Thursday, April 24, 2014

Which Large US Technology Company Has the Highest Profit Margin?

I bet not a single person could answer the above question correctly. And it's not even close who's first.

I also bet not a single person knows which US Technology Company has the second highest Profit Margin.  And there's a huge gap between second and third place.

From a review of their SEC filings, I found 20 US Technology Companies which made US GAAP Pretax Income of more than $2 bil each in their most recent fiscal year.

If you guessed Oracle, you are indeed an extremely bright person.....since Oracle was the 3rd highest with its Pretax Income as a Percentage of Total Revenues of 37.4%.

If you guessed Facebook, you are a very bright person.....since Facebook was the 4th highest with its Pretax Income as a Percentage of Total Revenues of 35.0%.

If you guessed Microsoft, you are a bright person.....since Microsoft was the 5th highest with its Pretax Income as a Percentage of Total Revenues of 34.7%.

If you guessed Apple, your knowledge of US Technology Companies and of Accounting is fair to middling.....since Apple was the 8th highest with its Pretax Income as a Percentage of Total Revenues of 29.3%.  But still, Apple's 29.3% Pretax Profit Margin was less than half of that of #1.

If you guessed Google, your knowledge of US Technology Companies and of Accounting needs some work..... since Google was the 9th highest at a much lower 24.2%, less than half of that of both #1 and #2.

If you guessed Priceline com, that was a pretty good guess.....since Priceline was the 6th highest with its Pretax Income as a Percentage of Total Revenues of 33.8%.

And if you guessed Qualcomm, that was also a pretty good guess.....since Qualcomm was the 7th highest with its Pretax Income as a Percentage of Total Revenues of 33.0%.

What about Dell?  Well, Dell wasn't included in the 20 since it is now private and doesn't file with the SEC.  If I used its prior year's Pretax Income of $2.841 bil, its 5.0% of Total Revenues would be the very lowest on this list, just barely below Hewlett Packard's 5.8%.

Consumers are always complaining about how incredibly high their cell phone and land line monthly bills are.  Well, Verizon is 13th at 19.5% and AT&T is 18th at 14.4%.  And the Pretax Profits of these two are much lower in real terms since in 2013 they both benefited from Mark-to-Market Pension and Postretirement plan accounting.  If you remove these huge actuarial and remeasurement gains in 2013, then Verizon would be at #18 at 14.2% and AT&T would be at #19 at 8.5%.

Oh, what about Ebay?  Well, it's #12 at 21.6%

Well, what about some Old Tech Companies like Cisco Systems and Intel?  Well, Cisco Systems is #10 at 23.1% and Intel is #15 at 18.3%.

What about the New Tech/ Old Tech Combination Texas Instruments?  Well, its 22.6% Profit Margin is much above Intel's 18.3%.  But Texas Instruments is #11.

Computer Data Storage.....that's still really hot.  Where does EMC rank?  #16 on the list at 16.6%.

Oh, I've got it.....the extremely profitable Payroll Processor Automatic Data Processing, founded by the well-respected former New Jersey Senator Frank Lautenberg?  #14 at 18.4%.

Finally, I now see the light.  Those large CPA firms had fantastic computer technology consulting practices.  Who bought some of these computer technology consulting practices?  Let's see.....IBM bought PriceWaterhouseCoopers consulting practice.....IBM is #17 at 16.5%.  OK, but back in my prime, by far the best Computer Technology Consulting Practice was that of Chicago Headquartered CPA firm Arthur Andersen.  Arthur Andersen's Audit Practice collapsed with Enron but its Computer Technology Consulting Practice is still going very strong and named Accenture.  Accenture is #19 on the list at 14.3%.

OK, what about Marissa Mayer's Yahoo?  They own a nice chunk of Alibaba, China's version of Amazon.  Well, Yahoo's Pretax Income is short of $2 bil.  Its Pretax Income Margin is a very high 32.7%, but that's artificially inflated a bit since Yahoo's Equity in Earnings of Alibaba and Yahoo Japan totaled $897 mil of Yahoo's Total Pretax Income of $1.530 bil, but there weren't any of these two Companies' Revenues included in Yahoo's Total Revenues amount.

