Nimble has not made a profit since it was incorporated. Vasudevan et al. (2016) stated that Nimble will continue to operate at a loss as they enhance their product, properly size their employee base and adjust to changing market conditions. This trend will continue for the foreseeable future (p. 17). Consequently, Nimble’s profitability ratios yield the greatest concerns and opportunities for improvement.
Z Score – X2
This ratio measures how much of the retained earnings are being used to acquire assets. Altman (1968) stated that this ratio is a measure over time; a new company will accumulate its earnings the longer it operates. Consequently, newer companies who haven’t built up their retained earnings may be negatively reflected by this ratio (p. 595).
Figure 9: cumulative earnings invested in assets for the quadrumvirate over five years.
Nimble, who has been publicly traded since 2013, may be considered new. Nimble hasn’t retained any earnings, in fact, it has an accumulated deficit worth over $320 million or 10 times its losses in 2012 as represented by the following table:
|% change since 2012||1062.7%||664.0%||335.7%||192.5%||100.0%|
|% change annual||60.1%||97.8%||74.4%||92.5%|
This table also shows that their accumulated deficit growth rate is slower in 2016. However, in comparing the Z Score X2 ratio to the triumvirate, Nimble’s losses are the second worst; this is a concern.
Return on Assets
In 2016, due to Nimble’s continued negative profitability, their return on assets of -37% was well below the industry average of 4.18% and the quadrumvirate average. Stated differently, instead of helping the company generate a profit, Nimble’s assets cost the company $120 million dollars. In looking at Nimble’s five-year trend, their ratio improved in 2014 because of their IPO.
Figure 10: Return on assets (ROA) for the quadrumvirate over five years.
Nimble was operating at a loss, so the large increase in assets improved this ratio (from -51% to -26%). This presents a weakness in this ratio; when operating at a loss, increasing cash (by iassuing stock or financing) will temporarily improve the results even though no long-term assets were purchased to improve productivity. Additionally, Vasudevan et al. (2016) disclosed a meager interest income of $240 thousand dollars on their cash and cash equivalents by investing in money market funds (p. 48). To improve this ratio and profitability, Nimble executives should evaluate investing a portion of these cash assets in higher risk / higher return funds.
Z Score – X3
This ratio is like the ROA, except that it evaluates earnings before interest and taxes. Altman (1968) preferred this ratio as it is a better measure of the company’s raison d’être (p. 595). Considering Nimble’s low interest earned on cash, it will be very close to ROA:
|2016 Earnings (loss) before interest and taxes||$(118,636)|
|2016 Net earnings (loss)||$(120,069)|
The recommendation to improve the ROA by investing a portion of the cash in higher yield funds will not influence this ratio. As Nimble’s raison d’être is producing storage devices, the only ways this ratio can be improved are for Nimble to earn more on the sale of their product, or to reduce operating costs.
In 2016, Nimble sold $322 million dollars’ worth of product and service with a gross profit margin (GPM) of 65%, the highest of the quadrumvirate. Despite this, they posted a net loss of $120 million resulting in a profit margin of -37%; their operational costs are too high for the revenues they are making. The margin was below the quadrumvirate average and second lowest next to Pure Storage.
Figure 11: Profit margin for the quadrumvirate over five years.
Upon examining Nimble’s operating expenses, approximately 60% were in sales and marketing. This is slightly higher than the quadrumvirate average 52% but very close to NetApp. However, unlike Nimble, NetApp enjoyed a positive profit margin of 4.1%. The IDC (2015) reported that NetApp held approximately 11% of the external storage market in the third quarter of 2015 measured by revenue (para. 5). Being incorporated since 1992, NetApp not only has a well-established brand, they had a 15-year lead on Nimble and today holds a notable portion of the market. To make their product better known, Nimble would need to increase their sales and marketing, a strategy confirmed by Vasudevan et al. (2016, p. 43). To confirm if this is a good strategy, the following chart analyzes the change in sales and marketing expense over the past 5 years:
|Sales & marketing expense||$198M||$144M||$75M||$40M||$13M|
|% Change since 2012||1539.1%||1116.2%||583.9%||309.8%||100.0%|
|% Annual change||137.9%||191.2%||188.5%||309.8%||438.4%|
The following table show the change in revenue over the past 5 years:
|% Change since 2012||2299.4%||1624.7%||897.3%||384.2%||100.0%|
|% Annual change||41.5%||81.1%||133.5%||284.2%||733.6%|
This horizontal analysis shows diminishing returns; in 2016, one additional dollar invested in sales and marketing created $0.30 of additional revenue. If this trend holds, this strategy will likely worsen profit margins. To improve, Nimble should look at their GPM. If they lower their product prices to align their GPM with the triumvirate, they might increase their sales without having to increase their sales and marketing teams. Additionally, Nimble needs to reconsider their customer base. For example, rather than compete with cloud storage-as-a-service, Kurian, Pasek, and Nevens (2016) stated that NetApp supplies these “hyperscaler providers” (p. 11). Doing a combination of both could correct Nimble’s ailing profitability.
General limitations of analysis
In addition to the limitations stated in each section above, the following limitations apply generally.
Each company uses a different amortization schedule for property and equipment:
|Nimble||3 years||3 years|
|NetApp||2-3 years||5 years|
|Quantum||3-5 years||10 years|
|Pure Storage||2-3 years||2-3 years|
(Dietzen & Riitters, 2016, p. 69; Gacek & Ahmad, 2016, p. 58; Kurian et al., 2016, p. 58; Vasudevan et al., 2016, p. 75). This will result in a different mixture of expenses vs long-term assets. When using these ratios to compare multiple vendors, these variations could produce incongruent results.
Despite all being categorized in the Computer Storage Devices industry, each company has different types of products and different levels of diversification:
|Nimble||All-flash storage, hybrid storage, and management software|
|NetApp||All-flash storage, hybrid storage, cloud storage, data protection software, management software, and professional services|
|Quantum||Hybrid storage, archive storage, data protection storage, and management software|
|Pure Storage||All-flash storage and management software|
(Dietzen & Riitters, 2016, pp. 7–10; Gacek & Ahmad, 2016, pp. 4–6; Kurian et al., 2016, pp. 6–10; Vasudevan et al., 2016, pp. 7–12). The ratios, like profit margin, gross profit margin, Altman Z Score X5, return on assets, return on sales, etc all use the overall totals recorded on the income statement. Because the different mix of products per vendor, using the ratios to compare between them could produce incongruent results.
Meaningful horizontal analysis could not be performed on some of Nimble’s line items because of the change from loss to profit, as demonstrated with their net-cash from operations:
|Net cash flows||$5.8||$5.4||$(6.7)||$(18.8)||$(14.8)|
|% of base (2012)||-38.8%||-36.2%||45.4%||126.4%||100.0%|
|% change for the year||-7.0%||179.7%||64.1%||-26.4%|
Instead, this information was plotted on a graph to perform the analysis.
The future of Nimble is uncertain. A recurring theme in this analysis is that Nimble must become profitable. From the analysis performed, the recommendations include: suspending their plans to increase sales and marketing, lowering the price on their products to align with the triumvirate, supplying cloud storage-as-a-service, and better investing some of their cash. Until this happens, Nimble will be reliant on financial leverage which today is achieved through the issuance of stock. Nimble is selling their inventory, they can meet their short-term debt obligations, and their total market capitalization is 300% higher than their total debts. With their current Altman Z score, they are at risk of becoming insolvent in 1-year and will rely on customers like us to purchase their quality products to survive.
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Formulas used in this paper:
Altman Z Score
Receivable Turnover was provided by Mergent
Inventory Turnover was provided by Mergent