UPDATED: 11:20 AM EDT — And… the SEC Form 10-Q has been filed — but that review and analysis will be a separate post, tonight. Right now, the NASDAQ trading graph, and price chart would indicate that someone (cough! Mr. Singer, and/or Craig Hallum) is out there — using its balance sheet, to defend the price of the company’s stock, this morning — even so, it is down sharply, on high morning volumes. Currently the stock off “only” about 11 per cent, on 75,000 shares changing hands as of 11:20 AM EDT. Whoever it is — that cannot last for very long. Look for additional price declines, at the close, tonight — or in the coming days and weeks, as the stabilization players run out of funds, and/or patience. [End, updated portion.]
As our law firm colleague prepares the securities class action complaint, we have shown him the below. He is rewriting, and updating the complaint at law, as we push send, on this post. [So (for those investors following this blog) it may be a few days, as a notice to the investors involved in that matter, while the complaint is edited and redrafted. We are given to understand that he will be in touch with all of you.]
To the substance, then: to our knowledge, spanning at least five full years, Mr. Conway has never disclosed this before. Mr. Mullen, the board member and CFO just said for the record last night, that 60 per cent, or $600,000 of the loss in Q2 2017 was due to cash the company had to pay to third party technology providers, in delivering the suite of products to Mattersight clients.
[Is this a flat $600,000 the company must pay every quarter, even though the bookings were only a little over $2.3 million in Q2, or is this a variable formula amount, depending on the number of end users actually using the products, in the seats? We have no way of knowing, as the company (in its usual model of opacity, coupled to cliche-laden “happy talk“) hasn’t explained in any detail — and only disclosed it last night, by a “back-handed” non-disclosure.]
In either event, this is a jaw-slackingly belated admission: that all those patent applications (running now into several million dollars in legal spend, over the last ten years) have been largely… for naught. Mattersight must spend heavily on third party licenses, in order to deploy “its” suite of products into customer accounts.
Fully 60 per cent of the “miss“, on (its own “double secret probation” adjusted) EBITDA figure, in Q2 2017, was due to the $600,000 paid to third parties in Q2 2017. Yet he chose to talk about the 40 per cent being severance and lease exits, first — per the edited conference call transcript section, below.
CFO and board member Mullen, last evening:
“…Our EBITDA loss of $1.7 million was $1 million worse than our forecast, with the shortfall all attributed to expenses. Approximately 40% of the expense overrun was a result of conscious efforts to reduce our future spending in the form of severance payments and buyouts of office leases and vacated space. The balance was attributable to underestimating our usage of third-party technology products that we use in delivering our solution….”
Without disclosing this to the markets (until now), it would plainly seem that Mattersight has become simply a[nother] value added reseller, of other peoples’ tech — in the delivery of the PBR “solution” to its Fortune 100 clients.
Disgusting. And likely… actionable. [That is… a total of 17 nesting dolls, at right, by the way — 17 years’ worth, at Mattersight. Hilarious.]
The stock should fall to around $2.45 today, unless either Mr. Singer or Craig Hallum steps up to defend it, in the NASDAQ OTC.
As an acerbically humorous aside, given all the Kremlin like opacity in the numbers at Mattersight, I wonder whether the CEO and CFO are simply using Bob’s projected losses as “cover” — to clear the Red Square, by disclosing expenses, and thus losses — they’ve apparently long been holding-silently in the cut, or in a series of nesting Matryoshka dolls, of some sort.
Now you know.
What Matters? 
I read the transcripts of the call. There were a number of things that were very surprising that I’ll mention later in another post but related to what the author commented about I was surprised at how much this is still a consulting company with some enabling technology and not a product company selling a solution. Once you wrap your head around this it then becomes clear why their deployments have been so slow. They’re likely limited by their ability to find people who can understand client requirements understand client systems and understand the Mattersight message and technology, not to mention the third party software embedded in delivering a solution.
