Today we published a report on Tangoe (TNGO). It can be found in its entirety at:
Below is a piece of the report. THE REPORT SHOULD BE READ IN ITS ENTIRETY AS THE SEGMENT BELOW ONLY CONTAINS HIGHLIGHTS AND THE APPROPRIATE REFERENCES ARE FOUND IN THE FULL REPORT:
Last week, a blog called StreetSweeper published a thoughtful report on Tangoe, Inc (NASDAQ: TNGO, $17.00).[i] Their expose was quite comprehensive on the investigative side, uncovering significant red flags in the Tangoe story. After doing a deep dive into Tangoe's financials, it is our belief that the company has significantly misrepresented its de novo growth rate, while demonstrating many of the telltale shenanigans and behavior that tends to be a harbinger for blow ups. We believe that an SEC investigation may be warranted based on our belief Tangoe publicly misrepresented its organic growth rates, and altered material biographic information, in front of a large secondary offering.
Despite ample opportunity to expand on the StreetSweeper's material, we will instead focus this report on irrefutable facts that have been meticulously gathered from SEC documents and other corporate filings. As such, this report should be read in conjunction with the StreetSweeper report.
In response to the StreetSweeper's report, a myriad of sellside analysts have produced reports in a matter of hours, attempting to defend Tangoe. These analysts have argued that Tangoe's organic growth is indeed 20-25% per year, just as management has claimed. Further, given the fact much of the sellside analysis is in fact taken directly from management, many analysts went on to note that Tangoe's management team is honest and forthcoming. Additionally, the arguments suggested that management's prior issues at Information Management Associates were simply an unfortunate situation related to the dot-com bust. In the following abbreviated report, which may be expanded in the future, we explain why we believe Tangoe's issues are much deeper than even the StreetSweeper suggests. We will present both the "bull case" based on quotes taken from sell-side analysts and "the reality." Based on the analysis below, we believe any unbiased, objective analyst will conclude that Tangoe has severely misrepresented its business model, its organic growth, as well as management's backgrounds and IMA experience which led to the CEO and CFO of Tangoe being accused of fraud.
This report will highlight:
1) Tangoe is a fast growth SaaS business - FALSE
We believe that Tangoe's financial profile and key business metrics are not consistent with those of SaaS peers. Non-recurring consulting services, the resale of telecommunication accessories, a deferred revenue balance showing minimal growth, BPO-like gross margins that are roughly 2000 basis points below the purported SaaS comps, and revenue per employee that is 50% lower than its "comps" all suggest Tangoe is little more than a body shop.
2) Tangoe's organic growth rate is 20% - 25%- FALSE
Based on our analysis Tangoe has been systematically underreporting the revenue contribution from acquisitions, which has had the effect of misrepresenting the company's organic growth. Our analysis suggests the CFO categorically falsified the impact from a recent acquisition on the Q2'12 earnings call, understating its impact by up to 60% compared to the figures disclosed in their quarterly 10Q. This would mark the second time in the last three quarters that Tangoe has provided a lower revenue contribution from acquisitions on its calls than it ultimately discloses in SEC filings. This effectively overstates organic growth.
3) Deferred Revenue Growth is not a Reliable Business Metric - FALSE
Tangoe has repeatedly claimed that changes in deferred revenues are not indicative of its organic growth rate, which would be problematic because deferred revenues have actually contracted over the last three quarters. Inconsistencies between Tangoe's disclosed revenue recognition policy for implementation fees (ratably over twice the term of the customer contract) and a declining balance of deferred implantation fees would seem to suggest Tangoe may not be growing organic new customers. Implementation fees, which should grow as the company adds new customers, have grown 0% since December 2010, the first date it reported this metric.
4) The REAL Organic Growth Rate
We are unable to reconcile CFO Martino's public statements about organic growth. Current SEC filings combined with management's guidance at face value, leads to an implied organic revenue growth rate that IS WELL BELOW 20%. Based on our analysis, we believe Tangoe's organic growth rate may be almost 50% lower year-to-date than the rate many analysts have communicated. If we assume ProfitLine's revenue is flat year-over-year (rather than the decline management implied with their guidance) and we annualize the revenue for ttMobiles from Q1'12, then organic growth has been closer to ZERO year-to-date.
