Monday, 28 October 2013

Globo (GBO) ... wake up and smell the houmous

Monday 28th October 2013

Globo is a £252m market cap company, quoted on the UK’s AIM market. The group describes itself here as “an international leader and technology innovator delivering multi-platform Enterprise Mobility Management and Telecom software solutions.” It has won a raft of awards for its financial performance and innovative technology. Its share price reached an all-time high in early October.

I reckon Globo employs extremely aggressive accounting.

I will attempt to highlight why its accounting could be considered aggressive, through comparison to a peer. I will also attempt to highlight other aspects to the accounts which should make any reader’s jaw drop.

What does Globo do? ...   

Globo has two main product offerings; Enterprise Mobility (GO!Enterprise) and Consumer mobility (CitronGO!).

The Enterprise Mobility products allow for employers to manage users, content, security etc with regards to access to its data. For employees it allows access to their corporate email, calendar, tasks, notes, customer relationship management data etc, through their own mobile device; Bring Your Own Device (BYOD).

The Consumer Mobility products provide the ability to access smart phone services on feature phones (the more moderately priced alternative to smart phones but obviously lacking the smart phone capabilities). The target customer is aged between 17-30, has email, has a feature phone but wishes to access social networking sites, such as Facebook, Twitter, YouTube, which are available on smart phones. I’m 34 years old. I know plenty of people in their twenties. Not one of them has a feature phone. Come to think of it, I don’t know anyone with a feature phone. That aside, the target market also encompasses the developing world, where topography and economic factors impacts the preponderance of feature phones. Developing markets are therefore a principal demand driver for CitronGO!

Strong record of growth ...

Since 2007, Globo has reported remarkable growth. Its last annual report shows continuing 2012 revenues of €46.0m, gross profit of €24.1m, and PBT of €17.2m. It has a gross profit margin of 52%, an EBIDTA margin of 48%, and a PBT margin of 37%.

Globo 2011 & 2012 P&L
Source: 2012 Annual Report

How does this compare? ...

By comparison, the US-listed provider of enterprise mobility solutions, Aruba Networks (ARUN US, mkt cap $2.0bn), had FY 2013 revenues of $600m, with a 71% gross profit margin, a 2% EBITDA margin, and was loss making to the tune of $10m at the PBT level. Coincidentally, each company's revenue growth has been practically the same since 2009 (I have included Globo's discontinued operations in this, i.e. including Globo Technologies - see further below). They're in the same field. Their revenues grow at the same pace. Aruba seems like a good comparator

Here are some charts illustrating how Globo compares to Aruba ...

Globo revenue growth compared to Aruba Networks revenue growth
Source: Globo Annual Reports, Aruba 10-Ks, Bloomberg,
2013 Aruba actual (Jul yr-end), 2013E Globo consensus
Globo gross profit margin compared to Aruba Networks gross profit margin
Source: Globo Annual Reports, Aruba 10-Ks, Bloomberg,
2013 Aruba actual (Jul yr-end)
Globo EBITDA margin compared to Aruba Networks EBITDA margin
Source: Globo Annual Reports, Aruba 10-Ks, Bloomberg,
2013 Aruba actual (Jul yr-end), 2013E Globo consensus
Globo revenue compared to Aruba Networks revenue
Source: Globo Annual Reports, Aruba 10-Ks, Bloomberg,
2013 Aruba actual (Jul yr-end), 2013E Globo consensus
Globo EBITDA compared to Aruba Networks EBITDA
Source: Globo Annual Reports, Aruba 10-Ks, Bloomberg,
2013 Aruba actual (Jul yr-end), 2013E Globo consensus
Globo cumulative revenue compared to Aruba Networks cumulative revenue
Source: Globo Annual Reports, Aruba 10-Ks,
Aruba (Jul yr-end), Globo (Dec yr-end)
Globo cumulative EBITDA compared to Aruba Networks cumulative EBITDA
Source: Globo Annual Reports, Aruba 10-Ks,
Aruba (Jul yr-end), Globo (Dec yr-end)
Globo cumulative operating cash flow compared
to Aruba Networks cumulative operating cash flow
Source: Globo Annual Reports, Aruba 10-Ks,
Aruba (Jul yr-end), Globo (Dec yr-end)
Globo net capex as % of sales compared
to Aruba Networks net capex as % of sales
Source: Globo Annual Reports, Aruba 10-Ks,
Aruba (Jul yr-end), Globo (Dec yr-end)
Globo cumulative net capex compared
to Aruba Networks cumulative net capex
Source: Globo Annual Reports, Aruba 10-Ks,
Aruba (Jul yr-end), Globo (Dec yr-end)
Globo cumulative net borrowings and share issue
compared to Aruba Networks cumulative net borrowings and share issue
Source: Globo Annual Reports, Aruba 10-Ks,
Aruba (Jul yr-end), Globo (Dec yr-end)
Source: Globo Annual Reports, Aruba 10-Ks,
Aruba (Jul yr-end), Globo (Dec yr-end),
Operating and net capex to 2012,
net proceeds includes Aruba actual and Globo consensus 2013,
$ values translated to €'s at 1.38
Globo and Aruba's trade receivables, accrued income,
pre-payments, amounts recoverable on long-term contracts
as % of sales compared
Source: Globo Annual Reports, Aruba 10-Ks,
Aruba (Jul yr-end), Globo (Dec yr-end)

