Diligent Boardbooks IPO

[Whipmoney]

Should I even mention our retracement channel or no news until Feb (if it doesnt get delayed AGAIN!)?

If it gets delayed again then (as a fundie) i'm happy for another dip and another good chance to top up. If the restatements do come out then i'm now expecting a bit of a bolt northward, particularly if its in combination with a reasonable Q4 announcement.

With regard to the retracement (regression) channel.. what does that even mean? I don't see how plotting the share price over a historical period of time will give you a reasonable indicator of where it will end in february?

[robbo24]

With regard to the retracement (regression) channel.. what does that even mean? I don't see how plotting the share price over a historical period of time will give you a reasonable indicator of where it will end in february?

Winner69 and some others discussed this topic ad nauseam in the past... Probably about 4 months ago now. Much of it panned out to be correct, too!

[winner69]

There shouldn't be any change as there has been no change in cashflows - they have made that very clear. Therefore if your cashflow model suggests otherwise, then you have either made a mistake or classifying cash flow differently for the purposes of your valuation.

You are correct but better said as 'There WON'T be any change in cash flows" .... not because they have said so but the accounting says so .... unless they have incorrectly disclosed what was in the bank

KG formula will never give the reported FCF ... instead of his formula why not just use the one in DILs Accounts they send out each quarter (some times)

Now I be accused of preaching to the choir

[KiwiGreen]

I've recalculated my Free Cash Flow in anticipation of the restatement of installation revenues over 9 years.

I decided to take installation revenue as being 10% of all revenues. I matched this by assuming installation costs as being 10% of all Cost of Revenues (CoR). I figure surely if they are re-distributing the installment revenues over 9 years surely the same must be done for the associated installment costs. Thus I deducted 8/9ths of 10% off of each. But I also needed to add 1/9th of 10% of both 2012 and 2011 revenues as well as 1/9th of 10% of their CoR.

Regarding the 2012 balance sheet I then added only 1/9th of this 10% (from 2010,11 and 12) to 'Deferred Revenue' (current liability) as liabilities further out than the next year obviously can't be current. The rest (7/9ths of 2012, 6/9ths of 2011 and 5/9ths of 2010) went to non-current liabilities. Further I did a similar thing in both current assets and non-current assets for the deferred charges (i.e. the associated CoR). The balance of the difference is made up in a loss to equity by increasing the accumulated deficit. This made the most logical sense to me, any thoughts on how you could do it differently?

The end result was that although the reduced net income was offset somewhat by a reduced Change in Net working Capital, Free Cash flow for 2012 dropped by about US$1.7m. From about US$17.65m to 15.95m.

Welcoming critique.

[Whipmoney]

Winner69 and some others discussed this topic ad nauseam in the past... Probably about 4 months ago now. Much of it panned out to be correct, too!

I wouldn't presume causality. The regression channel was based on past data points which have no predictive value for subsequent external events (e.g. announcements of further delays in the restatement process) which in turn caused a further shareprice retracement. In order words the model got lucky..

[robbo24]

I wouldn't presume causality. The regression channel was based on past data points which have no predictive value for subsequent external events (e.g. announcements of further delays in the restatement process) which in turn caused a further shareprice retracement. In order words the model got lucky..

I understand your point - but the situation has largely been an absence of news and announcements.

A few delays/extensions and non-contentious announcements but nothing over the top.

[Whipmoney]

I understand your point - but the situation has largely been an absence of news and announcements.

A few delays/extensions and non-contentious announcements but nothing over the top.

Yet the SP dropped over a $1 (25% upon the last announcement to the delays in the restatement process).

Either way though... goodtimes, I've accumulated cheaply and have already gained 17%. Expecting an SP of circa $5 by mid 2014.

[winner69]

Just for you Whip .... the chart that got lucky (mind you these charts can go up as well .... is that luck as well)

I have no idea what it all means except that since early June the DIL shareprice has been declining at a rate of 0.6% per day.

Decline started before the restatement news.

The big dots on this version of the announcements made about the restatement problem. Maybe its just luck but the announcements have generally been positive for the shareprice - most times the price has reverted to the long term trend line.