5) Based on 20%-25% organic growth - here would be the conservative estimates for Q3 and Q4
We believe that with our report, sellside "estimates" will no longer matter and Tangoe's new benchmark to demonstrate 20% growth will be based on our analysis (which is rather straight forward). We clearly illustrate why Tangoe's actual results will need to be $2.28M and $3.69M higher than the midpoint of their guidance for Q3 and Q4 respectively if they are actually growing at least 20%. This assumes they do not underreport the Symphony acquisition.
6) Squeaky clean management and VC partner - FALSE
Tangoe's CEO and CFO were accused of fraud at IMA, a fact the sellside has arrogantly ignored. Further, in their last venture at IMA, their large VC-backer (who happens to be Tangoe's VC investor as well) aggressively sold stock after a fictitious earnings report. Tangoe's CEO and CFO blatantly changed their bios for the most recent secondary offering, removing the disclosures that IMA filed for bankruptcy from the original IPO filing. In neither filing do they disclose to investors that they were accused of fraud, while "recklessly issuing quarterly financial statements which materially overstated the Company's actual revenues and assets and materially understated its expenses and net loss." According to public records, we show that Tangoe was actually founded while the CEO shared duties as CEO of IMA, and at the same time the SEC had asked his other company for information pertaining to A/R balances, the collectability of A/R and revenue recognition. Further, we have found inconsistencies in management bios, including claiming to have been credited with a patent that doesn't seem to exist (or at least that we have been able to find).
7) IMA was just another dot.com bust - FALSE
Contrary to the sellside story, IMA had multiple financial restatements, including IMPROPER EXPENSE RECOGNITION FOR TWO ACQUISITIONS. One particular earnings misstatement led to operating income being overstated by 257%, which led to a 200%+ increases in the stock in a mere 10 days, which was followed by aggressive insider sales. Additionally, IMA raised capital for a subsidiary called Buyingedge (which Subbloie claims he founded) at a time IMA had falsified public earnings statements that were later restated. Further, IMA fired Arthur Andersen (who took issue with the Company's bad debt reserve) and subsequently fired PwC a mere 172 days after engaging them. PwC "had identified certain transactions where the underlying documentation raises questions regarding the revenue recognition accounting afforded to the transactions." Amazingly, many of the same players are deeply entrenched in the Tangoe story, including its primary VC investor, CEO, and CFO.
8) Tangoe throws off a lot of operating cash - MISLEADING
Tangoe strangely spends 87% less on capital expenditures (including capitalized software) than a broad set of its desired SaaS peers. More troubling is the potentially artificial benefit acquisitions have had on the already insignificant cash flow. Based on our analysis, we believe Tangoe may be acquiring balance sheets with positive working capital, which may create a "one-time recurring" benefit to cash flow from operations (the acquisitions are deducted from cash flow from investing which is ignored by sellside analysts in their free cash flow calculations). Our analysis suggest that excluding the potential forward working capital benefit, Tangoe's trailing 12 month operating cash flows would have been 38% lower than the measures the Company has reported.
9) Sellside analysts really believe - Paint us skeptical
The Tangoe story is a bank's best friend because the one thing that all roll-ups require is capital. Tangoe has already raised $104.7 million through two public offerings in a little over a year, which may help explain the blind justification from Wall Street for asinine price targets and ignominious analysis. We believe Tangoe's cash that is effectively "unrestricted" is closer to $17 million, compared to the $78.4 million that was reported on 6/30/12.
10) How to Value Tangoe
Tangoe's "stellar profitability" (according to management and analysts) would suggest that it should be valued based on some metric of profitability. Using both forward EBITDA and EPS, as well as affording Tangoe a generous 20% premium to what we believe are the appropriate peers, yields a price target between $6.47 and $9.60 per share, representing down side of 44% to 62%.
Disclosure: I am short TNGO.
Additional disclosure: IMPORTANT Disclaimer – You should do your own research and due diligence before making any investment decision with respect to securities covered herein. As of the publication date, the author of this report has a short position in the company covered herein and stands to realize gains in the event that the price of the stock declines. The author does not discuss unpublished reports, or provide any advanced warning of future reports to others. Following publication of this report, the author may transact in the securities of the company, and may be long, short, or neutral at any time hereafter regardless of our initial opinion. To the best of our ability and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable. However, such information is presented “as is,” without warranty of any kind – whether express or implied. The author of this report makes no representations, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. All expressions of opinion are subject to change without notice and the author does not undertake to update or supplement this report or any of the information contained herein. This is not an offer to buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction.