Wednesday, 16 July 2014

Globo (GBO) ... a peek at the Greek

Wednesday 16th July 2014
  • Globo (GBO) divested 51% of its Greek operation, Globo Technologies (GT), in Dec 2012.
  • GBO values GT at c. €23.7 million.
  • 57% of GT’s net book value appears to be related to capitalised intangibles/software.
  • 17% of GT’s net book value appears to be trade receivables over one year past due.
  • GT’s revenue declined by 29% in 2013.
  • GT's software related revenue fell by €14.480 million or by 75% in 2013. 
  • GBO's Enterprise and Mobile software project revenues rose by €17.781 million in 2013.
  • GT reported a €12.529 million cash outflow in 2013, largely on intangible/software items. 
  • GT’s net debt has risen to €13.731 million in 2013 (2012: €0.780 million).
  • GT trade receivables and revenue recognised under IAS 11 is 101% of 2013 revenue.
  • 36% of GT’s trade receivables are over one year past due.
  • GT has not reported positive operating cash flow for two consecutive years.
  • GT's 2013 free cash flow was negative c. €12.867 million. 
  • GT is held on GBO’s balance sheet with a value of €11.625 million (2012: €10.464 million).
  • GT's management still owe GBO €9.7 million.
  • I am short GBO.

Globo’s (GBO) 49% stake in Globo Technologies S.A. (GT) is held on Globo’s balance sheet with a value of €11.625 million as “Investments in an Associate”, while €9.700 million is due from GT's management as “Proceeds from disposal of a subsidiary”. A total of €21.325 million is attributable to GT, which is just over 15% of GBO’s net asset value for 2013. Other than an update from September 2013, little has been heard of GT since GBO’s Greek operation was divested on 3 December 2012.

Globo 2013 accounts: Investment in Associate
Globo 2013 accounts: Proceeds due from Globo Technologies
GBO sold 51% of its subsidiary, Globo Technologies (GT), to a company called, Zipersi Consulting, owned by GT’s management team. GT was sold for €11.2 million. This was deferred consideration. In fact the payment schedule seemed particularly favourable, with only €2.0 million of the deferred consideration due over the first two years and €9.2 million due from December 2014, through to a final instalment of €3.7 million due in December 2016.

In addition to the preferential financing terms, according to GBO's 2012 annual report, in note 15, while an initial €400,000 was received by GBO as a first receipt of consideration due from GT's management team, it would also appear that €7,061,000 in cash and cash equivalents went to 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 from GT's management team
Source: Globo 2012 annual report 

One may ask why GBO elected to sell 51% of its stake in GT? If the business was bad, then why not sell all of it? If it was a good business, then why sell it at all, or even as much as 51%? Especially on preferential financing terms to the management team buyers?  

The upshot of all this was partly aesthetic in that a boat load of receivables prior recorded on GBO’s balance sheet, were replaced by a relatively anodyne “Investment in associate” and “Proceeds due”. Indeed this was alluded to in the accompanying divestment announcement:

“In addition, the exclusion of assets and liabilities (including debt) from the Group’s balance sheet will provide significant additional visibility to the investor community on the Group’s international operations and financial performance.”

Globo updated the market on 23 September 2013, as to its own and GT’s performance. At that time, GBO’s CFO, Mr Dimitris Gryparis stated:

“The divested company Globo Technologies S.A. is out-performing expectations and trading ahead of forecasts. For the six months ended 30 June 2013, its revenue increased by 233% to €13.64 million (H1 2012: €4.09 million). It has a pipeline of public and private sector contracts of more than €10 million to the end of the year.

Profit after tax reached €1.49 million, with that attributable to the Globo Group, as a 49% shareholder, being €0.7 million.”

GT’s 2013 full year accounts can be found here. They highlight that revenue in the full 2013 year was €25.224 million, down from €35.701 million in 2012. There are several things to note here:
  1. This is a dramatic year on year decline in revenue. Revenue fell by 29%.
  2. If, as GBO’s CFO highlights, GT achieved €13.64 million of revenue in H1 2013, as against €4.09 million for H1 2012, then this means that GT’s H2 2012 revenue would have been €31.611 million. This would imply that while GT’s H1 2013 revenue may have been 233% higher as compared to H1 2012, that H1 2013 revenue was 57% lower than revenue achieved in H2 2012. Further, at €11.584 million, H2 2013 revenue would be 63% lower than H2 2012 revenue. See GT's revenue trends as implied by Globo statements and GT's 2013 accounts in the chart below.  
  3. GT's revenue decline was attributable in the main to a €14.480 million fall in software applications revenue. This fell from €19.209 million in 2012 to €4.729 million in 2013. A drop of 75%. Incidentally, in the same year, GBO's Enterprise mobility licences & subscriptions and Mobile software projects business lines were going great guns. They grew revenue a combined €17.781 million in 2013. As highlighted further down, while GT's software related revenue plummeted, its cash outflows on capitalised software related items went considerably higher. Why was this when revenues were falling so sharply? 