Several observations from the charts above:
  1. Each company’s revenue growth has been practically the same since 2009 (I have included Globo’s discontinued operations in this, i.e. including Globo Technologies).
  2. Aruba’s annual revenues are roughly 6x that of Globo’s.
  3. Aruba achieves a superior gross profit margin to Globo.
  4. While Aruba’s gross profit is superior, its EBITDA margin is paltry compared to Globo’s. In fact it’s never been above 6%, while Globo’s has never been below 38%.
  5. During the period 2009-12, while Globo reported a cumulative €158m in revenue and €70m in EBITDA, Aruba reported €1,379m (c. €1,000m) in revenue and $3m (c. €2m) in EBITDA. Globo is clearly doing something right!
  6. Globo has been investing heavily since 2009, so that as a percentage of sales, net capex has averaged 28% per annum. Aruba has been somewhat more pedestrian, spending an average 2% of sales on capex per annum.
  7. On a total cumulative basis, Globo has spent €41m on net capex during the period 2009-12. This compares to Aruba having spent $33m (c. €24m).
  8. Globo has consistently raised finance through debt and share issuance. Aruba has issued equity but also bought it back.
  9. Globo's trade and other receivables have run at 93% to 115% of sales. Aruba's have never been above 23%. 

Oh by the way, Aruba Networks also expensed $140m (23% of sales) as research and development costs during FY 2013 to its P&L. And regularly expenses c. 20% of revenue per annum as R&D. 

Eyebrow raising accounts ...


In comparison to its peer, Globo seems to capitalise a vast amount of cost, has raised significantly more finance through equity and debt, and has a receivables problem. 

In 2011, Globo appeared to have (and I reckon still has) a trade receivables problem. In 2011, the group had €25m (55% of sales) in trade receivables. Further, other receivables and other current assets, the bulk of which were prepayments and accrued income and amounts recoverable on long term contracts, totalled €18.5m. This meant that Globo had €43.5m (96% of sales) tied up in trade receivables, prepayments, accrued income and amounts due on long term contracts. Why amounts due on long term contracts fall into current assets I’m not sure; especially as other receivables classed as non-current in 2011 were de minimis

Globo assets
Source: Globo 2012 Annual Report
By 2012, all these balance sheet items added up to €33.7m or 58% of total 2012 sales, and 73% of 2012 continuing sales. How did this decline?

On 3 December 2012, Globo divested its Greek operations (announcement here). It sold 51% of its subsidiary, Globo Technologies (GT), to a company called, Zipersi Consulting, owned by GT’s management team for €11.2m. This was deferred consideration. In fact the payment schedule seems particularly favourable, with €9.2m of the consideration not due until December 2014 at the earliest and the final instalment in December 2016. Interest at a rate of 5% per annum.

Globo divestment of Globo Technologies
Source: Globo 2012 Annual Report
According to Globo’s 2012 accounts, as at 31 December 2012, GT had €29.7m in trade receivables (including intra group balances), €1.0m in other receivables, and €10.4m in other current assets; a total of €41.1m. GT’s revenue was reported by Globo to be €12.1m to 30 November 2012; hence the €41.1m in trade receivables, other receivables and other current assets, equated to 341% of this 11 month sales figure (2011: 176% on the same basis). 