Good on you for buying when it dropped quite a long way off the long term trend - you have made a decent profit as it has reverted to that trendline .... was that luck .... of course not it was skill wasn't it

It cant keep going down forever .....maybe one the trend will reverse and a new trend will occur .... hopefully this time a decent long term up trend .... but at the moment something is keeping the long term trend heading down. Trend theory says trends (up and down) stay in place until there is a 'shock' to break that trend. What that shock is for DIL goodness knows ,,,, but maybe not the final outcome of the restatement problem because that could be considered to be a 'known' .... what will they conjure up .... something lucky I hope

[Whipmoney]

Just for you Whip .... the chart that got lucky (mind you these charts can go up as well .... is that luck as well)... I have no idea what it all means except that since early June the DIL shareprice has been declining at a rate of 0.6% per day.

I mean't that it got lucky in terms of its predictive power from when you previously showed it. Personally I don't care what the chart shows up, down, left or right, I think that given it is a simple linear regression model all it shows is the mean price plotted over a time series which as you state has lead to a decline of 0.60% (on average) per day.

I understand that chartists like to operate on lines and trends (ongoing market sentiment?) however what these charts fail to account for (ex ante) is announcements.. I mean how can they?

Just out of interest you should run your regression model on the PEB prices right up until the announcement of their first medical insurance partner. What you'll probably find is a similar story of a downtrending stock heading towards 40c then bam it jumps to $1.48. What does that say about a linear regression model? Basically that unknown unknwowns (good or bad) will blow it to bits.




Decline started before the restatement news.
The big dots on this version of the announcements made about the restatement problem. Maybe its just luck but the announcements have generally been positive for the shareprice - most times the price has reverted to the long term trend line.


After having re-looked at the historical record I don't believe they did... The stock capped out at about $8 on the 17th of June with a slight drop to $7.97 on close of the 19th. On the morning of the 20th it dropped significantly and closed for the day down over $1. So in hindsight the announcement clearly took the market by surprise.



Good on you for buying when it dropped quite a long way off the long term trend - you have made a decent profit as it has reverted to that trendline .... was that luck .... of course not it was skill wasn't it

Probably a bit of both really. I have done my own fundamental valuation on the stock is based on my analysis (and others) it is well under-valued. If your model is right and it continues to trend downwards then it only increases my opportunity for making profit. If not all good. Personally I think 2.76? was the bottom as many of the funds would have jumped back in given how far it is discounted against their valuations and I guess that the accumulation by ACC was anecdotal evidence of this.



It cant keep going down forever .....maybe one the trend will reverse and a new trend will occur .... hopefully this time a decent long term up trend .... but at the moment something is keeping the long term trend heading down. Trend theory says trends (up and down) stay in place until there is a 'shock' to break that trend. What that shock is for DIL goodness knows ,,,, but maybe not the final outcome of the restatement problem because that could be considered to be a 'known' .... what will they conjure up .... something lucky I hope

Restatement alone would likely bring it back into the 4's as the fundies could quantify their values. Q3 and Q4 accounts may change growth outlook so it yet remains to be seen what will happen but I suspect it will be a lot further north of here.

[winner69]

Whip ....I never said it was a predictive model. As you say it is only reflecting what has happened.

And sometimes there are 'hidden' messages where that trend is going .....isn't price and its trend essentially a measure of market sentiment, even if it appears to be irrational (and I make no judgement on that point)

As I said a 'shock' is needed to reverse the current trend .......just like a shock that PEB had ....maybe a really positive restatement will be that shock for DIL .....if it is I will probably join in the fun .....might miss a bit on the way up ......but conversely keeping an eye on this line has saved me heaps lately after cashing in on the rise of the last few years.

Will be interesting to see what happens when they finally sort things out

Read this in the context I am not a day trader ..... Just like holding things in long up trends but cashing out when the uptrend finishes .....and of course not buying into long down trends, irrespective of perceived value.

[Mista_Trix]

And down we go again on the big DILil dally rollercoaster. hope people got out while the instos pumped up the price the past few days. Whip, I suggest you give your charts a bit more respect, because thats how this game is going to be played until February.

Snoopy should be back soon when theres a 2 out in front again.

At least its consistently riding the trend line. The push out till Feb isn;t really even that major, one week till xmas - most are taking it off, then many people back at end of Jan.

