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Comment by neom | Hacker News Reader

"•Grew net revenue from $126.0 million in 2018 to $219.3 million in 2020, representing a compound annual growth rate, or CAGR, of 31.9%;

•Grew our digital revenue from $113.2 million in 2018 to $194.6 million in 2020, representing a CAGR of 31.1%;

•Grew our store footprint from three in 2018 to 22 in 2020;

•Grew our U.S. and international revenue by $52.5 million and $40.7 million, respectively, from 2018 to 2020, representing a CAGR of 20.8% and 112.4%, respectively;

•Increased gross margin by 454 basis points from 46.9% in 2018 to 51.4% in 2020;

•Generated net losses of $14.5 million and $25.9 million in 2019 and 2020, respectively; and

•Generated adjusted EBITDA of $(1.3) million and $(15.4) million in 2019 and 2020, respectively."

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EBITDA in a non-comparison context is meaningless. EBITDA is only useful when you're comparing ownership of two like businesses.

What is interest, if not an expense? What is tax, if not an expense? What is depreciation if not an expense? Alright, amortization, yeah, that one could get added back in – I buy that.

Whenever someone starts talking about EBITDA, check your wallet.

Why can't the comparison context be from one year to the next year?

Because your choice isn't "invest or not" but invest relative to other potential investments in the marketplace.

The parent comment is right. EBITDA is used for both industry comparison as well as YoY trends. For YoY it's used to try to eliminate "noise".

YoY trends don't matter in isolation as you're trying to decide to make an investment.

> YoY trends don't matter in isolation as you're trying to decide to make an investment.

What.

You 100% can make investing decisions in isolation. I don't think this is what you meant you say, because this makes absolutely no sense at all. If someone comes to me and says "if you give me a dollar today, I'll give you $10 tomorrow" I really don't need to consider anything else. Sure, someone else might say "I'll give you $11 instead", but if the deal is there and I can analyze that the risk of default is minimal, then I can absolutely make that decision in isolation.

We must be talking past each other. I have no idea what you're talking about. What do you mean by you can make a decision in isolation? How would you know that giving someone a dollar for 10 dollars tomorrow is a good investment unless you have other investments or investment opportunities to compare it to?

And even so, how would you construct a life such that you were naive to all investment opportunities until this single one arises? It doesn't make sense.

> I have no idea what you're talking about.

Clearly.

I said: - EBITDA is used for both comparison and YoY trends

You replied: - YoY trends don't matter in isolation

All of my clients (PEGs) used EBITDA both as a tool to normalize YoY trends and to do like for like comparisons of comparable assets. Ultimately this is to evaluate whether they want to make an investment or not.

Since you cared to provide some contradictory clarification to my comment, I can only assume you were disagreeing that EBITDA can only be used for comparative measures, which is 100% not true as per practice. Hence my example was that in theory you could make an investment decision in isolation (as naive as that might be).

I think the person in the OP edited their post. They no longer mention YoY changes which is what the comment I replied to was asking about and I responded to.

All I was saying is that you have to have context and something to compare the YoY to and you can't simply look at a YoY growth rate. It's literally meaningless to do so without comparables. It's like saying the velocity of something is 50, ok who cares unless you can tell me how it relates to some other thing. If a company grows 100% YoY I don't care without information relating it to other investment options. 100% could very well be really bad unless I know what is normal, below average, above average, etc.

So idk what's really going on here anymore. I think something has become confused that's causing this conversation to go in useless circles.

Isn't EBITDA the number of greater interest to institutional investors such as Private Equity funds?

Interest could be irrationally expensive for a business, taxes could be higher than they should be if the entity is not setup correctly, Amortization represents assets which could be sold off.

These are all things that PE firms can fix/work on to one extent or another with financial engineering. They can't really grow cash flow.

PE usually look to load up the company they acquire with debt to cover their purchase price. EBITDA gives them a good idea of how much debt the company can service via cashflow.

