LON:TRMR | Taptica Q & A (18/05/18) - Potential Red Flag/issue?

18th May '18 by David Cheong

17 comments 6339 reads

Most recently Taptica released a QnA (https://www.taptica.com/wp-content/uploads/2018/05/QA-Hagai-Tal-May-2018.pdf).

Taptica has two revenue streams: the performance division which is the original Taptica business, and the brand advertising division, Tremor video.

There was a question and answer which I am unclear about - I wanted to check with more expreinced investors and/or accountants on their thoughts......:

One of the questions and answers in the QnA was :

Q: Why does the moving around of costs and people between areas (i.e. performance to branding) of the business mean that organic growth cannot be tracked at least on the top line?

A:The revenue of the two divisions can be tracked, but the profit cannot as we keep costs below each division fluid, i.e. we constantly move staff between the two divisions to create operational efficiencies.

If organic growth cannot be tracked on the top line, is this a potential red flag or issue in terms of quantifying / measuring /auditing the top line growth? or am i missing something and this is not an issue to worry about?

Thanks all

Dav

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jjis

18th May '18

You asked If organic growth cannot be tracked on the top line, is this a potential red flag or issue in terms of quantifying / measuring /auditing the top line growth?

From your post - A:The revenue of the two divisions can be tracked.

From the Annual Results statement:
"Significant revenue growth driven by contribution of new international offices and successful acquisitions"
Which probably makes discerning the organic growth rate more difficult, but a little later on in the statement they say
"Revenues increased by 68% to $210.9 million (2016: $125.9 million), including mobile in-app (non-video) year-on-year growth of 35%"
Although obviously some of this may reflect new offices or acquisitions.

So overall I would say that as it is growing by expanding into new regions and via acquisition this makes defining organic growth somewhat difficult, although as they say top line total revenue growth can be measured.

Hope this helps.

rhomboid1

I think it is a serious issue, I read the Q&A and stopped at that point , if you can’t measure organic growth in profits then you’ve got a major credibility problem , in a simplistic example it’s one person working in 2 areas , one the ‘old’ bit , another the ‘new’ bit ..it’s possible to split & allocate their costs but for whatever reason they’ve chosen not to. I find that unusual

GrahamF

I think you're misreading what they are saying.

You have to imagine that the questions are coming from an analyst and not the company. The direct question from the analyst about revenues is "Why does the moving around of costs and people between areas (i.e. performance to branding) of the business mean that organic growth cannot be tracked at least on the top line?"

What they are answering is in two parts. (i) "The revenue of the two divisions can be tracked" (ii) but the profit cannot as we keep costs below each division fluid, i.e. we constantly move staff between the two divisions to create operational efficiencies.

So, the answer to the analyst's question as I see it could more accurately be.......Top line growth (i.e. revenue growth) is tracked by division. In other words the statement in the question that it cannot be tracked is wrong.

So, they seek to explain the confusion in the second part of the answer. To me this second part simply means that they choose at this time not to count the amount of time each member of staff spends on each project for each business. The plus side is that you don't spend time on admin activity and then arguing about whether the figures are right or not; activity which adds no value for the customer. The negative side is that the profitability of each activity is less visible.

Having to account for each hour of the day that you spend can be a very stifling, big brother is watching, environment that kills enthusiasm and creativity.

Although it has around 200 employees, this is still a relatively small company and we shouldn't necessarily expect them to seek to have all the bureaucracy, processes and systems that large companies have. One of the reasons large companies need them is because the senior management are so remote from the front line. that's less true down at this level.

I don't see this as a particularly worrying sign at this time. As they grow, they will gradually need to put more controls in place. And they are well aware that there is a trade off being made here. It is after all fairly early days for the Tremor acquisition to bed in.

In my view the thing to watch out for is declining margins. If this starts to occur, it could be due to market pressures but it could also be because they've lost control of their costs due to inadequate management. If margins are reasonably stable then less to worry about.