Ride the trend until that point :-S

[Harvey Specter]

Must admit, I thought it had turned for the better. At least for more than a few days.

[Mista_Trix]

Must admit, I thought it had turned for the better. At least for more than a few days.

There was never any buyer support if it fell, indicating it will slide (and continue to) quite quickly once the money-go-round stops.

[Whipmoney]

And down we go again on the big DILil dally rollercoaster. hope people got out while the instos pumped up the price the past few days. Whip, I suggest you give your charts a bit more respect, because thats how this game is going to be played until February.

Snoopy should be back soon when theres a 2 out in front again.

I don't doubt it will retrace somewhat.. shares go up, shares go down. But if/when it breaks $4.50 I hope you remember that I got in at 3.07 and 3.20.

If it goes below $3.00 between now and Feb.. well no biggie.. if it stays below that long-term then i'm happy to admit i'm wrong and i will gladly gift you a single DIL share (or the cash equivalent thereof).

[robbo24]

I note that ACC ($3.13 average), and others, were happy to buy in and around this range... The value of the share is exactly as it was... It will be an interesting story anyway.

[Xerof]

Looks like 'price' may not assist with an early escape from winners channel (W69, you should patent that as an indicator - maybe Chanel69?) but 'time' could come to the rescue over the break, i.e. sideways to the edge of the top channel

anyway, keeping an eye this one, a higher low would be good.....

[Whipmoney]

Still need some very good news/growth to break the trend though.

Why so..? You need to remember that not all stock movements are attributed to traders, chartists or momentum chasers. A large portion of market activity is dominated by the Insto funds, almost all of whom rely on fundamental analysis. As such I would expect many of these to realise that this stock is comparatively cheap compared to their own DCF analysis. Sure the restatements may make things slightly murkier but they will just price this into their discount (safety factor). We have already seen this with ACC jumping in deeper and I would actually imagine that Milford probably would have jumped back in if they hadn't shot themselves in the foot by trashing the stock by declaring to the world that they were out.

I don't know of any mainstream funds that use technical analysis / charting so trend isn't necessarily an issue to them.

[robbo24]

Here comes a bunch of Odd Lots to get people excited...

[robbo24]

Odd Lotters are selling - time to buy? http://financial-dictionary.thefreedictionary.com/Odd-Lot+Theory

[KiwiGreen]

Does anyone know where/how ASB, Direct brokers etc get the EPS of 13.57c? 2012 Annual report has basic EPS at 11c, which I think without rounding would be 10.69c.

[nextbigthing]

Does anyone know where/how ASB, Direct brokers etc get the EPS of 13.57c? 2012 Annual report has basic EPS at 11c, which I think without rounding would be 10.69c.

Nobody knows. That's the problem :eek2:

[winner69]

Does anyone know where/how ASB, Direct brokers etc get the EPS of 13.57c? 2012 Annual report has basic EPS at 11c, which I think without rounding would be 10.69c.

AR in USD .......converted to NZD

Prob change though .....not much people say though

[KiwiGreen]

Thanks Winner, knew I was overlooking something simple.

[sharp]

Provided the financial statements are reinstatement are issued without major issues isn't this share ripe for accumulating?

disclosure. I've been topping up at the mid to high $3 waiting for a bounce back in mid Jan and Feb

[Lorne Ranger]

Provided the financial statements are reinstatement are issued without major issues isn't this share ripe for accumulating?

disclosure. I've been topping up at the mid to high $3 waiting for a bounce back in mid Jan and Feb

If youre happy to wait until mid Feb and beyond then yes it probably is. All will depend on the latest quarterly growth figures though, not so much on the re-statement (although getting that monkey off our back wont hurt).

Many holders here burned by DIL in recent past, so it's hard to recommend it, but I do think if the growth is solid (after several quaters of slowing), then its a reasonable candidate for being back on the right track.

I hope you sensed my ambivalence? ;)

[Mista_Trix]

If youre happy to wait until mid Feb and beyond then yes it probably is. All will depend on the latest quarterly growth figures though, not so much on the re-statement (although getting that monkey off our back wont hurt).

Many holders here burned by DIL in recent past, so it's hard to recommend it, but I do think if the growth is solid (after several quaters of slowing), then its a reasonable candidate for being back on the right track.

