LON:GBO^J17 | Globo - An Open Letter

30th Sep '15 by Ramridge

19 comments 20135 reads

Below is the text of an email I sent earlier today to Dmitrios Gryparis, Globo's Finance Director. The main issues have been unashamedly drawn from Paul Scott's blog of today (all E&OE are of course mine). Any replies I receive will be published here.

Dear Mr Gryparis

I am a Globo Plc investor who has been following your company’s fortunes fairly closely over the last 18 months. Your company’s rise in the global EMM & MADP market, focusing now on North America, has put you as a serious player punching well above your weight when compared to your competitors. I know from past experience in the software & IT industry that Gartner performs in-depth analysis and due diligence, and does not lightly award a company inclusion into the chosen sector’s Magic Quadrant. You are to be congratulated for this.

But I have a major problem.

Your interim and final reports and accounts have raised and continue to raise serious questions among the investment community. Today’s publication of the 2015 Interim Results does not it appears dispel the major concerns that investors & analysts have about the financial health of your company.

This email is addressed to you in your capacity as Finance Director, because the issues are not with Globo’s strategy or business delivery trajectory, but with finances. As long as these difficulties remain, Globo will continue to have its shares being very harshly valued on (currently) less than five times earnings estimates.

Here are the major issues.

1. Cash balances & long term debt

Your recent balance sheet accounts show Cash of €104.4m and Debt of €56.9m, which (looking at the P&L accounts) give rise to €368K investment income, and €1981K interest cost over 6 months. On an annualised basis that is an interest charge of near €4m. This is a substantial cost which it is argued could be avoided by simply paying down your debt leaving a net cash position of €47.5m. This net cash position represents approx. 33% of the company’s market cap – thus a significant war chest would still be available for future acquisitions.

2. Acquisitions

This next issue follows on from the one above. Raising funds via a high yield bond for further acquisitions is likely to be costly, with a gross redemption yield of at least 8%. The question then is why raise costly funds ahead of potential acquisitions when there are net cash balances of €47.5m available to the…

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Paul Scott

1st Oct '15

An excellent letter! It will be interesting to see what the response is like.
Well done for being proactive.

Regards, Paul.

Monty9

Ramridge, if I may piggy back your letter ...

I have also been invested in Globo for a few years and have been and remain most impressed by the development and growth of the business. I also share a concern with Ramridge, which is very specific

While the debtors are high, the payment record and recent collections has put my mind at rest but I think the "Other current assets" of EUR35.8M reasonably requires more visibility. At the moment my take on this, absent any other information, is:

Part will be normal prepayments (see 2014 finals) but about EUR34M (up from EUR20M 31-12-14) would be classified as "Accrued income and recoverable under long term contracts". This sounds like development work being undertaken in the mobile services' "Mobile software projects" income class. If so this suggests no more than EUR7M of the six months development has been invoiced (34-20 = EUR14M increase against EUR21M revenue). Looking at the 18 month history EUR32M of revenue is shown against the total accrual of EUR34M. Even allowing for the increase in sales volume through time this is close to 18months of revenue contained in the accrual. I see there appears to be a reserve of EUR0.59M against this.

It is this sort of asset that has often signalled problems in a company and the lack of analysis and explanation to such a material amount will inevitably give rise to concern. Are you able to provide explicit information on the makeup of this sum of EUR35M and some information to give comfort as to its recoverability?

TheWatchmaker

Well done Ramridge.
The content of any reply should make for interesting reading.

oneplusone

Great question. Just a quick clarification. The income for MBS for H1 2015 was EUR19.5M and not EUR21M, so even less revenue has been invoiced.

Ramridge

2nd Oct '15

Guys -
I have posted above a note from Mike Jeremy, Globo's Investor Relations Officer, that a reply from Costis and Dimitris will be with me soon.

tizo100

Well done Ram I have always found Mike Jeremy very helpful.

Flackwell

Well done for taking the initiative

5th Oct '15

Guys -
I have just posted a reply from Globo's FD which I received about an hour ago.

I am sure there will be interesting feedback over the next few days.

Regards, Ram

Ramridge, first of all, thank you for posting the reply from Globo's FD.

I am a little confused regarding the first answer about the financial charges. Am I misunderstanding the answer or is Dimitri Gryparis (FD) saying that the repayment of the debt (= amortization of debt) is included in the financial expenses?

JakNife

6th Oct '15

I feel that the first question could have been worded better, it only obliquely touches on the key point. Eg:

"As at 31 Dec 2014 Globo reported gross cash balances of EUR 82.8m and as at 30 Jun 2015 this had increased to EUR 104.4m.

So why on earth is Globo borrowing money? As at 31 Dec 2014 Globo had gross debt of EUR 42.4m and, despite reporting positive cash flow during H1, Globo drew down further on its debt facilities such that its gross debt position is now EUR 56.9m.

That means that Globo wastefully paid almost EUR 2m on debt facilities that it didn't need in H1. On the one hand Globo is paying LIBOR plus 350bps on its debt facilities whilst elsewhere it's placing cash on deposit at rates close to zero.