This also goes along way to understanding why their previous efforts in building a reseller channel of their own technology has not succeeded or why their relationships with other systems integrators has not succeeded. You see these other VARs and systems integrators are able to pick from a broad variety of tools with which to build a solution that best suits the needs of their clients. Mattersight on the other hand basically has one tool. And when all you’ve got is a hammer everything looks like a nail. This might also explain some of the challenges in the sales process as they try to convince customers to use their solution as opposed two other technologies and other approaches. Mattersight is not the only company calling on these prospective customers to provide similar things.
Bingo! Will make yours a new post after lunch… I think it gaps down — to $2.35… before “recovering” to $2.45 by day’s end! Hah!
Well… at least it looks like I called the close correctly: $2.45 — off about 17% on the day — about two-and-one-half times normal (110K shares) volume — at 250K on the day.
Paging Mr. Singer. Mr. Eric Singer… your Mr. Wolf (a/k/a “the cleaner”) services, from “Pulp Fiction” are now required at 200 West Madison.
Hilarious!
UPDATED: I should note that under the Private Bank covenants (at page 58), as of the end of Q3 2017, Mattersight must not post more than $1.25 million in negative EBITDA (without writing off any debt repayment/penalties), in order to avoid a covenant default.
I expect the company will need to seek a waiver in Q3, on a less than 100 day old facility. In Q4, the company must break even on EBITDA, or face the need for another waiver — and associated waiver fee.
U G L Y.
What really reinforced this for me was when Mullen slipped and referred to the client opportunities as projects. If they were really selling a product these would be merely sales.
It would be interesting to look at the revenue stream and cost stream for a particular customer. Is this merely a consulting project that is priced out on an annuity basis based on a previously agreed-upon monthly fee per seat. If this is a case I can see where they would get into some big trouble if they can’t accurately estimate their costs in turning on a new customer. Since costs are incurred in the present and revenues are received in the future this can be a big problem particularly if not only were the costs incurred to turn on a customer underestimated but also the costs to support the customer on an ongoing basis are underestimated up front. If this situation occurs you would likely see a company that would achieve revenue goals but could never get their costs in line to achieve any sort of economy of scale or profit. It would always be we will achieve a profit next year.
Exactly. As in… THIS company! Off to a plunging NASDAQ open now!
[Hey — and I see you at fed ex — at 9:15 this morning! Grin!]
That $600,000 mistake, whose performance review gets dinged for that one?
What are you smoking, Bob?! This is Mattersight!
BOTH the CEO and the CFO will get added “bonus gravy” from the board — at year end (likely in stock, I’ll grant you)… for making sure they were “ever-ready” for a scaled up demand curve… but one that (as ever) didn’t materialize this year (or any other)!
They get awards! No dinging of top five, ever!
You silly guy!
EBITDA! EBITDA! EBITDA! Let’s hear it for EBITDA!
Let me tell you why this is the rallying cry of the feckless manager and investor. It’s all about the D.
That D stands for depreciation which is the amortization of capital expenditures. You know, real stuff you bought with real money, provided by the shareholders (this company is owned by the shareholders and everything belongs to them). If you keep focusing on measures that remove depreciation, you are removing a very important cost from an assessment of company performance.
Why do we care? A company usually makes capital expenditures each and every quarter and Mattersight actually spent about $1.5M in Q2 on real stuff. Go look at the quarterly statements for the “Consolidated Statement of Cash Flows”. Find the line for “Capital expenditures”. Subtract the 6-month total in the Q2 statement from the 3-month total from Q1 and the result is what Mattersight spent in Q2, or $1.493M.
If you ignore the depreciation of capital expenditures every quarter, you are missing a key cost of business operations and company performance. Where it gets really objectionable is when management has performance objectives based on EBITDA.
