It's been a while since I've taken out the microscope to a company's financial statements, but over the weekend, I called up a colleague from Chicago who specializes in tech M&A and we decided to take a quick look Procuri's released financial statements as well as David Bush's analysis from last week. In the spirit of limiting the time of this analysis -- after all, there are far more important things to look at in the sector from a practitioner perspective -- I'll keep this particular examination to digging into the facts upon which David rests his argument. I should have done this before. Last week, I spent a few minutes reading David's post and offered up some commentary from it just as I was about to go on the podium for CVM Solutions at their Cincinnati Supply World event (I literally took my computer off the project mode to write the post). Well, we all make mistakes. Upon further reflection after my research this weekend, I should have done some more homework on David's financial analysis before just quoting his statements. Here's why.
First, David claims that Procuri was "losing money and not reversing the trend -- 6.2MM in '05, 7.6MM in '06, 4.3MM in the first 9 months of 2007." Granted, these are not stellar, profitable years, but I don't fully understand David's statement. Consider how $4.3 annualized is a $5.7 million loss (less than a $7.6 million loss), which is in fact reversing a trend, at least as I see it. Along the same lines, we also don't know from his analysis if Procuri has any lumpy revenue (from services, for example) which might have brought up Q407 revenue and earnings. Many companies best quarterly performances are turned in during Q4. From his analysis of the revenue trend, we also have no idea what was in their receivables and sales pipeline -- only Ariba and the bankers had visibility into this, presumably. And finally, as someone who spent his first job in merchant banking and a couple of years later in his career doing corporate development, I find it hard to make definitive statements about trends, reversing, etc. with only 2 years and 3 quarters worth of data.
Next, David notes that Procuri used at least "$37.5M in venture capital and related debt instruments from cradle to grave to create the sale of $92M in stock and cash plus $8M in debt relief". What is the point here? It's kind of like saying the sky is blue. Statements like this do not tell us anything about the payout structure (i.e, the cash and stock split of the $92 million). Making statements like this without the facts such as the current capitalization structure of the company at the time of sale (and prior), equity interest and payout schedule of majority holders and their terms, stages of exit, etc. is a recipe for misinterpretation. For example, if David is arguing in his post that the VC's took the money and ran, then we really need more facts -- which do not come out in his analysis or the SEC filing. In another example of jumping to conclusions, along similar logic lines, David also suggests that "Procuri spent a WHOPPING 70% of inbound revenue on sales and marketing expenses (if you can assume most of the COGS were sales/marketing commissions)." This statement is almost laughable without further facts to back it up. What could make someone who is not an insider assume with access to more data that most of the COGs were sales and marketing expenses? Were there sales and marketing in OPEX? We simply don't know, yet David jumps to a conclusion in his analysis.
In the following statement, David notes that Procuri's sales were growing rapidly: "$17.4M in 2005, $22.3M in 2006, and $21.2M in the first 9 months of 2007. Of course, one has to remember there were acquisitions of TrueSource and CMSI that increased this growth percentage. These numbers do not reflect the COST of the growth." After my own dissection, I have some issues with this statement. Consider whether less than 30% sales growth is really rapid (even in a SaaS model). Is it? Second, there are several reasons for acquisitions -- pumping up the sales numbers is only one of them. Companies acquire business for intellectual capital, to enter new markets, to expand their product footprint, etc. Without knowing the make-up of organic growth vs. purchasing growth, how can anyone make a statement that past acquisitions contributed to supposedly rapid growth? Seriously, TrueSource was struggling to make payroll at the time of the deal close (and I know this for a fact -- and you won't read about it in the SEC filing).
David also notes that: "Procuri paid $2.2M for TrueSource ($1.5M in cash and $684K in Stock). TrueSource only had $5k in the checking account and $150k in AR, at the time." Here, it's critical to remember that current and future cash are only 2 variables in valuation. And for Procuri, who had a limited product footprint before the deals, they were probably only one of the factors contributing to valuation and acquisition rationale. David also notes that "Procuri paid $14.1M for CMSI ($7.1M in cash, $562K in stock, $4.6M in debt issuance (a note payable at 10%!), and $1.7M in liabilities assumed) CMSI had $533,000 in the checking account and $858,000 in AR (+ $426K in fixed assets) when acquired." I have a difficult time with what appears to be a value statement analysis here given that without looking at the actual terms of the deal, what the prime/lending rate was at the time, etc., it's impossible to suggest whether or not the terms were advantageous. For example, given that prime is just below 5% today and the Fed only started dropping rates recently, if the deal happened a while ago, perhaps this was not such a bad structure. We simply don't have enough data to know (or to pass judgment).
In summary, I question a lot of the assumptions behind David's research and how he spun the numbers to paint a story which is still missing half the canvas. Even though he is clearly spinning the numbers just as any competitor would in an analysis -- and for those who do not know David, he is a Procuri competitor -- there's a difference between extending an analysis that's missing a few pieces and plain guessing to fill in the blanks in any particular direction based on how you want to interpret the data. What do I think about Procuri's financial position at the time of the deal and the three years prior? I simply don't have enough information from the SEC filing to make a definitive statement on the numbers without spending a good day or two running comparable models and trying to get some more color behind the numbers from those close to the deal. At the same time, I stand by my earlier assertions that this was a leveraged venture where outside investors had control over its ultimate destiny. At least that David and I agree with. If you're curious for my take on the deal from a solution perspective, search for "Procuri" in the search field on the right side of the blog. There's over a dozen takes and perspectives. No need to rehash again.
- Jason Busch