How to Read 10-K Filings: The Product Manager’s Guide

1. 10-K Intro

A Form 10-K is an annual report required by the U.S. Securities and Exchange Commission (SEC), that gives a comprehensive summary of a company’s financial performance. Although similarly named, the annual report on Form 10-K is distinct from the often glossy “annual report to shareholders,” which a company must send to its shareholders when it holds an annual meeting to elect directors (though some companies combine the annual report and the 10-K into one document). The 10-K includes information such as company history, organizational structure, executive compensation, equity, subsidiaries, an audited financial statements, among other information.

Fiscal Year

On the cover of the filing, EasyLink’s fiscal year is listed. Most company’s fiscal years run from January through December. EasyLink’s runs from August 1 — July 30. Companies sometimes use non-calendar fiscal years to differentiate themselves from other companies.

Business Overview

On page 1 of the filing EasyLink briefly describes their business. This section is basically the start of their corporate messaging platform, and it is how they simply explain their business. This section also describes how EasyLink segments its business into two broad categories. It also describes two significant acquisitions EasyLink had completed.

Departmental Overviews

On page 3 EasyLink describes their product development, customer and technical support, and sales and marketing organizations. In terms of product development they note that in fiscal 2011 they spent $12.7 million in product development. This represents only 10% of revenues. High growth companies often spend 25 – 30% of their revenues on product development.


On page 4, EasyLink discloses that they have approximately 30,000 customers. Many EasyLink customers may generally terminate services with 30 days notice without penalty, unless their agreement contains a minimum revenue commitment that would require payment by the customer of any unused shortfall amount upon termination. Translation: most customers are month to month, which makes it easier for competitors to steal away than customers that had multi-year contracts with monthly or annual minimums. EasyLink noted that no single customer accounted for more than 10% of revenues. When companies disclose that their revenues are concentrated in a few customers, that is a sign that if your firm can steal away one or more of those customers, you can inflict significant financial pain on your competitor.

Seasonality & Backlog

EasyLink notes “Our revenues experience modest changes due to seasonality, and we have no material backlog in sales orders or the provisioning of customer orders. We traditionally experience lower than average usage in the fiscal first and second quarters as we move into the summer and holiday months.” Translation: their third and fourth quarters are not too backloaded.


On page 5 EasyLink states “As of July 31, 2011, we had approximately 541 employees worldwide, all of which were full-time employees. Of these employees 340 were located in the U.S. and 201 were located internationally. None of our employees are covered by a collective bargaining agreement. We consider our relations with our employees to be good.” Some companies even break down headcount by major department.

Risk Factors

All 10-Ks contain a section that details, from the company’s perspective, risks and uncertainties that could impact their financial performance and stock price. Many of these items are pro-forma, you will see them in most 10-Ks. You should be alert to anything that is not cited by other companies in the industry. EasyLink’s risk factors start on page 6 and run through page 12.


On pages 12 and 13 EasyLink describes six lawsuits they are party to. It is not unusual for companies to be involved in lawsuits. If the company believes that they have a significant risk of losing a lawsuit, they will establish a reserve to cover any settlement. If the suit settles with no financial impact, the company will release the reserve and provide a temporary one time bump in profits and earnings.

Accounts Receivable and Allowance For Doubtful Accounts

On page 19, EasyLink describes their accounts receivable and doubtful accounts. “The net carrying values of accounts receivable were $29.8 million and $11.5 million as of July 31, 2011 and 2010, respectively. Inclusive in the values were allowance for doubtful accounts of $2.9 million and $1.7 million, respectively. In addition, the bad debt expense for Fiscal 2011 and Fiscal 2010 was $1.4 million and $0.8 million, respectively. This level of accounts receivable and doubtful accounts are reasonable given the scale of EasyLink’s revenues is fine. Another useful metric is DSO — Days Sales Outstanding. DSO = total accounts receivable / (total sales/365). A DSO of less than 45 days is ideal.

Report of Independent Registered Accounting Firm

The audit report from EasyLink’s auditors Friedman LLP is on page F-2. Public companies are required to have an independent audit each year. This ensures that the financial statements and other management commentary are complete and accurate. They also certify that internal controls are sufficient to meet the requirements of Sarbanes Oxley.

2. Results of Operations

Results of operations is one of the most significant sections in the 10-K. It describes overall revenue and expenses, and the commentary describes what has driven increases and decreases. Consider this table:

3. Other Financial Statements

10-Ks include full financial statements for the fiscal year. We have already discussed Results from Operations (aka Income Statement or Profit & Loss statement), let’s move onto two other statements — the Balance Sheet and Cash Flow Statement.

Balance Sheet

The balance sheet presents a snapshot in time of a firm’s assets, liabilities, and stockholder equity. In the EasyLink example, most of the changes from 2010 to 2011 were driven by the acquisition of Xpedite.

Cash Flow Statement

A cash flow statement is intended to:

  1. Provide additional information for evaluating changes in assets, liabilities and equity
  2. Improve the comparability of different firms’ operating performance by eliminating the effects of different accounting methods
  3. Indicate the amount, timing and probability of future cash flows
  1. Cash flow resulting from investing activities;
  2. Cash flow resulting from financing activities.

3. Summary

A basic understanding of quarterly and annual filings with the SEC can provide product managers with tremendous insights into customers and competitors. Staying current on competitor and customer business trends is important for product managers. Public filings provide product managers with a quick and efficient way to do this.

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John Mecke

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John has over 20 years of experience in leading product management and corporate development organizations for enterprise firms.

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