I was at the Annual General Meeting of Ideagen yesterday (a full report is here), and happened to talk to one of the advisors present about recent events at Globo, another software company. We agreed there was a problem with bulletin boards that should be tackled.
As mentioned in a previous blog entry, Globo has come under attack in the last few days on a number of bulletin boards and financial blogs for the quality of its business and its accounts (more comments on those allegations below, but let’s discuss the general problem of bulletin boards first).
As a result of these postings (which are not all one-sided), the share price has been driven down from over 80p on the closing of 21st October to about 55p at the time of writing. The volume of trading has also gone up significantly. Simon Cawkwell, aka “Evil Knievel”, seems to be one of the leaders of a concerted campaign to destroy the reputation of the company and, it is alleged, has been “shorting” the stock.
At least Mr Cawkwell has been posting using his own name on ADVFN (one of the main sites involved), which is more than can be said for many of the commentators. There are of course a myriad of other sites where these allegations have been made, or replicated.
Some sites are moderated, but others have no or minimal moderation. That means you get not just gossip and unsubstantiated allegations made thereon, but often personal abuse. I understand for example that on ADVFN, the creator of a board can moderate comments, but not those made by a paying subscriber. Otherwise the organisation itself does not moderate and takes no legal responsibility for what is posted – indeed even if the posts are defamatory and a company complains, they will not be removed. Certainly some of the comments on Globo were inaccurate and defamatory (“justification” and supporting evidence for them is not supplied of course).
Now you may want to preserve the freedom of the internet, like some people want to preserve the freedom of the press to publish and be damned, but it does seem to me that some regulation is required, just as some press regulation is being brought in. The press have a commercial incentive to behave badly (such as illegally tapping phones and bribing the police for information) because a scoop gains them business, and in addition they can sometimes generate more profits from libelling someone than they might pay in costs – even if someone libelled has the resources to fight a legal battle, which they often do not.
In the case of companies, bringing an action for libel is exceedingly dangerous because it just tends to spread the allegation around, thus affecting their reputation even if they are in the right. Look at the “Maclibel” case for example. So very few companies do so.
The big problem with financial bulletin boards is that posters can make money by either puffing or ramping companies (i.e. promoting their merits) or disparaging them (i.e de-ramping). In the latter case the speculators can short sell the stock to make a quick turn. And of course they can do this anonymously because they don’t declare who they are and even the board organisers do not know. So in effect, we potentially have anonymous “market manipulation” and “market abuse” – the latter is a criminal offence. The FCA have the powers to investigate market abuse but would they likely do so on a small cap company like Globo where there may be relatively few investors – the answer is no. Because they simply do not have the resources to do so.
Globo is of course not an isolated example of possible market abuse. There have been lots of others. So the question is what to do about it.
It would not seem sensible or wise to shut down financial bulletin boards altogether, although they are full of garbage and frequented by the ill-informed and pusillanimous. Some boards are better quality than others and some posters make useful contributions to the information available on companies. But so often they mix up reportage with comment, and seem unable to separate fact from rumour.
At least it would seem wise to me that posters should declare who they are, i.e. their real names and some background information – for example whether they are short or long on a stock. Even Facebook and Twitter insist on real names before you can register.
It is currently possible to register with different names repeatedly so that you can post lots of different comments appearing to be from different people, when it’s actually one person. Some checks on email addresses of posters and their IP addresses might prevent that. So regulations to remove anonymity of posters would be one positive step to stop abuse.
In addition I think board operators should have a responsibility to “moderate” them, i.e. review and remove posts that exceed the bounds of decency or prudence, particularly in response to complaints. In other words I would propose that they would not be required to monitor all posts all the time, but particular boards brought to their attention should be. Boards and blogs might need to have some kind of licensing system imposed so that they were clearly signed up to a code of practice and could have their license removed if they consistently ignored the rules.
It’s one of the oddities of the modern world that giving financial advice generally requires you to be a regulated person. But anyone can post any garbage on company shares in the form of “advice” on a bulletin board or blog without any regulation whatsoever, or any penalties if you behave outrageously or in your own personal financial interests.
The reasons for these proposals are that it’s a lot easier to prevent abuse at source, rather like it’s easier to prevent crime rather than catch the criminals later and get restitution for the victims.
If you think that something needs to be done about this problem, and have any comments on the above suggestions please let me know.
Globo – the allegations
Let me first declare that the writer is a small holder of Globo stock, but I have not traded the shares recently. I have attended a number of presentations by the company and talked to the CEO. I have also attended the last three Annual General Meetings of the company and there are extensive reports on those in the AGM Reports page. In addition ShareSoc has reviewed the company in past newsletters and they also presented at one of our Technology Company Seminars (see www.sharesoc.org/techseminar.html). In case readers are not aware, I have also had a past career in the IT world so I may have a better understanding of early stage software companies than many.