Revenue of Globo Technologies as implied by Globo statements and Globo Technologies accounts
Source: Globo, Globo Technologies annual reports

The quality of GT’s revenues is also worth considering. GT’s accounts highlight that revenue rose and fell as follows in the chart below during 2010 to 2013:

Globo Technologies revenue: 2010 to 2013
Source: Globo Technologies annual reports
GT’s trade receivables were as follows during 2010 to 2013, highlighted in the chart below:

Globo Technologies trade receivables: 2010 to 2013
Source: Globo Technologies annual reports

GT’s revenue recognised under IAS 11, which is essentially revenue recognised under long-term contracts and the corresponding cash due, was as follows during 2010 to 2013 as highlighted in the chart below:

Globo Technologies revenue recognised under IAS 11: 2010 to 2013
Source: Globo Technologies annual reports

And finally, adding trade receivables and revenue recognised under IAS 11 together and contrasting this with reported revenue during 2010 to 2013 was as highlighted in the chart below:

Globo Technologies revenue, trade receivables and revenue recognised under IAS 11: 2010 to 2013
Source: Globo Technologies annual reports

GT’s 2013 trade receivables and revenue recognised under IAS 11 is equivalent to 101% of revenue in 2013. This was up from 64% in 2012. 

Having established that GT’s revenue was equivalent to 101% of its trade receivables and revenue recognised under IAS 11, now what about the quality of those trade receivables?

Trade receivables were reported as €15.770 million in 2012. Of these, €1.365 million was reported as being above 360 days overdue. Hence in 2012, 9% trade receivables were over a year past due.

By 2013, trade receivables were reported as €12.363 million. Of these, €4.402 million were reported as being above 360 days overdue. Thus in 2013, 36% of trade receivables were over a year past due.

English translation of Globo Technologies ageing of trade receivables
Source: Globo Technologies 2013 annual report
Greek original of Globo Technologies ageing of trade receivables
Source: Globo Technologies 2013 annual report

Percentage of Globo Technologies trade receivables over 360 days past due
Source: Globo Technologies annual report

So we have now established that GT’s trade receivables and revenue recognised under IAS 11 was equivalent to 101% of revenue in 2013 and that 36% of its trade receivables were over a year past due. I reckon this to be an alarming deterioration in the quality of revenue and corresponding cash flows.

Of course in the spirit of openness, it is worth highlighting that:
  1. While 2013 revenue experienced an outright decline of 29% YOY;
  2. and that this (101%) was more than all reflected in trade receivables and revenue recognised under IAS 11;
  3. and that 36% of these trade receivables were more than a year past due;
  4. that GT’s operating profit actually improved (!!!) by 144% to €5.980 million in 2013 from €2.453 million in 2012.

But also worth highlighting is that GT’s net debt increased from €0.780 million in 2012, to €13.731 million in 2013, as illustrated in the chart below, and indicated in the company's balance sheet. This was primarily driven by an increase in long term debt from €0.953 million in 2012 to €15.533 million in 2013. The extra debt was seemingly needed to fund GT's considerable rise in capitalised software related cash outflows.

Globo Technologies net debt
Source: Globo Technologies annual reports


English translation of Globo Technologies 2013 balance sheet
Source: Globo Technologies 2013 annual report
Greek original of Globo Technologies 2013 balance sheet
Source: Globo Technologies 2013 annual report

GT’s cash flow statement highlights that it spent a fair wodge of cash on the purchase of tangible and intangible assets in 2013. GT’s cash flow statement highlights that there was a €12.529 million outflow related to the purchase of tangible and intangible assets in 2013, up from €6.050 million in 2012. The bulk if not all of this appears to have gone on "Δικαιώματα βιομηχανικής ιδιοκτησίας", which is translated as being "Industrial property rights". As this falls in the intangible assets section, I presume this means some sort of software related licensing or development. 