If it's not time to sack your CFO then I suggest that it is time for you to double check that he's not spinning you a yarn!"

regards,

JakNife

shauniekent

Nothing here to make me think anything other than this company is hiding something from investors (for example that booked revenue is fictitious).

The FD had chance to bat away the issues raised clearly and provide investors with answers that made commercial sense. Instead the answers seem to try and muddy the waters rather than provide something clear and sensical. Those responses weren't written to be clearly understood - but to cast doubt in minds of naysayers (bears) because they were difficult to follow (and wonder if maybe we just don't get it) and give bulls smth to grab onto (choosing to repeat rather than understand).
Aimho,
Shaun

janebolacha

The answers seem to be deliberate gobbledygook.
If that's the best they choose to produce
in response to questions from an investor,
then that is, imo, a reason in itself not to invest.

Rusty2

Well the biggest signal to me is how they are trying to raise money, a 10% junk bond which they seem to have trouble selling. The banks want their money back. 2 auditors leaving within a year is another signal. Along with various dubious accounting practices.

Guys -
Globo's FD was given the opportunity to dispel the doubts and queries which have dogged this stock for some time and kept its stock market valuation at a record low.

After reviewing his reply,
- Has the FD substantially cleared the fog around the main issues? No.
- Does his reply give me confidence in Globo's management? No
- Am I reasonably confident that the accounts do not go beyond just being aggressive accounting? No

That is sufficient for me to call it a day. I sold my holding this morning.

Regards, Ram

Ram - have to agree with you that that was an opportunity missed by the FD - which is extremely poor especially since he knew your answer was going to a wider audience.

Makes you wonder why they pay for advisors if this is the best they can come up with (and on the assumption that he would have sought their views prior to responding)

"Q: Your recent balance sheet accounts show Cash of €104.4m and Debt of €56.9m, which (looking at the P&L accounts) give rise to €368K investment income, and €1981K interest cost over 6 months. On an annualised basis that is an interest charge of near €4m. This is a substantial cost which it is argued could be avoided by simply paying down your debt leaving a net cash position of €47.5m. This net cash position represents approx. 33% of the company’s market cap – thus a significant war chest would still be available for future acquisitions.
A: The interest cost on current debt (as stated in our 2014 AR p100) is Euribor +3.5%, indicating a charge of approximately €2m on an annualised basis. This calculation, however, ignores amortisation of this debt, which commenced in April 2015. Financial charges - not pure interest costs - will include this amortisation figure, which is also not payable on a straight-line basis. In 2015 the resulting figure, comprising interest, amortisation and banking costs, should be approximately €4m in 2015."

I'd like to repeat my question regarding the first Q/A. Is Dimitri Gryparis (FD) saying that the repayment of the debt (= amortisation of the debt) is included in their financial expenses? I don't think his answer is very clear as he does not confirm what exactly is in the €1981K "finance costs"/"interest paid" for the first 6 months, but the wording implies that he claims the repayment of the debt is included in this figure?

The interim report itself shows that the repayment is NOT included in the "interest paid"/"finance costs" position. The Cash Flow statement (p. 18) clearly indicates interest paid of €1981K and repayment of borrowings as separate position of €900K. The position "Interest Paid" probably does include some banking costs as it is called "Finance Costs" in the Income Statement (p. 15), but nevertheless this shows that interest, amortisation and banking costs were in fact €2881K for the first 6 months. I doubt that the resulting figure, comprising interest, amortisation and bankng costs will be anywhere close to €4m for the FY 2015.

Am I missing something here or is the Financial Director displaying a fundamental lack of how their own accounts are generated?

To add on to my previous post on why I think the resulting figure, comprising interest, amortisation and banking costs will not be anywhere close to €4m:

The annual report 2014 (p. 99) indicates €2700K of long term bank loans payabale within one year. This means another €1800K of debt will be have to repaid in H2 and there will be at least another €1000K, but more likely €2000K, of "Finance Costs". The sum of interest, amortisation and banking costs would therefor be €5700K-€6700K for the FY 2015, being significantly higher than the €4000K projection by their FD.

oneplusone,

The FD is obfuscating. Firstly there was no debt amortisation; amortisation is a debt *repayment* but in practice additional debt was drawn down rather than repaid. Secondly though, debt amortisation is not included in financial expense, it is a balance sheet movement in the amount of debt, it is NOT a P&L item.

This is all irrelevant though. The point is simply that *IF* Globo has all this cash then it is needlessly wasting money paying interest to borrow money that it doesn't need.

pka

JakNife wrote: "The point is simply that *IF* Globo has all this cash then it is needlessly wasting money paying interest to borrow money that it doesn't need."

It does need the money - "for carrying out an undertaking of great advantage, but nobody to know what it is" (in the famous words of one of the companies that floated during the South Sea Bubble of 1720).

Globo - An open letter

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Ramridge

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