Angie's List: The End May Be Nigh

Aug. 4.14 | About: Angie's List, (ANGI)

Summary

ANGI has many problems and is a well-known, much-discussed, short idea.

ANGI’s problems include a bad business model, continued strong insider stock selling, growing negative equity, continued annual losses, client growth going down fast.

This article covers ANGI’s most important fundamental indicators and discusses a new issue: The recent introduction of a new accounting formulation that may be disguising even worse bottom line results.

Many articles have been written about Angie's List (NASDAQ:ANGI), most of them presenting this company as a good short case, diagnosing its many problems, and discussing its bleak future. I, myself, published 3 of those articles here at Seeking Alpha: "Angie's List's Big Problem", "Angie's List Big Problem: Getting Worse", "Angie's List: An Update On Growth Evolution, And Some Predictions". Besides studying and discussing ANGI's many problems and the (very limited) options of the management to overcome them, my articles focused mainly on the evolution of ANGI's client base growth. These problems remain valid and in fact are getting progressively more noticeable, perfectly in line with what could be expected. To keep the company going for some more time, ANGI's management may have been forced to resort to one of the last accounting tricks available for companies in terminal decline: an inflation of the booked assets.

I intend this article to be as short and focused as possible. I expect most readers to be already familiar with ANGI's business and with the main aspects of its business model. As such, to avoid wasting their time, I will not present here a tedious repetition of those preliminaries. If someone needs to review of those points, Yahoo Finance presents a good short profile and Seeking Alpha has a vast number of good articles discussing this company. Also, in this article I will not try to present an overall review of ANGI's difficulties - mainly resulting from the bad and outdated business model. My previous 3 articles, linked above, already provide a discussion of those issues, with appropriate outside references and links. Here, the objective is to cover a number of very specific points, all directly based on recent numeric data provided by the company itself. These points cover the most relevant fundamentals of the company, and are determinant to understand what kind of future can be expected for ANGI's business. Note: ANGI went public with an IPO in 2011. Some of its indicators had a significant discontinuity at that moment (e.g. with the cash infusion resulting from the IPO, the stockholders' equity recovered from negative to positive). As such, in this analysis I will only use values starting in 2011.

Now, jumping into the specific fundamental points without more delays:

· Client growth

The table shown below presents the evolution of ANGI's final client base - the paying "members" that chose ANGI as a useful list of service providers, and a useful source of reviews about them.

Click to enlarge

This table shows that the growth of paying members is seasonal (mainly due to a deliberate annual marketing cycle), and has been decaying consistently. The percentages shown in blue for Q3 and Q4 of 2014 are personal predictions. (Similar predictions presented in my previous articles about ANGI have proved quite accurate.) The evolution of this extremely important indicator during the last few years is illustrated in the following chart. The chart shows the percentage growth of "paid memberships" isolated for each quarter.

As can be seen, the decrease in growth shown in this chart is extremely regular and, in my view, can be expected to go on. Naturally, one can dispute the importance of the number of final clients/"members" for ANGI's business model, since at present the income ANGI gets from the service providers clearly dominates over the income obtained from the paying "members". However, I think it is quite clear that the service providers' reason to pay so much to ANGI is that they want to reach ANGI's considerable final client base (and promote themselves to them). If ANGI's number of final service consumers stalls, that will not only mean less direct revenue paid by them (still a non-negligible component of ANGI's income) but, most importantly, it will reduce the attractiveness of ANGI for the service providers. The very considerable marketing effort ANGI conducts in the media seems to indicate that the management recognizes this rather obvious reality, and is willing to spend precious resources to keep attracting new paying "members".

· Net results

The table shown below presents the evolution of ANGI's quarterly net results (unit: million dollars).

The first point to notice is that the yearly losses are consistent. However, these results also have a significant quarterly cycle. In particular, the results tend to be more negative in the second and third quarters (which does not bode well for the next results to be published…) and less bad in the fourth quarter. This is due to markedly reduced marketing expenses in the last quarter of each year, a consistent tradition of ANGI's annual working cycles (and one that has direct reflection is quarterly client acquisitions). The same information (quarterly net results, in million dollars) is presented below in a chart.

It seems obvious that during this period ANGI's results don't show a definite tendency of improvement and, in this regard, it is important to remember that ANGI is not a recent company. According to their website, the company was founded 19 years ago (in 1995) and, as such, they have a mature business. As much as can be understood from the published financial information, during those 19 years there was not a single one with bottom line profits: ANGI lost money in every year since its inception. If after 19 years they are still unable to reach breakeven, and are still locked in a "development" phase typical of a technological start-up - sacrificing bottom line results for the sake of pure sales (or client base) growth - maybe it is time to assume that the business model proved to be a failure. Maybe there is no realistic way of achieving profits from it.

