Dark Destroyer- destroyer of common sense Part II

Thanks a lot for all the messages. Perhaps know my last post was a little bit unprofessional but I'm not going to apologize. I strongly believe that unregulated bloggers who write without proper homework should be questioned and checked at some level. And I can see the motivation of such bloggers as my last piece was read in more than twenty countries.

On my part, I went through Dark Destroyer's series again to make sure that I wasn't unfair. And once again, I am at a loss for words. Here are a few more points that I believe are worth a mention -

Growth Story

In his third article Dark Destroyer mentioned-“The interim statement to 31 October 2014 indicates that suppliers grew to 171,000 from 168,000 in April 2014. This is 1.7% half on half growth.  However, this differs with the accompanying interim presentation, which highlights 174,000 suppliers (up from 168,000). I can only presume that the discrepancy lies with this figure representing growth in the period 31 October 2014 to the release of the interims. That growth is a bit better, but still less than a 2% increase over several months. ”

As I mentioned in my last article, Dark Destroyer is not able to work out the supplier captive model. He was biased and ignored the growth in buyer numbers. OB10 took 14 years to add 122 buyers (IPO document- Intention to float -page 2) and the current management added 46 (37.7% growth) in one year since OB10 acquisition. It is a massive achievement in this market with fierce competition from Ariba, Basware, TradeShift, Taulia and numerous other small companies. The master stroke was to acquire DocuSphere. The other key point was to get four German government departments on-board on Ariba's home turf.

Similarly supplier numbers were 140,000 as per IPO document (Intention to float -page 2) and 31,000 (22.14% growth) were added in one year since OB10 acquisition.

The increase in buyers had definitely increased their addressable market and will reflect in supplier numbers in a very short while.

Cash burn

In his first article on 23^rd Feb 2015, Dark Destroyer mentioned - “Its net cash position declined from £62.6 million as at 30 April 2014, to £27.7 million as at 31 October 2014. Whilst it is investing heavily, it is also burning through considerable operating related cash. Consensus forecasts project that net cash will have declined to £4.3 million by 30 April 2015.

PwC has to sign off its books during the next four months or so, and therefore be certain that it has sufficient resources to meet its obligations. My reckoning is that a sizeable cash call is needed to persuade them to do the signing.”

Tungsten declared preliminary results for the year to 30^th April 2014 on 8^th July 2014. Dark Destroyer missed the post balance sheet event (page 35 and also explained on page 12 of annual report 2014) which clearly conveyed £25.3m was paid in June 2014 for FIBI bank acquisition. So anybody who can read and read carefully, would have known that cash available at start of that period was not £62.6 million but £37.3m.

Let's look at the cash burn in first year (Oct 2013 – Oct 2014 ) of Listing-

If Tungsten had a similar cash burn (26.2m) in the second year, they would still have enough cash till Oct 2015. I cannot understand how Dark Destroyer arrived to this - “Consensus forecasts project that net cash will have declined to £4.3 million by 30 April 2015”

The other important point to consider is one-off costs in first year of listing. Understandably, a considerable cost would be incurred to-

- integrate OB10 and FIBI bank systems to launch early payment.

- integrate OB10 and cloudbuy software for Analytics

- get FIBI bank licence transfer

Tungsten's cash balance is more than enough to cover whole of 2015 even without

• no revenue* increase from e-invoicing (37.7 % more buyers in second year)
• no revenue from invoice financing ( went live in UK and US in Dec 2014)
• no revenue from Analytics (one contract signed and 27 in trial as per Jan 2015 interim statement)
• no revenue from DocuSphere

*Revenue from e-invoicing in first year was £21m

In my opinion, while Tungsten doesn't need to raise cash they should do so to strengthen the balance sheet and ward off bears.

Disclaimer

All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information 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 b

Dark Destroyer- destroyer of common sense

Dark destroyer is a monkey who is putting his tail on fire to burn Ed Truell's empire but all he seems to do is simply burn his tail!. The share price has recover from the all time low. He wrote four articles to criticize Tungsten's business model; and did a shoddy job in analysing and presenting facts.

An analyst who can't analyse-

In his fourth article, he compared Ariba's dynamic discounting model with that of Tungsten and calculated Ariba's discounting penetration to be between 0.003% to 0.007%. Ariba's discounting model is dependant on availability of buyer's spare cash and willingness to pay early to supplier's to get discount. Dark destroyer somehow concluded that all of about $700 billion dollars were made available by buyers for early payment. He made a wrong assumption that buyer's have lot of free cash and are willing to pay early. In fact it is quite the opposite in the real world.

If buyers have spare cash and are willing to pay early, the very existence of invoice financing business does not make sense. Dark destroyer contradicts himself in the second part of article by showing that there are lots of companies involved in invoice financing. The sheer number of businesses involved in invoice financing proves that buyers don't have spare cash and are not willing to pay early.