I hope you sensed my ambivalence? ;)

Its the growth element that's a worry.
Without having seen the books in forever, its hard to estimate how the companies actually doing. I think most people will wait to see what the pace is looking like, if they've slowed a lot, it wont be a good buy and accumulating will bring smaller gains than other companies.

Everyone's a little burned and hesitant. Even those that got out ... ... ... especially those that got out.
It maybe feels a little like those still in are convincing themselves its a better story than perhaps it is.. ?!?!

[Whipmoney]

If youre happy to wait until mid Feb and beyond then yes it probably is. All will depend on the latest quarterly growth figures though, not so much on the re-statement (although getting that monkey off our back wont hurt).

Many holders here burned by DIL in recent past, so it's hard to recommend it, but I do think if the growth is solid (after several quaters of slowing), then its a reasonable candidate for being back on the right track.
I hope you sensed my ambivalence? ;)

I somewhat disagree with you here Lorne..

Whilst i'm not a chartist i've reviewed the charts and there was a severe drop (over $1) after their first announcement of the restatements and the stock has trended downwards ever since. Upon the last announcement of a delay of the 4th of December the stock dropped down to ~$2.96, so clearly this evidence that the restatements (and delays thereof) are having a material effect on the share-price.

As such I'm starting to believe that a reasonable restatement should provide for a reasonable lift in the share-price (back to the mid fours). My reasons for this is that there has been an absence of financial information up until now and therefore the restatment will provide us with a clearer steer on the companys growth.

On the other hand you have mentioned the obvious decline in customer sales and despite a reasonable level of penetration in the Forbes 1000 companies between DIL and Boardvantage, I suspect that Total Penetration of the wider boardbooks market is only circa 30~40% and whilst the lower hanging fruit is mostly gone there is still a significant level of growth to be achieved for the next 3-4 years.

On top of the there is scope for a second product roll-out (aimed at senior executive managmement) which I believe whilst offered at a lower price point (much like those of their competitors) will offer considerable sales growth at the aggregate level.

In summary at <$3.50, I think DIL is an absolute steal as it has a good growth path, no debt, a boatload of cash on hand and is in a market that is a long way from being fully penetrated. Good company overall, many hiccups, but a solid cash earner. I'm willing to bet the bank on it.

Just my 2 cents though...

[klid]

NB I am very wary of DIL as growth is most definitely slowed and im afraid the next quarterly is not going to be pretty (anyone gave a date for this nailed down yet?)...
Not exactly but their last announcement said:
"While the Company cannot disclose detailed financial results at this time due to the ongoing restatement process, the Company expects to provide selected operating highlights for the Company’s fourth quarter of 2013 in mid-January.

Mon the 13th maybe. So what number of signups do you think will be the point where it won't affect the price much? It seems they will have more than 122 new signups at least?

[robbo24]

Moosie - you have NO IDEA as to what you are talking about. Sorry pal. I've been indulgent of you for some time, but that last comment is just drivel.

5222

For Moosie...

[Lorne Ranger]

Put it this way: Two years ago I saw a fantastic plant, it was a giant bird-of-paradise plant that I knew suited our warehouse perfectly. It had copious massive leaves, ten foot tall, and a promise of dramatic flowers and more shoots to come. I shelled out twice what I had budgeted, it looked so good. Despite loving attention, 6 month later it was mostly dead, the long stalks and stems had not coped and in fact had collapsed and needed amputation. 8 stems went to 2. I had about given it up for dead but re-potting and careful attention has garnered some new shoots, with leaves tiny by comparison. I know the root stock has the potential to grow a huge glorious plant, but how long will that take? In the interim it looks like a dying plant, even though I know that new shoots are appearing.

Am I keeping it for its future potential, or out of emotional stubbornness? Or pity? Wouldnt it just be easier to buy a replacement plant?

Sorry I know metaphors are subjective, it's just a dilemna that enlivens a similar part of my brain than thinking about my 2 year with DIL.

Christ I need a holiday.....

DISC: Still holding DIL and watering daily.

[winner69]

That's a very moving story Lorne

Just remember that everything has an intrinsic value. No doubt your plant has a high intrinsic value relative to its current state.

Just remember continual watering leads to dilution ..... and some plants don't like wet feet all the time.

