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I notice that some financial reports miss gross profit or cost of revenue.

This often happens in Software companies. Does this mean the cost of revenue is zero?

I attached a financial report for reference.

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  • It looks to me like the "cost of revenue" is the same as "Operating expenses". – RonJohn Jan 2 at 23:29
  • @RonJohn Really? I feel most financial reports have separate "cost of revenue" and "Operating expenses", like this one: investors.twilio.com/news/news-details/2020/… – Jerry Zhang Jan 2 at 23:34
  • Please wait 24 hours after asking to accept an answer. Something better might come along. – RonJohn Jan 3 at 0:10
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Does this mean the cost of revenue is zero?

Probably not, but it may be insignificant (e.g. < 1% of gross profit). If the software is completely online (e.g. no CDs or packaging) then I could see a very small COGS, and all costs would be indirect (salaries, R&D, advertising, etc.). It's also possible that the company does not allocate direct labor (if there is any) to gross profit.

Depending on what you're using gross profit for, you might be okay using just Revenue, but be sure to watch this company to make sure it isn't an outlier that skews your results.

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  • I think even if the cost of revenue is small (<1% of the revenue), it still should list the cost of revenue. Usually, the cost of revenue is not that small for a software company. If you look at the financial report of cloudflare, its cost of revenue is about 15%. Cloudflare is a totally cloud-based software, its cost of revenue is still far greater than 1%. – Jerry Zhang Jan 4 at 15:03
  • Have you look at the footnotes or the commentary of the financial report? It may list the COGS there (or explain why its not listed). – D Stanley Jan 4 at 15:04
  • I just checked the S1 report again. It does not have the footnotes to explain this. Here is the link for the S1: sec.gov/Archives/edgar/data/1647639/000119312520285895/… – Jerry Zhang Jan 4 at 15:09
  • @JerryZhang you could try using the "Total Direct Expenses" from the breakdown of "Contribution Profit", although that looks like in includes more indirect expenses than I'd consider for "COGS". – D Stanley Jan 4 at 15:35
  • It makes more sense. However, "Total Direct Expenses" is listed in the Non-GAAP section. I don't know whether it is a good idea to compare GAAP revenue with Non-GAAP data. – Jerry Zhang Jan 4 at 17:23
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COR is "the total cost of manufacturing and delivering a product or service to consumers".

For a software company, that seems to be Engineering and product development (the manufacturing) plus maybe Customer operations (if that's delivering the product to the consumer).

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    I don't agree. Engineering and product development should be Operating expenses instead of cost of revenue. Cost of revenue is direct cost to the revenue, for example, cost to manufacture a product. You can see the Twilio financial report I posted. It has "cost of revenue" and Operating expenses (including Research and development). – Jerry Zhang Jan 3 at 0:18
  • @JerryZhang you yourself said that many software companies don't post COR numbers. There must be a reason why software companies don't but Twillo (which Wikipedia calls a "cloud communications platform") does. Twillo must purchase AWS resources to host it's product, in addition to developing software. That ISTM is why Twillo has COR but many software companies don't. – RonJohn Jan 3 at 1:57
  • I don't think so. The financial report I posted is from upstart and I think it also uses AWS. So, it should have direct cost to generate revenue. It is possibly more accurate to say some software companies don't post COR numbers. The majority will post COR. I guess we need an accountant here to answer this question. – Jerry Zhang Jan 3 at 13:52
  • AWS could still be an indirect charge, especially if it's even partially fixed (doesn't scale directly with product sales). But we're getting into accounting minutia. – D Stanley Jan 4 at 14:18
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    @RonJohn I don't like that definition of COR either - it implies that all manufacturing costs are part of COR. But things like factory equipment, etc are not part of COR because they don't scale with sales (you pay for a packaging machine whether you sell 0 or 1,000 widgets). Only things like raw materials and other direct expenses are included. Other manufacturing and delivery costs are indirect and aren't part of COGS. – D Stanley Jan 4 at 14:23

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