Thx Graham ..agree with a lot of that but I cannot understand why a simple 50/50 split or whatever can be agreed , it is after all critical to the business to know how their acquisitions are panning out in profit terms...not revenue

DaviStoVest

But that could be seriously misleading if the actual splits were not in fact 50/50. Instead of a lack of information you would have the illusion of information that really amounts to nothing and could lead to mistaken conclusions.

If Taptica are not monitoring time allocations at the employee level, drawing a number out of the air will not improve matters.

A guesstimate is better than flying blind no?

I'm an economist. As a profession, we are notorious for making assumptions to leapfrog gaps in data. But there are good and bad ways of making assumptions. The good way is to argue "we don't know 'x' ... but we do know 'y' and we also know 'z' and on that basis it is reasonable and defensible to assume such and such a value". After that, it is also a good idea to do some sensitivity analysis to see if plausible errors in your assumption would affect your analysis to the point where it would lead you to a different conclusion. A guesstimate is worthless, however, and is dangerous because it leads you to behave as though you know things that you do not. It generates a false sense of certainty where none should exist.

In this case, I think Taptica should be putting a bit more effort into working out time allocations across its two businesses (maybe through occasional surveys rather than through introducing a time-sheet model) so that they could provide at least indicative, management accounting level, information about the profitability of the two businesses. Indeed if I was a member of the BoD, I would insist on it. No reason to fly blind without instrumentation if you don't actually have to.

I think you’re agreeing with my point then, not attempting to allocate costs correctly is a red flag, but spending too much time attempting to do so to the nth degree is overly burdensome, a guestimate to me is a broad brush attempt to hit a moving target & if done in good faith is better than doing nothing which appears to be the TAP approach

Probably, I am ... I just prefer 'informed assumption/estimate' to 'guesstimate' as a matter of terminology but that's not really so important.

Again, if I were on the BoD, there are others things that I'd be trying to get my management accountant to figure out ... especially what costs vary with output in each line of business and how much cost is fixed. And, again, I'd prefer an informed estimate to nothing at all.

Agreed

Luthrin

19th May '18

In the Marimedia Ltd (now Taptica) May 2014 Placing and Admission document to AIM, the Risk Factors section contains the following (page 32):

"As noted in paragraph 7.9 of Part IV of this document, Hagai Tal is a co-defendant in a claim arising out of the acquisition by Great Hill Equity Partners of Plimus Inc, a company of which Mr Tal was, prior to its sale, the chief executive officer and a minority shareholder. All the defendants to the claim (including Mr Tal) deny any wrongdoing and intend to vigorously defend themselves against it. However, there can be no guarantee that, should the claim proceed to trial, their defence would be successful. Any judgment against Mr Tal could have an adverse effect on the Company, its reputation and its relationships with its customers."

After digging deeper into this claim (which I believe is still ongoing), and in particular after reviewing this Delaware Chancery Court opinion , I reluctantly sold all of my holding in Taptica last month at a 6% loss.

I appreciate that as a consequence I may be missing out on a great growth story, but the above issue undermined my faith in the veracity of any of the company's claims, and this applies to the Q&A RNS released on Thursday.

gus 1065

Hi Luthrin.

Thanks for your post and the link to the 2014 DCC opinion. I’ve previously (albeit over 10 years back) been involved in various types of commercial litigation and the process can at best be described as “ugly”, especially in the US. Both sides put the best possible case together based on their selection of appropriate facts (or at least alleged facts) then dress it up in all manner of self-righteous indignation and spin to undermine the opposite side.

I’ve speed read the opinion (so apologies if I’ve missed a lot of the finer detail) but it boils down to the PE acquirer of Plimus, Great Hill Equity, alleging a conspiracy on the part of Plimus directors, their original PE shareholder and their advisers Goldman Sachs to withhold information/present misinformation on the reasons for the termination of its relationship with their principle payment processors. Hagar Tal is tied up in this as CEO of Plimus and is further tarred for seeking payments to induce (the documents describe this as “black mail”) him to agree to tie himself into the Plimus equity after the deal completes (to avoid spooking the buyer that he is not happy with the future prospects of the company).

