Indeed the revenue rise for the first nine months is about the same as the revenue rise for the whole previous year. They have not told us how many more staff they have employed but unless the staff have become massively more productive they have probably added a further 1600 or more staff. (That rise would also be consistent with their rising cost base.)
But the total fixed assets (including vehicles, buildings, leasehold improvements etc) have risen from 26.3 million dollars to 27.9 million dollars. If we guess 1600 staff as above (and that is just a guess) then the rise is only a thousand dollars per staff member. Whatever - we are now talking cheap computers and no vehicles, fittings, fixtures or anything else much.
Even if there were no new staff it would be pretty amazing to grow fixed assets by only 1.6 million dollars whilst growing fat-margin revenue by about 70 million per annum. I have never known any business to have that sort of capital efficiency.
What is going on with capital management at Longtop?
The capital management here is just strange. The company raises money when it doesn't need it. It sits on cash equivalent to six years of operating expenses (which is about 6 times more than Microsoft). It has a world-beating software business which they are justifiably growing as fast as they possibly can. They state repeatedly that they are dependent on the skills and product development of their staff.
And despite this they don't seem to spend anything on fixed assets to make the staff more efficient or more happy.
I guess Chinese workers just put up with it. Chinese software workers make do working on outdated equipment. And as for the basketball courts and in-house restaurants of Mountain View California. Well - you ain't seeing them here.
I don't get this. Obviously I don't understand China. A riddle wrapped in a mystery inside an enigma you might say - but that was said about a previous superpower.
I just report it. Can't say I understand it.