What about Amazon?  Well, its Pretax Income was only $506 mil because it's investing heavily in its future.

What about the previous very hot Computer Storage Device Companies?  Well, they didn't make the $2 bil Pretax Income threshold.  Seagate Technology generated Pretax Income of $1.831 bil  and had a Pretax Profit Margin of 12.8%.  And Western Digital had Pretax Income of $1.222 bil and a Pretax Profit Margin of 8.0%.

What about very profitable Computer Programming Services Company Cognizant Technology Solutions?  Well, it generated $1.688 bil of Pretax Income and a Pretax Profit Margin of  19.1%.

OK, let me give you a couple of hints on #1 and #2.

#1 is in Silicon Valley and generated a Pretax Profit Margin of an incredible 61.6%.....Pretax Income of $7.258 bil on Total Revenues of only $11.778 bil.  No, I'm not kidding.

#2 is headquartered in New York and generated a Pretax Profit Margin of a likewise incredible 53.9%.....Pretax Income of $4.500 bil on Total Revenues of only $8.346 bil.  No, again I'm not kidding.

And the two companies are very similar.  It is almost like the same person composed the written company descriptions in the Organization portion of their Footnote #1 to their Financial Statements in their 10-Ks.

Here's #1's Company Description.....#1 is a global payments technology company that connects consumers, businesses, financial institutions and governments in more than 200 countries and territories to fast, secure and reliable electronic payments.  #1 operates one of the world's most advanced processing networks.

And I love #1's Ultra Brief Mission Statement....."to accelerate the electronification of commerce".

And here's #2's Company Description.....#2 is a technology company in the global payments industry that connects consumers, financial institutions, merchants, governments and businesses worldwide, enabling them to use electronic forms of payment instead of cash and checks.

And why in the world haven't the very best US Technology Companies like Google, Microsoft and Apple entered this incredibly high margin tech space?  They could all 3 flat out nail this white hot technology subsector and do so quickly, as could many other US Technology Companies.

And why in the world have the Silicon Valley Venture Capitalists, for the most part, missed this key technology space?  I thought they were supposed to be ahead of the curve.

If you haven't figured out #1 and #2 by now, you need to pick another field to pursue.

And lastly, below here are all 20 of them, and I added Amazon as #21 to make it Black Jack:

Most Pretax

Recent Income

Fiscal From

Year Continuing Total Margin

End Operations Revenues %

mil $s mil $s
Large US Technology Corps With Highest Profit Margins

Visa Sep 13           7,257         11,778 61.6%
Mastercard Dec 13           4,500           8,346 53.9%
Oracle May 13         13,898         37,180 37.4%
Facebook Dec 13           2,754           7,872 35.0%
Microsoft Jun 13         27,052         77,849 34.7%
Priceline com Dec 13           2,297           6,793 33.8%
Qualcomm Sep 13           8,194         24,866 33.0%
Apple Sep 13         50,155       170,910 29.3%
Google Dec 13         14,496         59,825 24.2%
Cisco Systems Jul 13         11,227         48,607 23.1%
Texas Instruments Dec 13           2,754         12,205 22.6%
Ebay Dec 13           3,466         16,047 21.6%
Verizon Communications Dec 13         23,547       120,550 19.5%
Automatic Data Processing Jun 13           2,084         11,310 18.4%
Intel Dec 13           9,620         52,708 18.3%
EMC Dec 13           3,865         23,222 16.6%
IBM Dec 13         16,483         99,751 16.5%
AT&T Dec 13         18,553       128,752 14.4%
Accenture Aug 13           4,339         30,394 14.3%
Hewlett Packard Oct 13           6,510       112,298 5.8%
Amazon Dec 13              506         74,452 0.7%

Total all 21
      233,557     1,135,715 20.6%