My love affair with 10K’s started in 2013. My first gig out of college was a Consultant in PwC’s risk advisory group. And consultant is a generous term. I was really a lackey for the higher ups… a paper weight who also knew how to get coffee.
My first project was to inventory one hundred company 10K filings. 10K’s, as we’ll get into shortly, are an annual disclosure that publicly traded companies provide with their financial results and background on their business model, the executives, and the potential risks you may incur when investing.
As a member of the Risk Advisory group they wanted me to inventory how many of the stated risk factors in the 10ks were overlapping.
About a thousand cups of crappy office coffee (Flavia, anyone?) later I figured out that probably 70% of the risk factors were fluff - CYA’s that were so broad they didn’t mean much.
But there was probably 30% in there that was real signal. It was like a glimpse into what kept an executive up at night.
I figured that if I could separate the signal from the noise, I could better understand how businesses compete and what levers they could pull to go faster.
So today we’ll go through the resources at your disposal when it comes to public company disclosures. The staple of this session will be the 10K.
OK, so here’s a snapshot of Adobe’s Investor Relations web page. When in doubt as to where you should begin, just type into Google: “[Company name] investor relations.”
All publicly traded companies need to have a page like this. And they upload all pertinent documentation. I’ve circled some of the stuff we care about.
Now let’s categorize each of these resources.
10Q’s Earnings Releases, Earnings Scripts and Slides all come out as part of the quarterly earnings cycle.
The Form 10Q is full of financial exhibits and information required by the securities and exchange commission (SEC).
The Quarterly Earnings Release is kind of like a cliff notes version of the 10Q. This is the 10Q in press release format. It will have a few financial exhibits, but it’s mostly headlines on the company’s performance.
What I personally like to read the most is the Quarterly Transcript. You can also get the audio version of this. But I like to read the transcript and ‘Ctrl F’ for certain words.
Now, the 10K comes out once a year. It’s basically the 10Q, but on steroids. It has a lot more exhibits. A 10Q comes out in Q1, Q2, and Q3 and then the 10K comes out in Q4 (which covers both the 4th quarter and the year). It has both the last quarter’s results and the total year’s results. This annual filing will be the meat of what we look into today.
Finally, you can also grab a bunch of firmographic information from the Investor Relations website. FAQ’s are helpful in understanding where the Company is HQ’d and therefore confirming it’s in your territory. It also has information on when their fiscal year end is for budgeting considerations.
Company news and leadership are pretty self explanatory. They’re low hanging fruit for info you’d want to know before getting on the call with an exec. If the company makes an acquisition or has some sort of public legal proceeding, you’d find it here.
OK, so to dive into the 10K for a sales pro, here are my top buckets to group your information into:
Risks management identified: This is generally where you’d see some mention of cyber security, data breaches, employee retention issues etc… I’d search for whatever your company “solves for” here and see if it’s something that’s top of mind. You can repurpose the language in your pitch to align.
Health of Biz: You’ll get signals as to if they are still burning cash and if their topline is growing. These are important to size up what type of environment they’re operating in - are they in investment mode or cost cutting mode - you can tell pretty fast.
Competition: You can find soundbites on their competition and how they are using technology to go faster. In this section you’ll often find language about digital transformation as a way to compete. Find a way to use this for your product or service’s ROI.
Size of Employee Base: You’ll want to know how many people work at the company and approx how many are in R&D (or a specific part of the biz you sell into) and eligible to use your product.
Who’s in Charge: Who are the decision makers you ultimately want a meeting with. In addition you can find out who their board members are and if there’s any overlap for a potential intro with your investors.
So here I went to Adobe’s Risks section of the 10K. The official header is “Risks Related to the Operation of Our Business”. It’s the same title in all 10Ks.
Then, for this example, I searched for the word Security. You may be searching for “Workforce productivity” or “Hiring” or “Data Integrity” or whatever keyword links to what you are selling.
