Poseidon Concepts... Revisted (Part 1)

I've been meaning to address this inexcusable act of mass destruction.  Here's a play by play of this unprovoked annihilation of over $1B of market cap in a matter of minutes (can you feel the outrage?).


November 7 to November 14, 2012
A side note here as a point of interest: the average price dropped more than 8% during the week leading up to the "news release".  This is compared to a steady price over the preceding months.  Admittedly, a price movement like this during such a short time frame may be considered normal for a company like this, but nonetheless it's something to keep in mind if you're interested in  efficient market theory.  Also consider that the small handful of sellers who are in the know, would be offset by a large majority of buyers who don't know - the magnitude of gain for the smaller group is muted by the offset from buyers who see the drop in price as an opportunity.  Only the OSC can tell if certain individuals benefited (directly or indirectly) from this event.


November 15, 2012 - PSN "Announces" Q3 2012 Results and "New Product and Service Offerings"
I had a difficult time choosing which words to exaggerate here - guess it could have been just the one word "PSN".  In any case, you will see later that this "announcement" was part of the magic show.

• FY 2012 guidance was cut to $140M.  The original guidance was $130M, then evolved to $170M and then $210M in May 2012 (right now, it's probably closer to 0 than $140M)
• Management's explanation for the unfavourable results/outlook was cyclicality in the industry they service
• Management hinted at the accounting magic during this release
• Let the lawsuits begin!  And Poseidon says Bring It!!

At this time, I was still hopeful... a hopeful idiot, it turns out.


December 27, 2012
Management starts looking into their accounts receivable collection issues - they were having trouble collecting the money that their customers never owed them.

• Dividend suspended
• Special Committee formed
• Matt MacKenzie is no longer CFO (but will still work at the company until February)
• Lyle Michaluk (previously CEO) is now CFO
• Scott Dawson is CEO

At this time, I was too drunk from the holidays to lose hope - at this point I was delusional.  This news release confirmed my biggest identified risk to the PSN stock - why was AR turnover so funky.  What I didn't know at this time was that their AR and revenue were fictional works of art.


February 14, 2013 - Happy Valentine's day!!

• Michaluk leaves, along with his sidekick MacKenzie
• Accounting firm retained (E&Y), advising that 70% of previously recorded revenue and AR had never existed (Damn it, what happened to the magician code?!  Never reveal!!)
• EY has identified that the misstatements are related to "long term take-or-pay arrangements"
• Oh shit, now that we erase the Asset column on the balance sheet, the Assets do not equal Liabilities + RE... aaaand 6 days later PSN is in default and stock ceases trading.

At this point, I am hung over.  So let me get this straight.  First it was the industry's cyclicality that was hurting earnings.  Then the story takes a new direction and instead it's because their customers don't pay on time.  And now... What?! 70% of your company has evaporated?  You know, there are a lot of people ($1B worth of people) who are relying on this information (or lack thereof) to make decisions.

April 9, 2013 - CCAA Protection

At this point, I've regained some sense of reality and am wondering - why is Mike Tyson in my room? And why is he singing Phil Collins?

---------------------

Had enough?  It's painful, I know.  I'll just take a break here, since most of the pain has been delivered at this point.  Stock is worth zero - from here, there's nowhere to go but up!

I'd like to do some research on the accounting for long term take-or-pay arrangements and will report back in a few days.  I also want to address money flow (where did all the money go?), the auditors, the investment community and how Management played them all during the months leading up to this catastrophe.  All in all, in order for an open market to work, someone needs to be held accountable for providing reasonably reliable financial statements (which are, by the way statements of fact, not opinion).  We can't have everyday investors second-guessing reported actual results.

Bye Bye Rogers Wireless

Very. Tired.

http://mobilicity.ca/promotions/less-than-1-a-day/

PLUS

http://forums.redflagdeals.com/mobilicity-samsung-galaxy-nexus-299-tax-1210778/

PLUS

http://www.dellvoice.ca/

=

WOOT WOOT

Poseidon Concepts

It’s almost that time again.  Yep, you got it.  Poseidon (PSN on TSX) will be releasing Q2 results on August 8.  PSN has been a very interesting stock to track, primarily because of the explosive growth they have recorded so far during their short history.  The explosive growth and short history are also what make it hard to put a value on PSN.  Here’s an interesting blog providing some good background and analysis on PSN written in the early days (it was written 2 quarters ago).  With all the new information that is now available, I thought I’d take a stab at forecasting PSN’s results ahead of their release date.