And don’t get me started on “Adjusted EBITDA” which incorporates non-cash compensation to employees. This is just money printing, pure and simple. For every dollar that management conjures up out of thin air via non-cash compensation it represents a dollar diluted away from the shareholders. Yes, I know it’s supposed to be an incentive and reward for performance that doesn’t drain the cash position of the company, but for a company that loses money quarter after quarter, year after year, it’s just a slap in the face. It reminds me of a scene from Animal House.
It’s time to update my EPS/(LPS) projections for Q3 and Q4. When I last made projections (Q3 -20 cents and Q4 – 19 cents, they were based on the old share count, before the last stock sale. My prediction for Q2 was a 22 cents per share loss, but as share count expanded by about 15%, that normally would dilute the prediction by a similar amount. it was only by luck when Mattersight got out of the previous loan and incurred the exit cost that the resulting EPS was -22 cents per share.
Getting out of that loan was a good move by Mattersight as they only drew $13.7M on the new $20M credit facility and only pay interest on what they’ve drawn. When I mentioned that cash fell from $22M to $7M, I hadn’t seen they’d only drawn 2/3rds of what they could. so the correct comparison would be considering a full draw or that the cash position changed from $22M to about $13M or so. Still, the amount of cash available to them will decline from that $13M each quarter until they raise more cash somehow (and they’ll need to). From operations, they’ll likely draw $2.5M per quarter and from capital expenditures, they’ll likely draw another $1M per quarter. Absent a financing, their cash position at the end of the year will be $7M or less. A figure that should be concerning.
Now for the predictions:
I don’t think the seasonal upswing will be as significant as they hope and I don’t think operating costs will decline as much as they hope, if any decline occurs (if they do a stock sale, I’m betting costs go up). I think revenues will come in at $10.7m for Q3 and $10.8M for Q4 with losses of $4.7M for Q3 and $4.6M for Q4. Assuming share counts of 31.5M and 31.75M respectively, my LPS estimates are -15 cents for Q3 and -14.5 cents for Q4. These are not that far off from my previous -20 cents and -19 cents, respectively, if you use the old share counts. Of course, if they do conduct a stock sale, my estimates for Q3 and Q4 will need to be diluted accordingly.
The difficult thing about using EPS as an assessment of company performance over time is that they are only useful if share count remains constant and an argument can be made that you should only use the share count at the start of the year to judge performance for the entire year. They are frankly useless for a company like Mattersight and the focus should be and must be on official GAAP profits or losses as they incorporate real and economic performance of the company. Percent GAAP profit or loss is how the company, any company should be measured.
So, to calibrate, in Q1 they lost 47%, in Q2 they lost 66%, and I project a Q3 loss of 44%, and a Q4 loss of 43%. This is how I will predict in the future. Screw EBITDA, Adjusted EBITDA, EPS (LPS), and company-derived adjusted metrics. The company should use full-year GAAP profits on which to base performance compensation. For anyone. No annual profit, no cash or stock bonus, and they only get a portion of the profit in bonus. That’ll get them to focus on the proper things and align their activities for the shareholder’s benefit.
I’ve written enough the past two days in reaction to the results announcement, so I’ll likely respond sparingly unless something new comes up. I do hope something positive comes up for Mattersight, but I’m not holding my breath.
And, as always, I don’t hold, haven’t held and promise not to hold any position in the company, long or short.
Excellent! This will be a new post later tonight!
It is crazy that on pure GAAP numbers, the company is generating larger losses, even with the benefit of the newly infused capital.
I concur in all your points — but these guys sure run a cock-eyed operation!
I’ll look later tonight but do recall that the covenant tests under the shiny new Private Bank lending do NOT let Mattersight back out the cost of extinguishing the Hercules loan — from EBITDA, here in the remainder of 2017.
So there may be yet another trip wire in Q3/Q4 2017… embedded in the Pricate Bank documents.
Waiver fees to be paid?! Perhaps — and the ink isn’t really dry on that relationship, yet!
Crazy!
Namaste, man…