You can see my term came up a number of times. From this you can unpack how they think about data breaches, cyber attacks and data storage.
The next section I want us to take a look at is the income statement
Now, financial statements can seem scary but they really aren’t if you take a second to break them into chunks.
What you have up top is a breakdown of their revenue. You can see the majority of Adobe’s revenue is subscription, with a little bit of one time product revenue and a bit of professional services.
You can also tell from this that they are growing their topline at 25% year-over-year. That’s a really strong growth rate for a company of their scale - they’re doing nearly $16 billion in revenue each year.
The next section is their cost of revenue, that’s their hosting and customer support. For this analysis it’s not all that important (unless, well, you sell compute).
In the third section you’ll find their operating expenses. You can see that ⅓ of their total OPEX goes to Research and Development (R&D). This is important because it’s the hypothetical cost center you are selling into (you may be selling into Finance within General and Administrative (G&A) etc).
We can go one level further and see how R&D spend is increasing 16% year-over-year. That shows they are making a decent investment in R&D. That’s a good signal for us.
Here’s another snapshot of a supporting schedule. You can clearly compare the level of investment in each part of the business. R&D is growing at 16%, Sales and Marketing (S&M) is growing at 20%, and G&A is growing at 12%. Overall the company spent 17% more than the prior year.
We can also tell from this blurb that they place a big emphasis on the quality of their R&D hires and ability to release new software in a timely fashion.
The next section to draw you eyes to is the Competition section. This is titled the same in all 10K’s so it’s easy to find.
What I find fascinating is they identify information security to combat cyber attacks as a vector they compete on. In other words, they realize that they are not just selling a product, they are selling trust in a company.
Here is language you can pull straight off the 10K and find a way to incorporate into your discussions with execs. It frames up the mindset of the C-suite and how they think about security.
10K’s are required to disclose how many employees work at the company.
What I did was I pulled Adobe’s 10K from 2021 and also from 2020. I can tell that they had 26K employees in the most recent year, growing 15% from the previous year.
You can also tell how many employees are located in the United States. That bit of info might be helpful as well if you are selling to just one country.
Something else I would use the employee count for is trying to size up how many people are in R&D. This is total back of the envelope math, but I know an org of their size probably has 30% of their employees in R&D (rule of thumb).
This aligns with the OPEX breakdown we saw earlier
If that’s the case I can estimate that between 7k and 8k employees are in R&D, and potentially 2K to 3K are developers.
Once again, these ratios could change slightly, but that’s the quick and dirty to give you a rough order of magnitude how big the opportunity is.
Finally, the fifth key takeaway is who’s in charge. This is where you can get a sense for their title-ing convention at the exec level. Some companies have nuanced ways of classifying their execs
Adobe has a Chief Product officer for Document Cloud, which other companies wouldn’t have. This position is unique for their business, and important if you are trying to land in just one team within the org at the moment.
Something else you can take away is if they are undergoing any sort of leadership transition. If a transition has been announced it’s gotta appear here in the 10K (and if it’s mid-year, you can search their site for any proxy docs they’ve released).
A proxy is basically an announcement to shareholders of something that has materially changed in the business and everyone should be equally aware of.
This snapshot tells us that we may not be selling to Mr. Parasnis at the end of the day, as he’s transitioning out of the business.
If a company really cares about something, it will show up in their 10K. If they are doing good or bad, it will be apparent. Use these data points to improve your pitch and substantiate your ROI. Secure the bag.
What I’ve Been Reading
Everyone’s favorite pseudonymous CFO launched a Substack, and it’s as beautiful as his Fabio profile pic.
If you get hot and heavy over gross churn rates, running productive board meetings, and how to read a balance sheet (like, really, read a balance sheet), this is your Reno, Nevada, in newsletter format.
Quote I’ve Been Pondering
“That and a dollar will get you a cup of coffee”
-My dad, whenever he hears a bad business idea
Great content, CJ! More people should read public company financials :)
Those coffees brought you to write this beautiful article!