It’s worth repeating what I said at the end of the last AGM report in June 2013 (the share price rose rapidly thereafter to a level I thought was unreasonable bearing in mind the risks and financial profile of this business – was this a “ramping” episode one wonders?):
“In conclusion a very useful meeting with an open response to all the questions posed. My explanation of why the share price is relatively low is partly the historic “Greek” connection (apart from the political turmoil in Greece, it’s not exactly a location with a reputation for software development), but also because of the uncertainty about the future sales of Go!Enterprise. It is clearly going to take time to educate the IT market about the company’s BYOD offering. Using a distributor as the main US channel (and it is clear there is a big bet on the US market taking place), may be the best option but such arrangements, particularly exclusive ones, often do not work out. We will have to wait and see on that. But Ingram is probably one of the best companies to establish such a partnership with.
It is also clear that the company has chosen to compete primarily in the SME market rather than the corporate sector which their competitors are targeting. This could be tricky because the ‘early adopters’ of new software technology are often the larger companies. Selling to SMEs is never easy and it can take as much effort to sell to an SME company as a large corporate.
Reviewing the marketing material on the company’s web site (and the box containing a packaged version of GO!Enterprise Mobility that was circulated at the AGM), I am not sure what the compelling proposition is for such customers (or more specifically whether it is being communicated in the best way). Why should I buy it is the key question? What do I get for my $699 that will save me time or money? Having a clear sales proposition and focused marketing is absolutely necessary, particularly in the USA, if the company is to “cross the chasm” from the early adopters to commonplace users.
Well we will have to see whether the company has got the business model and marketing right. As with any new product, there could be quite a learning curve. That is surely what is holding back investors to some extent”.
The negative comments made on boards (which I will not repeat verbatim) seem to fall into the following areas:
1. Go!Enterprise is not a viable or real product, which undermines analysts’ projections for the business.
2. The company has excessive debtors and profits do not turn into cash (and as a result they need to keep raising more money.
3. The sale of the Greek business to its management (which is only partly paid for with extended credit terms) cannot be reconciled to the cash flows in the company, and/or the Greek company’s accounts (now accounted for as an “Associate” as Globo still has a substantial holding) cannot be reconciled to those of Globo.
4. The company is comparable to Aruba but has a very different financial profile.
5. Concerns about recent share sales by management.
Here’s some brief comments on them, short for the sake of brevity. It seems unlikely to me that Go!Enterprise is not a real product but making it a world leader may not be easy as I made clear in my AGM report. Cash flow is certainly of concern, but there are reasons for this if you understand the business in detail. One of the best comments on this question was a post by “Robbie125” which mentioned Mr Cawkwell’s past enthusiasm for Monitise which said: “Clearly this Mr Cawkwell cannot be the same person as the shorter of Globo, since I believe Monitise is a company which has a market cap of £750m, but has never made a profit, consumed vast amounts of cash and has no prospect of being cash flow positive any time soon”. Yes early stage, high growth software companies can consume cash rather than generate it.
As regards comment number 3, the company is to disclose more information later this week to try and clarify that issue.
On comment 4, a quick review of Aruba would tell you this is a totally different business with a different history and different products, although they have moved into the BYOD space recently (and note that Globo revenue is not totally derived from Go!Enterprise which a lot of folks seem to be ignoring). Their accounts are not likely to be easily comparable to Globo.
Obviously significant share sales by management are usually of concern, but it’s possible they simply took advantage of an opportunity to dispose of some stock when the share price got a bit ahead of reality. Monitise management have in the past sold large amounts of stock, relying on bonus schemes to replenish their holdings.
At best the comments made might highlight some of the risks faced by investors in this company, but are not necessarily a balanced view of the subject.
The suggestion has been made that analyst’s who cover the company have produced forecasts that are unreal but they may have more understanding of the business and its financial prospects than the commentators on bulletin boards some of whom have clearly not looked at the details of the business model.
But as with any business of this nature, analysts’ forecasts depend on the expectations and forecasts of management so could well be wildly wrong. That’s the nature of investing in early stage businesses. That’s all the “health warning” you should need.
NOTE: This article is the personal view of Roger Lawson and does not represent any adopted policy of ShareSoc as an organisation nor the views of anyone else on Globo.
Roger Lawson 30/10/2013
Postscript 31/10/2013. This morning Globo did publish additional information on various accounting issues, and also included a trading statement. The latter was positive with revenues up 58% for the nine months to the 30th September and “was ahead of management expectations”. They also reported positive cash flows in the period.
The “additional information” on accounting covered the accounting of the disposal of the Greek operations which contained no new news so far as one could see. They confirmed that revenue recognition and R&D capitalisation/amortisation were in accordance with IFRS, as one might expect.
They provided in-depth information on the business segments and collection terms, which obviously show quite long payment terms. For example 150 days “typically” on the CitronGO! and GO!Social segment, a mix of terms on GO!Enterprise Licensing depending on how sold (but again can be 90 days, or 120-150 days) and 120-210 days for GO!Enterprise projects. Most of this is not new news to anyone who knows much about the business or has asked questions about this area. The extended payment terms are also dependent they say on the “country concerned, including currency export and other regulations” as one might expect from some of the countries they operate in. The only disappointment here is the lengthy payment terms permitted on GO!Enterprise Projects after completion (and no mention of progress payments or advances). That’s not really the best way to run a project focussed business so that’s certainly an area to question at the next opportunity.