Had a quick read through the short interest article, and to be frank, I cannot see how they figured that they have a strong case for shorting the stock.
>>However, given the fact that cash is collected upfront and there is no return policy attached to sales of communications bandwidth, Global Crossing makes a separate disclosure in the footnotes to its financial statements, where the company computes an adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) figure. This figure, which analysts use as a proxy for cash flow in their DCF models, is based on cash revenues and accounts for all cash received at the point of sale.<<
All DCF models are based on "free" cash flows. The cash flows are discounted to present value which represents an estimation of today's monetary worth of the stock. DCF is a proven methodology. The theory is exact and correct, however, it obviously depends on forecasted future cash flows, which are subject to assumptions.
I don't know how the shortinterest group could "pooh pooh" DCF valuation.... a long proven valuation methodology.
GX's story is not unlike any other intensive capital expenditure development company. GX has incurred billions of capital expenditure creating an infrastructure. GAAP recognizes revenue on a "deferred" basis. That is, if a contact is 300 million over 5 years, in accordance with GAAP, only 60 million should be recorded as revenue each year over the 5-year period. GX is a developing company. If it reports only GAAP revenue, it would not be able to convey to investors how well the business is progressing. So it reports "cash" revenue, to inform investors on its progress on "selling" capacity and services. If fact, reporting cash revenue is a double edge sword.. Should there be a slow down in cash sales, investors will be able to recognize the slowdown immediately. If it reports under GAAP, because of the revenue deferral mechanism, it is not easy to spot a slow down in sales (unless one has access to a messy, and massive deferred revenue worksheet). So, I would disagree with the shortinterest.com people. Cash revenue report is good for investors to keep abreast on the progress of a a developing company such as GX. By reporting cash revenues, we can spot easily if there is a slowdown in selling capacity or services.
GX has provided definition of "cash revenue" and adjusted EBITDA in its financial statements, so I don't see any accounting reporting irregularities. Also, if you look at the GAAP financial statements, you'd see revenue and EBITDA reported under GAAP rules.
Definitions contained in GX's
"In this press release, Revenue refers to revenue reported on the Company's statements of operations under Generally Accepted Accounting Principles. Cash Revenue refers to Revenue plus the cash portion of the change in deferred revenue. Service Revenue excludes all impacts of IRU sales, and refers to Revenue less any revenue recognized immediately for circuit activations that qualified as sales type leases. Adjusted EBITDA refers to operating income (loss) plus goodwill and intangibles amortization, depreciation and amortization, non-cash cost of capacity sold, stock related expense and the cash portion of the change in deferred revenue, which definition is consistent with the financial covenants contained in the Company's major financing agreements. Recurring Adjusted EBITDA refers to Adjusted EBITDA plus one-time merger and integration expenses and other non-recurring expenses. For all periods presented, net income generated by the ILEC and GlobalCenter businesses is reported as ``Income from discontinued operations net of taxes'' on the accompanying Condensed Consolidated Statements of Operations."
For full report:
globalcrossing.com
As for the shortinterest.com view that GX management has been aggressive in their forecast of this year, well... who would know better... shortinterest.com crowd or GX management and analysts. I've not seen any analysts commenting that management's forecast is aggressive.
Should I accept shortinterest.com 's view? Who are these people? What are their qualifications? Also, why would GX management shoot their own feet by forecasting aggressively? What do they have to gain? |
