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%.
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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 ...
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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:
- 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).
- Aruba’s annual revenues are roughly 6x that of Globo’s.
- Aruba achieves a superior gross profit margin to Globo.
- 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%.
- 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!
- 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.
- 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).
- Globo has consistently raised finance through debt and share issuance. Aruba has issued equity but also bought it back.
- 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.
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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.
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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).
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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.
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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.
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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.
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Net cash outflow upon disposal from Globo to Globo Technologies
Source: Globo 2012 Annual Report |
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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).
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Continuing annual sales as stated in Globo 2012 Annual Report
Source: Globo 2012 Annual Report |
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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.
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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.
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| 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.
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