This article originally appeared on LandscapeManagement.net on August 14, 2019. Greg Herring regularly writes for Landscape Management, providing financial analysis and insights tailored to landscape business owners.
I write this series of articles highlighting BrightView’s financial results because I know that landscape companies can compete and win against BrightView — bigger is not always better, and in some cases, it is worse.
While bigger is not always better, bigger usually means more strategic planning, more structure and discipline in execution and more technology utilization. Why? Those practices help companies win. BrightView’s required securities filings provide insight as to how the company wins.
In this article, I will discuss BrightView’s utilization of technology and how technology can help your company win. In previous articles, I have discussed BrightView’s strategic plan and one aspect of its disciplined execution.
First, I will review the latest financial results for BrightView.
For the quarter ended June 30, 2019, BrightView’s results fell short of the expectations of financial analysts. The primary cause was above average rain in many areas of the country.
As a CFO, I assemble and review rolling 12-month income statements in highly seasonal industries like the landscape industry. I have simplified BrightView’s income statement in the table below which shows the rolling 12-month income statements through the last eight quarters. In other words, each column represents 12 months. The dollars in the table below represent thousands of dollars.
|Net service revenues||$2,226||$2,265||$2,336||$2,339||$2,354||$2,329||$2,335||$2,362|
|Year over year growth rate||8.1%||6.1%||5.7%||2.8%||-0.1%||1.0%|
|Cost of services||1,629.8||1,668.4||1,716.5||1,720.1||1,727.4||1,713.0||1,715.5||1,729.4|
|Gross profit margin||26.8%||26.3%||26.5%||26.5%||26.6%||26.4%||26.5%||26.8%|
|Selling, general and administrative expenses||435.5||431.6||446.2||461.3||481.1||471.4||473.0||467.8|
|Ongoing selling, general and administrative expenses||409.0||392.8||400.6||398.2||403.0||404.2||403.6||415.8|
|Adjusted operating income||$187.1||$203.5||$218.9||$220.5||$223.2||$211.3||$215.6||$216.4|
|Operating profit margin||8.4%||9.0%||9.4%||9.4%||9.5%||9.1%||9.2%||9.2%|
I have three observations from the table.
Despite continued acquisitions, BrightView does not show significant growth. The company’s revenue grew 1 percent in the 12 months ended June 30, 2019 as compared with the 12 months ended June 30, 2018. I suspect that BrightView’s size does not create a compelling advantage as the customers review proposals from BrightView and other established companies.
BrightView’s gross profit margin increased from 26.5 percent to 26.8 percent in the 12-month periods ended June 30, 2018 and 2019. This increase is due in part to the results of BrightView’s “managed exit” plan where BrightView ends customer relationships where the profitability is too low — essentially replacing customers with low profitability with new customers with higher profitability. Note that BrightView includes indirect job costs like vehicles and equipment expense in cost of services to calculate gross profit margin.
Adjusted selling, general and administrative expenses as a percentage of revenue increased from 17 percent to 17.6 percent in the 12-month periods ended June 30, 2018 and 2019. In each of the most recent two quarters, adjusted selling, general and administrative expenses increased by $8 million, or 8 percent, as compared with the previous two quarters.
Note that BrightView incurred expenses associated with acquiring and integrating businesses, becoming a public company and paying some employees partially through equity-based compensation. Because most landscape businesses do not incur these expenses, I have reduced selling, general and administrative expenses by these amounts.
Overall, BrightView maintains an enviable operating profit margin above 9 percent. Thanks in part to the wide availability of technology, I believe every landscape company can achieve at least that level of profitability.
Now, let’s discuss technology.
In its investor presentation, BrightView highlights three areas where it is currently deploying technology:
- Electronic time capture, through Kronos
- Customer relationship management, through Salesforce.com
- Property maintenance portal connecting customers with account managers, through “BrightView Connect”
Think about it: Why is BrightView promoting its use of technology to investors?
The answer: To support BrightView’s story about how it is going to increase revenue and the operating profit margin.
- Implementing electronic time capture increases the accuracy of time keeping and reduces the administrative burden of paper timesheets — increasing profitability.
- Implementing customer relationship management software is widely viewed as making salespeople and account managers more productive in selling — increasing both revenue growth and profitability.
- Implementing a property maintenance portal offers the possibility of increasing customer retention and upsell revenue through better communication and faster response — increasing both revenue growth and profitability.
The good news: Every landscape company can use similar technology cost effectively. In fact, many landscape companies have been using this technology for years. It is widely available and while it can seem expensive, the technology, when properly implemented, provides value far in excess of its cost.
What technology has provided great value in your company? Have questions about what technology your company could be using? Please email me.