The point of these things is that there are strict rules on what counts and what doesn’t do it’s a measurement that has some common degree of understanding. It’s far from perfect, but absent these things companies have a habit of making up BS metrics to make the company look healthy (remember “Community Adjusted EBITDA”) when the standard metrics would call the company’s financial health into question.

These metrics companies like to put out there, not surprisingly, tend to be something along the lines of “look at all the profit we’re making if you for a moment ignore all the reasons why our business model is not profitable.”

1) It's adjusted EBITDA which makes it even more meaningless.

> What is interest, if not an expense? What is tax, if not an expense? What is depreciation if not an expense? Alright, amortization, yeah, that one could get added back in – I buy that.

2) There is a specific reason these get taken out, because they generally represent values that the company either has little control over (taxes) or represent episodic expenditures (capital purchases, or debt raises) that have meaningful life greater than 1 year. D/A are essentially synonymous. So, no, D/A are not expenses, because they are simply representations of capital expenditures shown as expenses (the distinction is important) throughout the useful life the asset (intangible or tangible).

Easy way to illustrate this is an airline who buys an airplane in year 1 and then uses that plane for 30 years. If EBITDA wasn't useful, then calculating their earnings over a period time won't tell you anything about trends of the business health.

The devil is in the details. EBITDA is not all that bad, it's just not a "one figure to rule them all", especially since most firms create an "Adjusted" version of it to fit some narrative (and they always do).

To your point. The cashflow statement is much more important IMHO.

The reason EBITDA became popular is because private equity firms had low cost of borrowing (e.g., they would manipulate I expense) and were good at financial engineering such that tax rates could easily become 0 in the short term. D and A are excluded because they’re not cash.

Then, people just sort of adopted EBITDA as shorthand for “FCF from operations” and then companies like Allbirds took advantage of that to do whatever they want with it.

> Then, people just sort of adopted EBITDA as shorthand for “FCF from operations”

Very true.

> then companies like Allbirds took advantage of that to do whatever they want with it.

Here's an insider secret - everyone manipulates Adj. EBITDA (not just "Allbirds like companies"). It's part of the game of business sellers, which is why buy-side auditing is so important to get right. This is more or less why public security analysts exist - to keep pressure on proper reporting from the company. If WeWork actually went public every analyst worth a salt would basically throw out their "Community Adjusted EBITDA" and the term would be rendered meaningless.

EBITDA is a useful measure for understanding how much cash a business generates if you were to strip it down. E.g. EV/ebitda is the most widely multiple for buyouts and most accurately takes into account operating leverage. It’s less useful for a business like this, but saying “ebitda is a scam” is illiterate.

EBITDA is a good measure of the upper bound of the earning potential of the current business.

And you're also right in that it's useful for comparing with similar companies. It's greatest value is in the variety of ratios that it slots into.

If 2 similar companies have very different EBITDA/Revenue ratios, e.g., that would indicate that the company with the lower EBITDA/rev ratio is probably less efficiently run.

Not mentioned: $140mn in Sales and Marketing to generate $110mn in Gross Profit.

Is that unusual?

Maybe not unusual for a young, growing company, but its obviously not sustainable for each dollar in profit to cost more than a dollar in sales/marketing effort. Thats a negative ROI.

You're confusing profit and revenue

Gross profit = the profit from a specific business activity, in this case, sales, when looking solely at sales revenue less the specific costs of generating that revenue (aka COGS).

Net profit = the profit from the overall business, taking into account all sources of income and all expenses.

Sales and marketing are usually not treated as part of COGS, because they are not a necessary expense (in this context, COGS would include things like materials and production costs).

Many investors think in gross profit terms rather than revenue terms, because gross profit is the actual “cash in” from a given sale.

That had become less common because software has famously high gross margins that aren’t necessarily linearly tied to revenue, but allbirds are shoes.

When you’re growing that gross profit by 10% and you’re not locking customers into long term revenue agreements?

No comment on usual or not. Definitely not “good”.