Mitre 10 have Round Up on special this weekend if that's an alternative

[Baa_Baa]

Bird of Paradise is a truly gorgeous plant, hardy beyond belief for it's beauty, it thrives in extreme sunlight, crippling heat and dry or humid conditions, with little attention otherwise. DIL on the other hand wilts under dry conditions (accounting rules), can't handle the heat, and withers under the spotlight. The methaphor is quite precise as a contrary illustration. ;)

[robbo24]

Bird of Paradise is a truly gorgeous plant, hardy beyond belief for it's beauty, it thrives in extreme sunlight, crippling heat and dry or humid conditions, with little attention otherwise. DIL on the other hand wilts under dry conditions (accounting rules), can't handle the heat, and withers under the spotlight. The methaphor is quite precise as a contrary illustration. ;)

Any true gardener will tell you that plants reach maturity at different times - stagger and vary your plant types and planting times accordingly.

Sometimes plants will have a glorious yield even after a harsh late-spring environment.

Either rip it up or focus on your other plants while the bird of paradise regrows its leaves.

[winner69]

haha, cheers robbo, champion.

Good point Sparky, we cant know until the restatement is out, but new licenses (not total user numbers) are down. Margins are getting better, cash is up, cashpile is big, but we cant forget that growth is slowing and we STILL only have a single product. The way management has handled the current situation is pretty appalling as well. who knows how much longer they could drag out releasing that?

The market is right, even when its wrong. until things change, im out (NB - not forever and that DIL is one of my '14 picks in the comp on hopes it will turn!)

*below: why I (and most of the market) is out until we see a turnaround. Sparky, note that even if Q3 is seasonal as shown, the recovery will still be lower if the trend continues.*

http://www.sharetrader.co.nz/attachment.php?attachmentid=4898&d=1381440368

Growth may be slowing moosie but the numbers are still going up

And remember that DIL is in an industry with high retention rates (DIL not that special in this respect) so most of the 2,061 already signed up will continue to contribute more cash in the future eh

[robbo24]

Growth may be slowing moosie but the numbers are still going up

And remember that DIL is in an industry with high retention rates (DIL not that special in this respect) so most of the 2,061 already signed up will continue to contribute more cash in the future eh

Winner69, can u plz draw an average line on the sales and 1 std deviation either side?

I will only be concerned when cumulative licences fall below the bottom std deviation...

[winner69]

There are another 243 pre 2009 not included on that chart earlier

Cumulative number to Q313 is 2304

[hummerh40]

Summary:

Growth investors and those who follow technical analysis may be spooked by the restatement and vagueness over new client numbers. Value investors like myself should see Diligent as a huge opportunity to at least double your money, thanks to the negative perceptions around restatement.

Seventeen days to go to the first timeframe.

Disc: Holding and continuing to accumulate DIL on pricing weakness.


hopefully we don't see a price spike on Monday because of this post, was looking to add to my holding at the current price.

Thanks Sparky!

[okay]

Quarter 4 appears historically to have been pretty strong number wise for DIL. Q4 2011 203, Q4 2012 193. If DIL Q4 2013 is 155 will this be satisfactory for the market to rerate the share to $5.50 - $6? At 155 that would be their 2nd worst quarter out of the last 9 going back to Q3 2011.

[Lost in space]

Readers will know already that I greatly like this company and its potential, and hold a healthy amount. It won’t come as a great surprise that I have been accumulating more DIL on recent pricing weakness as investors fled the company due to

1. Revenue Restatement unknowns
2. Revenue Restatement delays and letdowns in finishing this work
3. Concerns over slowing new client growth

The lack of news would clearly put a number of people off, and so I don’t seek to criticize those who left the DIL registry because of their concerns not being able to be allayed.

However, I firmly believe that DIL is significantly undervalued relative to its sales, earnings and growth, even when you make very conservative assumptions about those factors.

There are a number of areas I’ll touch on before I make some assumptions about value and a target price, being new client numbers per quarter, average revenue per client, and how that translates into the bottom line.

1) My thoughts on client numbers

The limited information release by the company in October spooked a number of Sharetrader members. The figure of 122 seemed quite low and kicked off a number of hypotheses about DIL, such as a) customer growth had genuinely slowed as they were reaching market saturation, or b) some kind of issue like a change in personnel, or management were distracted by the restatement, or clients didn’t want to do business with a company whose market disclosures were messy.