I’ve tried to do a bit more digging to see if I can find an update on the process to trial. Unfortunately most of the reporting is behind specialist US legal “subscriber” walls and I’m disinclined to register/pay to get into the labyrinth. It looks as though the case is still proceeding (at least it was at the end of November 2017) although the Defendents (i.e. Tal and co) seem to have made several attempts to get a Summary Judgement to strike out the case which have to date been refused. This suggests the judge thinks there is a case to be answered in a trial, not necessarily that the case is proven while the defendents think they have a strong case to get the lawsuit thrown out. Getting this kind of Summary Judgement, in the UK at least, is usually quite a high hurdle to get over.

At risk of being simplistic, the obvious flaw in the Great Hill case is that any reasonable due diligence on their part would presumably have required them to check the reasons for the termination of the relationship with the payment processor directly, which they failed to do. Caveat emptor and all that. That they failed to do this and overpaid for a pup leads them to seek restitution by slinging as much mud as they can and presumably hoping for a cash settlement to avoid the expense to both sides of the legal due process and the possible bad publicity for Marimedia/Taptica and the associated parties. (Now who’s going down the blackmail route?)

At face value, Tal and co., don’t appear to come out of this smelling of roses and I can fully understand this calling into question his integrity and hence the veracity of anything else he might say about Taptica International (LON:TAP) . The Q&A you refer to put out by Tal last week certainly contains a lot of “Trust me, it’s not an issue” type commentary on some quite meaty issues so I can see why any previous record of dishonesty would make an investor nervous. Sadly this kind of legacy dispute/due process is surprisingly common and the universe of squeaky clean operators totally above reproach (or at least alleged reproach) is not as wide as we might like it to be. Whether it completely undermines the investment case in Taptica International (LON:TAP) is a judgement call. Tricky business this investing lark ...

Gus.

Thanks for your considered reply, Gus.

I appreciate that such court actions involve a great deal of mudslinging, particularly from the plaintiff. I had been what might best be described as a 'nervous holder' of Taptica International (LON:TAP) for some time, and so I'll openly admit to being swayed by some of the remarks made by Vice Chancellor Glasscock in the document I cited (they didn't leave me in much doubt as to his views on the conduct of some of the individuals involved).

It may well be a case of confirmation bias tipping my hand, but 'caveat emptor and all that' surely applies equally to purchasers of Taptica shares, and since I now have concerns over material disclosures not being made to investors, I'm happy to sit this one out for the time being.

donald pond

I still hold Taptica International (LON:TAP), but its price is a worry, especially compared with the Trade Desk in the US. Either it is ridiculously undervalued or the chart is telling me something and I am refusing to listen. It is a very difficult call and I respect your decision Luthrin, there are plenty of other companies out there that a "fear of missing out" is never a valid consideration for holding something. And yet, it is insanely cheap if there are no unknowns there. Decisions!

Hi Luthrin.

Fair enough - can’t argue with your conclusion. Plenty of other potential flags (overseas AIM, 30% share price fall in the last 3 months, identified with being tied in to an off the boil Facebook association etc.) - not necessarily “red” but enough to be a concern. I have a small holding, but by no means convinced and inclined to sell rather than buy more.

Gus.

David Cheong

20th May '18

Thanks all for the responses. I wonder what Paul Scott or Neal Graham would say on this issue. How do we 'alert' them to request their input?

Axonic

21st May '18

I just feel it's a measure of the management that they left it so long before trying to defend the company against the recent facebook issues. I did see a very short and unconvincing statement saying that they we're not affected by what was happening with CA but you have to wonder what they were playing at.

Taptica Q & A (18/05/18) - Potential red flag/issue?

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David Cheong

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