Are they paying people $14 to then in turn purchase an $11 shoe? Why can't I just keep the $14?

They're paying 14 to get people to purchase a 25 dollar shoe. Profit is after Cost of revenue.

More accurately, they’re paying people $14 to buy a $20 shoe that cost $9 to make. And they’re not just “keeping the money” because they’re hoping to be valued on a revenue multiple.

How, as a consumer goods manufacturer, do you continue to lose money? My background is in a different manufacturing sector, beer, but even as a journeyman brewer I was doing COGS analyses and knew exactly how much each bottle/keg cost us for each brew so that we could be profitable.

Because it's not their money.

It's a VC money, and the VCs will let this go on as long as an exit is in sight because they can then extract their money + a hefty premium.

Then at that point the money faucet is re-plumbed to the public's money via institutional investors and from there they're free to do the slow decline to penny stock at their own pace

VC backed company try to grow revenue at all cost, they don't care about profit.

Building a business to such scale that it can be a public company is an extremely expensive endeavour, continuing that growth till a time such that the business can sustain "market weather" while in the public is even more so. As crazy as it may seem, the bar for a public market business to be considered a "stable" or "safe" investment is very very very high and takes years in the public to build the platform that holds your market share. In near all instances, you have to continue to spend a lot into that sustainability.

Haven't read the S-1, but their gross margins appear pretty solid, so they're probably spending aggressively in SG&A and capex-heavy depreciated assets that will hit COGS over time.

Eg growing from 3 stores to 22 in two years probably requires a lot of big upfront expenditures.

It's important to look at cashflow statements, P&L, and balance sheet in concert rather than isolation -- especially for larger fast-growing companies.

From their S-1, 2020 revenue was $219m. From that, $106m was cost of revenue, $87m went out to SG&A, and $55m for marketing. Presumably if they wanted to hit pure profitability, they could take their foot off the gas on the admin expenses and marketing, but since they're still seeing good growth and seem to be having an easy enough time getting capital, they may as well keep spending on additional growth.

I haven’t looked at the filing in detail yet, but I would guess expanding their physical store footprint is burning money and the source of loss. They are in the expansion/growth phase so I would not expect profitability until either runway runs out or growth slows.

Out of fairness, their gross margin is 51%, so they're covering their COGS comfortably.

They're spending a lot on operating stores and advertising, where the input-output math is less clear/predictable. You could also believe that those stores stores will scale up in efficiency as people know that they're there and leave their house post-COVID.

Losing money isn't always due to a company charging less for a product than the direct cost to make it.

In the case of startups like this, the loss is often due to the large costs of things like expanding number of stores, expanding manufacturing capacity (it's not always as simple as sending orders to China to make), expanding their logistics system to handle shipping more and more shoes, etc.

For eCommerce ad-driven sales, I would think that ad expenses should be a part of COGS. It's easy to attribute sales to each ad dollar spent, and the impact of reduced ad spending will likely impact revenue, not just growth.

Why are the top line numbers shown from 2018 to 2020? If I had to guess, it would be because 2018-2019 showed the most growth while 2019-2020 showed less, and they want to show good % changes.

You would be correct. On page 18, 2019 revenue was 193M and 2020 was 219M, growth of only 13%.

No. All S1s do it this way for some reason.

My wife just worked on an S1 and had a similar comment but she investigated other S1s and saw that was just how it was done.

It's because the gold standard for IPO 8 quartners with sustained growth.

But showing two data points doesn't actually demonstrate sustained growth. Showing quarterly or at least annually would get closer.

Showing two data points could mask growth in year one and losses in year two.

Good observation. That's not th standard as people here claim.

Companies often play such games. Esp to make their IPO look attractive. I went over Squarespace S-1 today who IPOed in May and saw they claim around 70% revenue growth in commerce from 2019 to 2020. Then somewhere in the document you find that they acquired a company in March 2021 but they include their revenue in their 2020 numbers. So the 70% growth is not really organic growth and they don't mention anything about the growth of the acquired company (Tock).

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