So while GT’s net assets were reported to have risen to €25.853 million in 2013, from €22.617 million in 2012, this was more than driven by an increase in reported intangible/software assets to €14.679 million in 2013, from €3.362 million in 2012. I.e., of GT’s 2013 net assets of €25.853 million, 57% (€14.679 million) is in the main, "Industrial property rights" or software related licensing or development. 

... Oh and whilst on GT's net book value, do not forget that of €12.363 million in trade receivables in GT’s net assets, 36% are over a year past due, hence 17% of GT's net assets is actually trade receivables over a year old.

... And also recall that software application related revenues fell by €14.480 million in 2013, while seemingly c. €11.047 million in software related expenditure was capitalised in 2013.  


English translation of Globo Technologies 2013 cash flow statement
Source: Globo Technologies 2013 annual report

Globo Technologies cash flow statement
Source: Globo Technologies 2013 annual report

Why is this important? It’s important because having been 51% disposed of, seemingly to eradicate unappealing trade receivables, GT is now booked on GBO’s balance sheet with an implied value of €23.7 million. This is almost GT's net book value (NBV), a book value of which 57% (2012: 16%) is comprised of software related development or licensing. A further 17% (2012: 6%) of GT's NBV is attributable to trade receivables which are over a year past due. Further, GBO has marginally increased its valuation on a company where revenue fell by 29% in 2013, and over 100% of that revenue is reflected in trade receivables plus revenue recognised under IAS 11. Further still, while software related revenues plummeted in 2013, software related cash outflows sky-rocketed. In the meantime, GBO's Enterprise and Mobile software business experienced strong revenue growth. In terms of cash flow, GT hasn't generated positive operating cash for two years running. Free cash flow was negative €12.256 million in 2013. GT's net debt has ballooned. And GT's management still owes GBO €9.7 million!

What would Mr Mostafa Khder say about all this?


Mr Mostafa Khder, reviewer of Globo's GO!Enterprise app
Source: Google Play


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. 

6 comments:

  1. I wondered when you would get round to confessing that profits had more than doubled in 2013 - it took a while. So GT have increased profits by taking on more higher margin work whilst some of the prior revenue is still outstanding as debtors. Nothing new here - remember the Greek financial crisis? Globo were under pressure to divest themselves of the Greek business precisely because of these concerns. If and when any of the Greek business is impaired then Globo's share of it as shown on its balance sheet under the equity method will be reduced accordingly. Hasn't happened yet though.

    Lot's of strange stuff in there about an increase in software development -surely a good thing as this only goes on the balance sheet if there is a marketable product with expected future profits? Yet you connect this increase in software development with a fall in revenue in 2013 - forgetting that it is profits not revenue that matter and the former have increased.

    All in all a bit of a storm in a teacup. Good to see Mr Mostafa Khder again; I wonder what he makes of Globo's inclusion in Gartner's Magic Quadrant?

    ReplyDelete
    Replies
    1. I expect Mr Mostafa Khder would say "Good Excellent." Although whether he only says this when paid to is unknown.

      Delete
  2. Not good enough analysis Mr Earl. Must try harder.

    tietjens 19 Jul'14 - 09:27 - 18769 of 18771 2 0

    In respect of the recent blog article regarding GTSA, I had a 5 minute look at the GTSA accounts for 2011 to 2013 using google translate. If you look at the subsidiaries consolidated it looks like Profitel was a subsidiary of GTSA prior to the disposal so included in its consolidation for 2012 but was retained within Globo post disposal i.e. it didn’t form part of the disposal group. This explains the revenue drop from 2012 to 2013 in that it relates to Profitel no longer being part of the GTSA group when it was disposed of in December 2012.

    Adjusting for this, the revenue of the disposed of GTSA go-forward group (i.e. excluding Profitel) was €12m to 2 December 2012 (see discontinued ops notes in 2012 Globo accounts). So revenue in 2013 of €25m demonstrates some significant growth, rather than deterioration which was the main premise of the article. It could be argued GTSA is therefore a company that is growing quickly and investing in the future, rather than one crashing into the ground as was portrayed.

    ReplyDelete
  3. Hi Mr DaCapo,
    Thank you for taking the time to read the post. However, I'm afraid you're misguided.

    Best
    Mr Earl

    ReplyDelete
  4. Mr DaCapo,

    Further to my reply. You really shouldn't believe everything you read. But I would suggest that you read the 2012 and 2013 accounts of Profitel Telecommunications. Particularly its 2012 revenue line. I would be interested to learn how you reckon your assumption stacks up with Profitel's reported revenue.

    Best
    Mr Earl

    ReplyDelete
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