Naturally, a less kind alternative view would be that the management is ineffective, and has never been able to obtain positive returns from a good basic company idea. However, from the study of ANGI's business model (for an in-depth discussion see this) it seems clear that the blame cannot be attributed to the management, but to the business idea itself.

· Book value / stockholders' equity

ANGI's book value (or the stockholders' equity, if one prefers) has been dropping since it was propped up in the IPO, and at present it is already quite negative. The following table shows the value of the stockholders' equity at the end of each quarter, in million dollars. I present only values from the fourth quarter of 2011 forward, because that was when the IPO occurred.

The same information is presented below in chart form.

This chart illustrates very well two interesting points. The first one, the most important, is that the drop in stockholders' equity is quite consistent (could be well modeled with a simple straight line). The second, basically a curiosity, is the effect of the very regular seasonal pattern of ANGI's annual business cycle. The fourth quarter of every year tends to allow slight recoveries of the book value (since those quarters tend to present small positive net results). The first quarters of every year tend to lower the book value just a little bit (since those quarters tend to present small negative net results). The second and third quarters of every year tend to lower significantly the book value (since those quarters tend to present strong negative net results).

Naturally, the present negative book value of Angie's List should be a great concern for all, especially since its evolution is so regular and shows no signs of inversion. However, there is a new fact in ANGI's numbers that turns this reality into something even darker.

· ANGI's new accounting trick

So, things are going down. Losses keep coming. Even the strongest advertising effort fails to stem the continued reduction of client growth. Is there anything that can be done, at least to present a less negative picture (if not to solve the fundamental problems of a lousy business model)? Perhaps. If at the end of each new quarter the company can claim to accrue value in some of its inventory, that will reduce the bottom line losses of those quarters and increase the assets without affecting the liabilities. Very nice for the book value. Now, there is a slight problem with this: ANGI has no inventory of physical stuff to (re)evaluate smartly at the end of each quarter. But there is a solution for that - and it does not even require great creativity, since others are doing it already.

Until the last quarter of 2013, ANGI presented an item in the "assets" in its balance with the modest title "Property and equipment, net" (check the press release "Angie's List Reports Fourth Quarter and Fiscal Year 2013 Results", and also the previous quarterly press releases, available here). However, from the first quarter of 2014 that item was renamed into a more ambitious "Property, equipment and software, net" (see the 2014's first and second quarterly press releases, in the previous link). Does this change produce significantly different results? Let's check.

The following table presents the value stated in ANGI's balances for this item, in million dollars. The last two values, shown with a tan background, are those that add "software" to the "property and equipment".

The following chart illustrates visually the evolution of these same values.

Some comments may help to better understand what is happening here. The very clear increase in the "property and equipment" between Q3 and Q4 of 2012 was due to the acquisition of ANGI's headquarters building. Quoting from here, "The Company has agreed on the principal terms of the purchase of its campus headquarters in Indianapolis from an affiliate of its CEO for approximately $6.25 million. The transaction, which is expected to close in the fourth quarter […]" (I believe the ethics of this operation need no comment, so let's just remember the value, to explain the increase in "property and equipment" in that specific quarter). Besides that isolated jump, this entry in the balance was evolving slowly, until the last 2 quarters. Then we see a very significant jump, clearly due to the start of the new accounting for "software". A basic quantitative analysis of this evolution shows that discounting for the acquisition of the headquarters building ($6.25 million) the average increase in this balance item was just $1.07 million in each quarter, until the new accounting began. (The actual change between each of the 9 quarters that can be evaluated for this was a quite regular small increase.) Then, in the first and second quarters of 2014, a true gold mine was discovered (in terms of ANGI's assets valuation) in the form of an explosive growth of ANGI's accumulated software value. Good for them.

Out of pure, idle curiosity, I calculated what would be the evolution of ANGI's "book value" (or "stockholders' equity"), if the last 2 quarters (i.e. the first two quarters of 2014) had only added the historic average to the item "property and equipment". The results are shown in the following table and chart - presenting together the published, official, values (equal to those already shown above) and my pro forma "low-software" version.

Click to enlarge

Considering this, some final questions could arise in an inquisitive mind: Is software tangible or intangible? Did ANGI disregard the value of the software it used until the end of 2013? Is ANGI now developing some extraordinary new software that will change the world when finally revealed to the public? We will let the future answer those (and other) questions.

Conclusions

I have been shorting ANGI for some time, with good results. I recently reinforced my short position. I will be following ANGI's next quarters with some trepidation. If I was long ANGI's stock, or if I simply had a job at ANGI (and was happy with it) I would also follow ANGI's future results with some anxiety.

Disclosure: The author is short ANGI. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.