Globo's record of Globo Technologies' assets
Source: Globo 2012 Annual Report
However, ...

Globo Technologies’ 2012 accounts can be found here; google does a surprisingly good translation. There are some discrepancies with Globo’s record and GT’s. Whereas Globo has GT’s trade receivables at €29.7m, GT has them at €15.8m as at 31 December 2012. In general, the other asset lines also do not tally, although the discrepancy is not that much. The revenue line differs considerably. Whereas Globo has GT achieving €12.0m in revenues to 30 November 2012, GT reports €35.7m in revenues to 31 December 2012. This discrepancy may be down to the sale back of 2 companies from GT to Globo on 22 November 2012, which is mentioned in note 4.4.1 in GT’s 2012 accounts.

Globo Technologies' statement of assets as at 31 December 2012
Source: Globo Technologies 2012 Annual Report
What is really weird is that in Globo’s accounts, it reports GT’s assets as at 31 December 2012, but reports GT’s liabilities as at 3 December 2012. I have no idea whether this is a typo or by design. If the latter then any clues as to why would be welcomed.

Globo's record of Globo Technologies' liabilities
Source: Globo 2012 Annual Report
Further into Globo’s 2012 accounts, in note 21 (page 93), Globo indicates that its share of GT’s revenue was €810,000, which I reckon is for the period from 3 December 2012 to 31 December 2012. This would imply a revenue run rate of c. €20m for GT, (€810,000 x 12 (months) / 49% (Globo’s share). This is higher than the €12.0m of revenues reported to 30 November but less than the €35.7m of revenues that GT reports to 31 December 2012. I have no idea how this reconciles. Further, whereas Globo has GT reporting a profit before tax of €671,000 on revenues of €12,049,000 to 30 November 2012, according to note 21, its share of profit for the period 3 December 2012 to 31 December 2012 comes to a loss of €297,000 on revenues of €810,000.

By the half year stage to 30 June 2013, GT is reported by Globo, to be achieving H1 revenues of €13.6m and PBT of €1.49m, of which €0.7m is attributable to Globo.

As at 31 December 2012, Globo carried its investment in GT at a value of €10.5m on its balance sheet. It also carried the €9.7m in deferred consideration due as non-current other receivables. At the interim stage to 30 June 2013, the carrying value of this investment appears to have risen to €11.2m, while in light of the remaining €600,000*** in deferred consideration which was due on 15 January 2013 and €500,000 due on 31 December 2013, the other receivables line in non-current assets has fallen to €9.3m.
  
***According to the annual report, in note 15 (pages 85-87), €400,000 of the initial €1,000,000 that was due by 15 January 2013, was received prior to the year end, i.e. before 31 December 2012. Hence this is reflected as a cash inflow, and can be seen in the accounts in the last section of note 15, under the net cash (outflow)/inflow related to GT. However, it would also appear that while €400,000 in cash was received, the €7,061,000 in cash and cash equivalents (I presume all cold hard cash) that was held by GT, went with GT. This resulted in a net cash outflow on disposal of GT, of €6,661,000. This is an altogether odd flow of cash for a disposal. Usually one would imagine that the cash flows from the acquirer to the vendor and not the other way around, albeit with an understanding that it flows back over the years to come.

Net cash outflow upon disposal from Globo to Globo Technologies
Source: Globo 2012 Annual Report
Flow of cash from Globo to Globo Technologies
and anticipated deferred consideration schedule
Source: Globo 2012 Annual Report
What I am struggling to find is a reference within the recent interims, to 30 June 2013, which highlights the receipt of the remaining €600,000 which was due on 15 January 2013. The €400,000 of the €1,000,000 due by 15 January 2013 was received in advance and prior to the 2012 FY end and reported. I cannot find the remaining €600,000 cash inflow referenced in the interim’s statement of cash flows.   


So what's happened? ...

What Globo appears to have done is to have put a load of receivables off-balance sheet, replaced on Globo's balance sheet with deferred consideration and a investment valuation in an associate (Globo Technologies).

Continuing annual sales as stated in Globo 2012 Annual Report
Source: Globo 2012 Annual Report
Total annual sales (including Globo Technologies) and
deferred consideration and investment accredited to Globo Technologies
Source: Globo 2012 Annual Report
In the meantime, Globo continues to raise finance and generate free cash outflows.