Key historical information

	Q1 2012	Q4 2011	% Change
Average tanks Revenue Qtly revenue Qtly revenue per tank Annualized revenue per tank Operating Costs Qtly operating costs Qtly operating costs per tank Annualized operating costs per tank General and Admin	290 52,129 180 719 4,709 16 65 3,717	205 33,824 165 660 3,277 16 64 2,128	+41% +54% +9% +9% 44% 2% 2% 75%
EBITDA	43,703	28,419	54%

• Using historical quarterly information, we can derive revenue per tank and operating costs per tank.
• Revenue per tank has increased substantially in Q1 2012.  In their Q1 2011 release, management mentioned improved tank utilization.
• General and admin expenses have increased substantially (up 75%).  Based on the Q1 release, it sounds like they have been on a hiring binge, to meet growing business demand.  Hopefully this is good news, and hopefully management will stick to their guns when claiming to be a “rental business with relatively low fixed costs” with a “longer-term goal to be a dividend growth company”.
• G&A will be a tough variable to pin down, especially if Q1 is not fully reflecting all of the anticipated ramp up in costs.  To be conservative, I will us $20M for the year ($5M per quarter).

Cost of a tank

• One of the big questions is how much it costs to build a tank.  It looks like this is in the $150k to $200k range.  If this is true, given that quarterly revenue per tank is $180, PSN breaks even on each tank after one quarter!  
• Three ways to verify the $150k-$200k estimate:

1. PSN added $13,361 to PPE during Q1 2012.  They built 100 tanks during this period, which implies a cost of $134k (most of the PPE balance is represented by tanks)
2. The total gross balance of PPE at the end of Q1 2012 is $49,118.  At period end, total tanks were 340, implying a cost of $144k.
3. Depreciation in Q1 2012 was $1.1M.  With 290 average tanks in the quarter, the implied cost using PSN’s 10 year amortization policy results in a $150k cost per tank.  A similar calculation for Q4 2011 results in $180k cost per tank.

Debt

• The only debt remaining on the books is a $10M note payable to the parent company (due on November 1, 2012), with interest of prime + 1%.  I will assume 4.5% interest.
• Each quarter since spinning off, the company has slowly shifted its capital weighting from debt to share capital. 

Average Tanks

• PSN produces 7 tanks per week.  Assuming 50 work weeks, this will add 350 tanks by the end of 2012, or 175 on average for the year (350/2).
• Add this amount to the number of tanks PSN had at the beginning of the year (240) gives us 415 average earning tanks over the course of the year.

Forecast Scenarios

• With such big margins, it’s difficult to say if management can maintain them, especially if there are new entrants competing in this space.  I’ve added 4 potential scenarios.  For simplicity, these variables have been applied throughout the entire 2012 year even though we have 1 quarter of actual results.

S1:  Assumes revenue per tank and operating cost per tank is consistent with Q1 results

S2:  Assumes a 10% increase in operating costs per tank

S3:  Assumes a 10% decrease in revenue per tank

S4:  Assumes both S2 and S3 occur

• Going forward into 2013, as competition grows, tank utilization (ie.  the proportion of tanks that are rented out) will play a bigger role in forecasting PSN.  However, for the foreseeable future,  I think it’s safe to assume that tank utilization will be similar or better than previous quarters. 

	S1	S2	S3	S4
Average tanks Revenue per tank Total revenue Operating cost per tank Total operating cost General and admin EBITDA Interest @ 4.5% Depreciation Stock Comp Tax @ 26% Net income after tax Dividends ($1.08 x 28M) Retained Earnings Payout ratio Earnings/share (81M shares) Price/Earnings ($14 price)	415 719 298,394 65 26,955 20,000 251,439 375 6,225 7,200 61,786 175,853 87,480 88,373 50% 2.17 6.45	415 719 298,394 71 29,650 20,000 248,743 375 6,225 7,200 61,085 173,858 87,480 86,378 50% 2.14 6.53	415 647 268,554 65 26,955 20,000 221,599 375 6,225 7,200 54,028 153,771 87,480 66,291 57% 1.90 7.38	415 647 268,554 71 29,650 20,000 218,904 375 6,225 7,200 53,327 151,777 87,480 64,297 58% 1.87 7.48

Profitability does seem a bit too good to be true, even though conservative assumptions were used.  The last PSN EBITDA forecast for 2012 was $210M, which was revised upwards from $170M from previous guidance (also up from the $130M original guidance).  The above numbers are higher than PSN’s latest forecast, however PSN has developed a track record of providing conservative estimates.

This forecast may help rationalize the high dividend (currently ~8%).  In Q1 2012, after paying dividends, the company retained only $8.9M to reinvest in operations.  Based on the above, by the end of the year, the company will have retained $65M+ in the company.  This may also help rationalize a growing dividend in coming years.

The P/E above using current market price (~$14) could be considered high, depending on when you believe revenues/utilization will start to be impacted by competition.  Mitigating this is the high dividend yield and the prospect of accelerated NIAT growth in coming years.

In addition to the risks identified in Potato's blog, I’ll add a few more:

1. Collections – PSN has been slow in collecting from its customers, and this has gotten worse in Q1 2012 compared to Q4 2011.  Whats the hold up?!  It's not clear why it takes 2 quarters for PSN to collect from customers (could be the way they are recognizing revenue, or maybe this is how the business works).
2. G&A spend has been growing fast.  It will be interesting to see if this plateaus over the next 2 quarters.
3. As competition grows, revenue per tank will be under pressure.  However, at this point, it seems like there is still room in the market for PSN and any new potential entrants.

