Hi nanocap, wsleckie,
Wow, *three* posts on Friday! At this rate this VSNT board will be on the "hot topics" list by suppertime... ;-)
First, congratulations to all VSNT shareholders, you've been treated quite kindly the past few days. The longer term shareholders sure had a lot of misery to plod through, up until very recently. As a kind-hearted yet still-skeptical short seller ;-), I hope that everyone is able to rationally examine where they now stand (in light of the big changes we've seen in the past few days) with their investment in VSNT, and make the best decision (the correct mixture of greed and fear) for themselves and their position. As a still-convinced short I cheerfully admit that I hope all longs will see the errors of their ways and sell now (and at a profit, too!)
It sure is nice to see some discussion here. I've been kinda busy lately and have neglected posting here. If you recall I earlier posted here #reply-10512352 that I was short the stock from $1-5/8 -- now if that doesn't make me look like the world's smartest speculator, I don't know what will! ;-) Actually I felt compelled to cover 3/4 of my short at $4, because my initial trade was obviously (in hindsight now) too aggressive. As it turns out, painful though that forced covering was, it was for the better - instead of losing 150% on the shares that I covered ($1.625-->$4), I'd be 400% in the hole today (at $8)! In my original posting to this board I asked to be persuaded why I should not short VSNT -- unfortunately for me, I was not convinced!
So where do we go from here? Has Versant dug its way out of a near-death experience? Is their business and technology sound, and if so, do they now have the corporate means to survive and prosper? Or is this just a surge caused by daytraders that might soon peter out, without any lasting permanence?
In my initial analysis, Versant was near-death (very high debt, violations of their debt covenants, negative cash flow, little equity remaining, a delisting likely). My thesis at that time (the first part of this year) was that bankruptcy in the near term was quite likely -- that is why I was willing to take a large short position in the stock at $1-5/8 (a market cap of under $20M).
If you would like to follow along my train of thought since I initiated my short, their 2Q99 10-Q surprised me a bit when it was announced, being a bit of a mixed bag. Revenue grew from $6.2M (Q1) to $7.0M (Q2), but Accounts Receivable went from $6.0M (Q1) to $7.8M (Q2) -- my question here was, "does this A/R bulge indicate aggressive revenue booking?" They basically broke even (earnings wise), though their cashflow was pretty negative.
In a "bankruptcy is coming" scenario, shorts like to examine quality of earnings (high A/R levels and high A/R growth rates are usually negative signs). GAAP earnings can often be much less important that cash flow, since it is cash crunches (not earnings shortfalls!) that kill companies. Good press releases and "deal flow" also doesn't really matter (i.e., help or hurt the likelihood of bankruptcy happening) unless and until it affects cash flows.
Enough of the "how shorts think" digression. The most recent (3Q99) 10-Q surprised me some more. Their A/R didn't shrink much, it was $7.5M, and their revenue dipped a bit, to $6.7M. There might be something I'm missing, but 100 "Days Sales Outstanding" looks fairly unhealthy. What particularly impressed me about 3Q99 is that not only did they manage to basically break even on earnings again, but they drastically slashed their operating expenses, chiefly in the "Marketing and Sales" line item. Following this number from Q1 to Q2 to Q3 we see $3.0M, $2.5M then $1.9M. wsleckie, you reported in your first posting that they chopped 100 people from their sales/marketing departments. When I first saw that figure (100 people cut, in a company that Yahoo!'s notoriously unreliable profiles show to have 173 people on the payroll), it just seemed too big to believe. However if you try to figure what a $1.1M decrease in M&S (from 1Q99 to 3Q99) or a $2.1M decrease (3Q98 to 3Q99) works out to, then it looks like 100 people being cut might possibly be true.
What will decide if this hack & slash of marketing & sales was a wise move or a desperate short-sighted move will, of course, be the results: sales growth or sales decline. So far, they seem to be reporting (3Q numbers) that they didn't get hurt too badly by this drastic slashing. I think this item could go either way, however I have serious questions as to the quality of these sales (see below)
So now that I have seen 3Q99, what do I think?
Here is the positive:
* they have definitely cleaned up the company's capital structure. This is (IMO) management's No. 1 accomplishment, a necessary one to save the company from bankruptcy. A bit of a "bargain with the devil" seems to have been struck, in that the providers of the fresh equity received Preferred stock - however considering the alternative available to common shareholders, this was probably the best deal available.
Here is the negative:
* an apparent all-out effort to force a 1 cent/share profit out of the numbers. Some earnings seem to have come from these non-cash items: a reduction in the provision for doubtful accounts, a reduction in deferred revenue
* 100 days sales outstanding. This needs explaining!
* a continuing cash burn - $763K in Q3
* a neglect of capital spending. They spent only $107K on "property and equipment" during the most recent twelve months (and this is a software company, that necessarily uses hardware that becomes obsolete rather rapidly)-- are they allowing themselves to fall behind? Do they risk losing their best & brightest software developers, after having fired most of their Marketing & Sales people?
At this point I still have serious doubts as to whether this company will survive. They have done better than I have expected, and there is no short-term (i.e., 3 months or sooner) catalyst for their sudden demise. They have many challenges ahead of them, all of them biggies, and they are operating in what history has shown us to be a difficult and treacherous market (no one has made money on OODBs)
Their next mandatory report is their annual 10-K, which is due by 31 Mar 2000. Since this is an audited document, it will be all the more interesting to see if the auditors sign off on what I see as possible symptoms of aggressive accounting. It will also be interesting to see if they can get cashflow positive - if they cannot staunch this, they *will* die.
- Daniel |