Obviously, the overarching concern was that the drop in numbers was a concern for future quarters, and not a one-off problem. My view, and I acknowledge that it may be because I have rose tinted views of the company, is that in the limited information release in October, the company was at pains to stress that the months of July and August were slower than normal. However, it would seem that September’s global sales were NOT an issue. This suggests that the nature of the slow quarter was more attributable to one off issues than an ongoing issue.

2) Revenue per new client, and what does it all mean?

My spreadsheet work suggests that DIL’s new clients bring in around $33k USD each based on previous quarter disclosures. This is a very simplistic figure as the new revenue per month also includes upgrades, but it’s a good enough indicator that helps us understand how much extra revenue is generated per client. This means:

Q42012 – 193 new clients, $6.36m in new revenue, or $32.95k per client
Q12013 – 201 new clients, $6.65m in new revenue, or just over $33k per client
Q22013 – 173 new clients, or approx $5.7m in new revenue
Q32013 – 122 new clients, minimum $4m in new revenue (likely more than this as they had significant upgrades in this quarter)
Q42013 – let us assume 155 new clients, with approx $5.1m in new revenue

3) Getting to the bottom line

So, if DIL made $43.74m in revenue in 2012, and we assume that they have earned a further $21.45m in new client revenue (as my Q1-Q42013 assumptions outline above), then they are good for $65m USD in revenue.

This will likely result in NPAT of around $15.5m USD, or roughly $19m NZD at the 0.82c NZDUSD rate. With 120m shares on the register, this works out at about 15.8c in EPS NZD.

This gives a YOY NPAT growth of about 80%. HOWEVER, the revenue restatement, big office shift, and associated professional/logistical expenses will have greatly cut into DIL’s 2013 earnings. Note though, these will be one off costs, though DIL may have to spend more on enterprise level systems to prevent these kinds of accounting headaches again. So when the 2013 earnings are released, expect some shock over how the approx $19m in NZD looks more like $10m due to one-offs.

Diligent may also have some increased ongoing costs in terms of new and improved accounting systems, and hiring more or better staff to oversee the financial controls.

So what’s a target price for DIL then?

Using my good old Ben Graham formula for the enterprising investor, with the following inputs:

Growth rate = 35% over the next 5 years
2012 earnings = 9.1cps (confirmed)
2013 earnings = 15.9cps

Risk free rate of 5.5%, being the 20-year rate that NZ Treasury use. This is about right for sourcing a municipal type bond with higher security.

The BG formula gives a price thus:

Based on known 2012 EPS = $5.61
Based on estimated 2013 EPS = $9.73

Now that 2013 is over, we can expect intrinsic value to look a lot more like $9.73 than $5.61, perhaps with some further discounting of the price to reflect changes in revenue as it falls into different time periods. Note that restatement doesn’t affect actual cash held, merely how it is accounted for in different periods due to the nature of SaaS businesses.

So if the current price is $3.43, a fair price based on the assumptions I’ve given above is at least $5.61, and more like $9.73. That’s why I maintain that Diligent is woefully underpriced.

More target price methods

Xero is on a price/sales ratio of 90
GeoOp has a PSR of 400
SLI has a PSR of 5.5
WYN has a PSR of 90

If DIL has a market cap of $287m, and will have revenue of $65m USD (or $79m NZD), then it is on a PSR of 3.63 for FY2013. It should be on a PSR of closer to 8 or 10 in my view, especially if new client growth looks good in January’s limited announcement. A PSR of 8 = $5.26, and a PSR of 10 = $6.58.

Future Catalysts

Second product

We know that Diligent is working on a second product, We don’t know exactly what this is like, but hints dropped by the CEO at the 2013 AGM suggest it is some kind of “publishing” feature aimed down the corporate food chain from the board room to higher and middle management. Obviously, Diligent’s success in selling upgrades to existing clients is a positive hint that they will be successful at selling this new product to their existing client base. I’m loathe to speculate on how this might affect their bottom line as the pricing and margins will be completely different to the existing Boardbooks product, but we can assume it will be good for DIL in terms of earnings growth. Hence why I am comfortable assuming a minimum annual average growth rate of 35% over the next five years.

