The Active Network (NYSE:ACTV) trickled out an 8-K last week, exactly 6 days before its Q3 results are to be released on November 10th. 8-Ks normally can make for dull reading but this one restated some key business metrics which suggest that management has drawn incorrect conclusions from some of its operating results for most of 2011.
The essential text in the filing is shown here:
“In the third quarter of 2011, The Active Network, Inc. (the “Company”) identified previously unreported registration data during the first and second quarters of 2011. As a result, the Company underreported the number of registrations for these prior periods. The Company identified that the underreporting resulted primarily from the prior lack of the reporting systems of two new state customers. The underreporting has no impact on the Company’s prior financial statements, nor does the Company believe the underreporting has a material adverse effect on its business.”
I've summarized the two “as corrected” numbers (highlighted in yellow) in my own table below (click to enlarge image):
The previously reported registration counts on the left showed a growth of 7.8% and 6.8% for the first and second quarters of 2011, respectively. These registration counts indicate the number of transactions are a key business metric directly related to performance.
Along with an increase in absolute registrations, the revenue per registration also was reported to have increased by 4.4% and 7.8%, respectively. In the Q2 10-Q, management cited that the revenue per registration has increased due to a mix-shift “mainly as a result of growth in our communities and events customer groups.” Thus, investors could infer that these business segments could be accretive to operating margins since these transactions were higher value.
In fact, this information was used by management in the Q2 press release as the basis for the “Business Outlook” stated as follows:
For the third quarter of 2011, the Company is targeting total net revenue in the range of $84 million to $88 million, with registrations growth of approximately 5% to 7%, and revenue per registration growth of approximately 6% to 8% over prior year quarter.
The right hand side of the table includes the amended registration counts showing an increase of 15.0% and 14.6%. While the registration counts were increased, the total revenue was not increased since management did not fail to book the revenue from the missing registrations.
Thus, the “lack of the reporting systems” referenced in the 8-K did account for the revenue but did not account for the actual registrations. These registration quantities referred to state contracts with Ohio and California to issue hunting and fishing licenses. It is unfortunate that although The Active Network provides the IT systems to issues the licenses, it failed to measure the number of licenses in its reporting. In the case of California, these data for 2011 are publicly available. An interested analyst might have had better luck in discovering fishing and hunting sales data than the company itself.
Since the revenue was unchanged, the revenue per registration is very different from the previously reported period and is negative (-2.1%) or nearly flat (0.5%) instead of the previously reported 4.4% and 7.8%. So, the mix-shift cited by management did in fact not exist. Thus, the figure provided below at a Think Equity conference was in fact largely incorrect as to trends in revenue per registration.
While these changes in registration counts do not impact overall revenue, the state licenses business is recognized to be a lower margin segment since 80% of the transactions are point-of-sale or telephonic transactions and not the web-based transactions that are higher margin and characterize the company's legacy web registration business.
The timing of the 8-K suggested that Q3 registrations could be lower than expected in that management had to do some looking around to find extra registrations in order to meet the company's guidance of registration growth of 5-7%. However, as reported last week, Q3 registrations were up 15% and revenue per registration was up by 2%. Thus, the restatement had the impact of making the growth appear consistent on a year over year basis.
About 8% of the registration growth is due to 1.6 million new registrations to be achieved through the addition of the Ohio and California license contracts. Excluding these one-time contract adds, about 7% of the registration growth could be attributed to a combination of organic growth plus 2 acquisitions announced earlier this year. Thus the real growth rate is likely to be in the range of 4-6% plus a 0-2% increase in revenue per registration. These growth rates are uninspiring and management will likely continue to reduce the visibility on these metrics as the business model changes.
In the Q3 press release, the “Financial Highlights” section failed to mention either organization or registration counts. This contrasts sharply with the first page of the company's prospectus, which highlighted both metrics:
While David Einhorn wins even more validation for being short Green Mountain Coffee Roasters (NASDAQ:GMCR), it might be a good time to also think about other promotional companies like The Active Network where management can't seem to measure things right and changes what it thinks is worth measuring.
After all, if the company itself can't measure or decide even what to measure, do investors really have any basis for owning the equity?