I can almost sympathise with Dark destroyer's ill-informed assumptions but for him to contradict that very assumption in the same article is beyond the realm of my comprehension. If nothing else, I think it displays his rather questionable analytical skills.

Google analyst

Dark destroyer has displayed his skill of being able to google-search and has done wonderful job of copying and pasting images from the web on his blog. Are we expected to believe he understands the information he stumbled upon?

In his second article , he used RBS's invoice finance pricing to calculate Net interest margin (NIM) for Tungsten's model. He couldn't understand the difference between 1% of turnover and 1% of invoice value. He missed the renewal fee and did a poor job of calculating NIM to be around 2.15%.

I can imagine it will be hard to figure out RBS's actual NIM for invoice financing from their annual financial statement as it runs a very large and complex business. In the same article he used Bibby Financial Services (UK's leading invoice finance specialist) to get discounting penetration information. If he had gone one step further than the know-all-google-search and spent £1 on downloading the annual report of Bibby financial services from the companies house, he could have saved himself from the embarrassment of coming up with a shabby NIM calculation. It is quite easy to figure out Bibby's actual funding cost and NIM from their last year's report. Aldermore Bank's last year annual report also provides good insight into net revenue margin, net interest margin , administrative expenses and impairment losses of their invoice financing business in UK.

Cannot understand Technology company

In his first article, he compared Direct Insite with Tungsten and mentioned few sales pitch quotes/numbers from their website. He thought Direct Insite to be similar to Tungsten with the market cap about 21 times less than Tungsten. There was also another article published on Seeking Alpha which mentioned Direct Insite as hidden gem and also shown Tungsten to be way expensive with market cap of 27X sales (which I believe is factually incorrect). This has lead to a thought process that Tungsten has paid too much for OB10. I believe most Hedge funds are shorting based on this idea. Tungsten(or their broker) came out in defence that they have paid 5 times of sales which is better than what SAP paid (9 times of sales) for Ariba.

Direct Insite provides number of enterprise level software solutions to corporate and banks. Their main product is paybox to automate their client's lockbox services. There revenue is around £5m per year and they have only got 6-7 clients (one global bank and few corporates). Every client runs this piece of software independently for their own clients (which are 350,000 in total). So in effect every client is building their own mini OB10 network which will never interact with each other. Direct Insite doesn't control/own the data which runs through their software. It is just providing software services and it's clients will monetise the benefits by using the software. If Direct Insite wishes to follow OB10 then they will need at least 5-6 years for development and numerous rounds of funding to convert their enterprise level software to a Global network.

Aldermore has learnt in short time that it is not easy to scale invoice financing business. They have cut balance sheet and are investing in a stable platform after hit with number of fraud cases. They have to write down 8.9m in last 2 years. In light of this, the value of OB10 is under estimated. It provides more robust risk management for supplier fraud, data security and contract compliance.

Weak with numbers

In his second article, he used RBS's invoice finance pricing to calculate NIM to be 2.15% and two days later he corrected himself by using another website (Fund Invoice ) to update NIM by approximate 6 times to be 12.5%. Using his unmatched mathematical skills, he was able to predict that Tungsten will earn £10M in net fees by using either NIM (2.15% or 12.5%). I suppose he will reveal this calculation for his Doctoral thesis!! Dr Dark Destroyer?!!

No clue about business model

Dark Destroyer has mentioned more than a few times about the hardship Tungsten will face to convince suppliers to ditch their “Trusted banks”. He has not been able to figure out the captive supplier model.

As an SME, I would love to join Tungsten network but the buyer of my services/products is not convinced. Do I have any option?

As an SME, I hate Tungsten network but the buyer of my services/products has mandated to receive e-invoice only through Tungsten Network. Do I have any option?

Tungsten doesn't have to convince suppliers. They just need to convince their 166 buyers to mandate e-invoice through their network globally and help the buyers to connect suppliers to the network as soon as possible.

Suppliers will not need Invoice factoring services from the “Trusted Bank” once it has got 50-60% of his buyers on the Tungsten network. The basic feature of Tungsten Network is to improve DSO, reduce collections and administrative costs.

When Suppliers will submit invoices and check status through Tungsten network, I can't understand why would they do the following to receive invoice discounting from their “Trusted Bank”

• Let the bank have legal charge on the company
• Pay annual and renewal fee
• Email them the invoice and wait for 2-3 days for confirmation
• Get 80-85% of the invoice amount
• Total credit facility will have a limit

I can go on forever; it is quite amazing that the above piece of analysis got mentioned in The Times articles and that Tom Winnifrith (self proclaimed sheriff of AIM) calls him the most respected analyst. Tom has done a good job on QPP but he has lost it by comparing every AIM CEO with Rob Terry.

Don't get me wrong - this is not about Tungsten's growth prospect. I'm not writing this to support or criticise Tungsten's growth model.;I'm just amazed/surprised/shocked at this piece of analysis.

Disclaimer

All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information.n 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 b