Net proceeds from borrowings and share issue
as compared to operating and free cash flow
Source: Globo accounts and Bloomberg 2013E consensus

Further concern ...


Within note 31 of the 2012 accounts, Globo highlights something which should raise further concern.

Source: Globo 2012 Annual Report
It would appear that in raising debt, that the group uses its debtors as security. Selling receivables before the collection date in return for finance is a tried and tested method for manipulating operating cash flow. One interpretation may be that this is precisely what Globo is doing here. Companies sell trade receivables (usually to banks), transferring ownership, and take in the cash up front. The benefit to the cash flow statement is that the raising of finance can be demonstrated as a reduction in debtors and therefore a cash inflow to the operating cash flow section as opposed to a financing inflow.

I note that Globo’s CEO, Mr Costis Papadimitrakopoulos, personally co-guarantees the banks’ credit facilities. This statement is somewhat ambiguous, but I take it to mean that he is a guarantor for the facilities in the event that the receivables do not pay up. The way this is worded sounds more like the CEO is so confident in the quality of the receivables (the security) that he has offered to act as guarantor. Somehow I doubt that this was voluntary. 


Further, I have no idea what securing “major customer contracts in exchange for 60-70% of the contract value” involves, but it doesn’t sound good. 

In summary ...


All of this is more than enough to raise all of my eyebrows and prompt me to get on the phone to Jackie at ETX to short more.



Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog. 

15 comments:

  1. Good luck with your short, there is no right or wrong answer just a view and the market tape is the one that decides. Shorters make sure you take your profits when they present themselves as the longs should have over the years. Suspect we will see plenty of movement but still expect be will be higher than we are now in 12 months

    ReplyDelete
  2. One thing that would address a lot of the confusion would be a statement of the payment terms extended to their key customers. The rather large debtors could then be judged based on what the reader can see it should have been.

    ReplyDelete
  3. Aruba is in a completely different business.they sell Wireless Lans and other hardware.

    ReplyDelete
    Replies
    1. Globo: "Globo is an international leader and technology innovator delivering multi-platform Enterprise Mobility Management and Telecom software solutions."

      Aruba: "Aruba Networks, Inc. is a leading global provider of enterprise mobility solutions. We develop, market and sell products and services designed to solve our customers' secure mobility requirements through our MOVE architecture, which unifies the network infrastructure, access management an mobility applications into one integrated system that offers strong security and a simplified approach to BYOD initiatives."

      I suggest you visit the Aruba website for more info: http://www.arubanetworks.com/

      They're actually more alike than you think, apart from that Aruba generates cash, buys back stock, has low receivables relative to sales, doesn't employ aggressive accounting and is rewarded for these facts by a 27x P/E rating as compared to Globo trading on a P/E of 7x. This latter point should definitely tell you something.

      Matt

      Delete
  4. Yes it has been at the end of a concerted shorting campaign.

    ReplyDelete
    Replies
    1. Judging by today's volume, it appears more likely a few decent sized holders selling out than "a concerted shorting campaign."

      Either way, I would not presume it is at an end.

      Matt

      Delete
  5. Aruba also happens to be listed on the Nasdaq and I am sure that Globo's rating would be much higher if and when they do the right thing and move away from the bent London market.

    ReplyDelete
    Replies
    1. Do you ever wonder why they are on "the bent London market" in the first place?

      Matt

      Delete
  6. I think you will find the three main competitors Airwatch LLC, MobileIron Inc. and Good Technology are in private equity hands although,the latter is expected to become public.

    ReplyDelete
  7. You forget to mention how much cash Aruba has raised $620 million in equity versus Globo's $59 before the last placing.
    Some ten times more.
    Rather an important point.

    ReplyDelete
  8. You omit that Aruba has raised $620 million in equity,ten times more than Globo

    ReplyDelete
    Replies
    1. If you can. Please demonstrate how you arrive at this figure.

      Matt

      Delete
  9. Aruba is loss making despite being in business for 13 years,is growing at only 14% per annum and is on a p/e of 27.
    Globo is profitable,is growing at faster than 50% and is on a p/e of 7.
    That tells me Globo is extremely undervalued.

    ReplyDelete
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