Based on Scenario 1 assumptions, here’s my Q2 forecast estimate:

Revenue Operating Costs	61,680 6,490
General and Admin	5,000
EBITDA	50,190
Interest Expense	113
Depreciation	1,446
Stock Based Comp	1,800
Tax	12,176
NIAT	34,656

Disclosure: I am not an investment advisor.  I am long PSN (with a very minor investment).  I am more interested in seeing how the company will perform, given the volatility in the stock price and uncertainty in the company's results. 

The case for... switching Internet providers

Oh, Rogers.  I'm impressed at how you have grown to become a Mammoth Money Making Monster (MMMM), leaving your victims with no choice but to choose you (or choose your MLSE partner in crime, Bell).  But alas, we have a new hero (well not really new but just play along with me here) among us.  A choice for the puny retail consumer.  A Dark Knight. (cue in dramatic music...)

So you can tell I am a bit overly pumped about the Dark Knight Rises.  I am also just as passionate about competitive pricing from our telecom overlords.  So, for my first real blog since 2006, I wanted to start with an easy one - the case for saving money on Internet.

What I know about Teksavvy is that they have really cheese ads with Georges Laraque posing as their superhero (personally I would've chosen Christian Bale, but really who am I - nobody).   I also understand that Teksavvy utilizes the Rogers infrastructure, so if you go with Teksavvy, you are really using Rogers' systems.  I'm sure I could add some sort of symbolism here, but I won't (such as "Luke, I am your father!").


Comparison ($'s exclude taxes): Teksavvy vs. Rogers


Thankfully, these companies have made their internet packages quite easy to compare.  Here is a comparison of the first tier of internet packages offered by both companies:

As you will quickly notice, you get more for your dollar if you go with Teksavvy.  Rogers customers often move up to a more expensive package because the 15GB allowance is not enough.  These customers don't necessarily move up to the next package because they need faster download/upload speeds, which is what they are paying for with the next step up.  The next package from Rogers is $48.99 per month, and gives you only 80GB of bandwidth!  With Teksavvy's Lite Cable 3 package, you can get 300GB for $30.95 per month.  Out of all the ones offered by both companies, this package wins in my books - I get more than enough bandwidth and the speeds are fast enough for my requirements.  One day, if I ever start a server, I may consider looking at moving to a higher upload speed.


Additional Details ($'s exclude taxes)

• Bandwidth overage calculations: Each month, Rogers will calculate your bandwidth usage, and will add an additional usage charge to your bill for each GB over your limit (the charge ranges from $0.5 per GB to $4 per GB depending on the internet package you chose).  Teksavvy calculates your overage based on a 2 month rolling average.  This would be helpful on those months when you download an inordinate amount of cartoons.  +1 for Teksavvy.
• One-time Activation Fee + Modem Purchase: Under both Rogers or Teksavvy, you will need a modem (rent or buy).  The cost of activation + modem purchase from Teksavvy is $130, and from Rogers is $214.90 (difference of $84.90!!).  +1 for Teksavvy.
• So some people might say to me, "Hey Dufus!  I do everything with Rogers, and they give me 15% off all my bills.  I love Rogers! YAAR!!".  For those people, I would calculate what the additional 5% discount (from having a 3rd product with Rogers) amounts to.  You'll still be better off switching to Teksavvy, buddy.

Conclusion


Well, the choice is yours.  You can save 31% or $132 a year (pre-tax) by switching over to Teksavvy.  Or if you're looking to increase your bandwidth, you can opt for the 300GB package and still save $60 each year or 14%.  Make one phone call, and then sit back and watch the money rolling in!  Well actually, you'll be watching your money stay in your wallet (just as exciting).


I've been with Teksavvy cable internet for the past 5+ years and have not had any issues.  Recently, they have been restricting new customer activations in their highly congested areas, and have been trying to update their network to accommodate for this demand.  If this is the case, I give you 4 alternatives: (1) switch to DSL (Teksavvy also offers this), (2) speak with Rogers retention (I hear that they will often offer you a deal that you can't refuse), (3) have a look into Distributel, or (4) look at expanding your phone's data plan to use with your home network.


For those interested, here are the comparisons of the other internet packages offered by both companies:

I would love to meet the person who subscribes to the Rogers Ultimate package, with speeds of 75Mbps download and 2Mbps upload!!


Note: Other than being a customer, I am not affiliated with Teksavvy.  My only allegiance is to my wallet.  The above stats were based on Teksavvy and Rogers pricing in July 2012

The case for... a Blog!

In today's economy, companies are finding it difficult to add top line growth and instead are cutting operating costs to stay competitive.  Individuals are feeling the pinch too (due to corporate cost cutting) and are being pressured to do the same. 

This blog will serve as a place to review humanoid operating costs and to share my encounters with minimizing these expenses without compromising our standard of living...  because saving a loonie a day will pay for your annual Dom Perignon fix!