Cash, cash, as far as the eye can see.

We know DIL had around $47.4m USD in cash in Q32013. They are doing really well in building up this reservoir of cash. This will have to be used at some point for one of the following outcomes:
- Acquisition (unlikely, as DIL are innovators and not shy of R&D)
- Takeover (all that cash in the bank makes it easier for a purchaser to pay off their predatory behavior)
- Dividend (unlikely, as this is more for companies that has stopped growing, and dividends paid in NZD may not be attractive to US based shareholders)
- Buybacks (more likely, as this is a popular US method of improving shareholder value)

Diligent’s board will want to improve shareholder value. They’ll be hurting themselves as they will all be embarrassed and keen to improve their standing with shareholders. The chairman, via Spring Street Partners, is DIL’s biggest holder, so they’ll be self-interested in putting that cash to better use too.

Nasdaq beckons?

The Diligent board will be heartily sick of the NZX given their headaches and dramas this year. Accounting for two separate bourses with two different methods, and a NZ bourse that has been less than helpful will have weighed heavily on the directors. It has been noted that DIL’s board committees now require directors to have Nasdaq awareness as well as NZX awareness (a change from previous years), which suggests that they are preparing for the possibility of some kind of listing change in the future. Moving to the USA, where funds will be much happier about buying in, than dealing with a small country on the other side of the planet can only be good for Diligent holders.

Timeframes:

First timeframe of note will be the limited information release by the company on new client numbers, cash on hand and other information that was likewise released in Q32013. The date for releasing Q4 results is usually the second Tuesday of January (NZT). This suggests this info will be released prior to market opening on Tuesday 14th of January. As others have noted, new client numbers of 120 or so would be viewed negatively by the market, probably seeing Diligent drop to $3 or just under again for brief moments. In excess of 150 new clients would be viewed positively, and possibly see DIL see $5.50-$6.00 again.

Second timeframe of note will be sometime prior to the end of February 2014. This is revenue restatement, where I don’t anticipate any material changes to DIL’s position (+/- 5% or so). Some things will be for the better, some will be for the worse, but only in an accounting treatment sense. We have been assured that cash has not changed, and there has been no more material matters discovered, other than the need to restate (see December 4 statement to the market). Positive restatement will see DIL jump to back up to around $7.50.

Third timeframe of note will be between the finish of restatement and the AGM. During this time, I would anticipate Diligent making a number of material announcements along the line of:
- buyback/dividend/cash return (likely in some form)
- NZX and Nasdaq intentions (less likely, this is a disruptive corporate activity, and they’ve just come through a big period of corporate activity)
- Second product (highly likely, they’ve foreshadowed this at the last AGM)

The above will see Diligent improve its price to closer to the $9 mark, as I have suggested based on 2013 intrinsic value.

Summary:

Growth investors and those who follow technical analysis may be spooked by the restatement and vagueness over new client numbers. Value investors like myself should see Diligent as a huge opportunity to at least double your money, thanks to the negative perceptions around restatement.

Seventeen days to go to the first timeframe.

Disc: Holding and continuing to accumulate DIL on pricing weakness.

EDIT: 6:45pm, 28/12/13

To clarify - my figures above do not include the fact that 2012 revenue has churned by around 3%, as DIL has a 97% client retention rate. If we reduce 2012 revenue by 3%, we get total revenue of around $63.8m, and estimated EPS of around 15.6c instead of 15.9c. Somewhat immaterial at the margin, but I felt I should make this note.


Here is an analysis of depth and such quality that it can only be construed that the author is happy to share his knowledge with an altruistic view that we should all appreciate. Thanks STC.

[Harvey Specter]

2) It does not change the cash collected. DIL will still collect the full cost of the installation upfront. They may treat it in an accounting sense over nine years, but they still bank the whole amount. I am not an accountant, but have some familiarity with SaaS, and my understanding is that this deferred revenue that is time impacted will be noted on the balance sheet, so it will still be visible. Just not in the income statement. But it would surely still be part of the overall analysis that helps us understand the company's position. I think we will see this in a similar way to how we value Ryman and Summerset in underlying earnings instead of NPAT that recognises the change in land/building values. So it's not actually a big deal. Just headaches for the financial team...
Sounds about right Sparky. Double entry accounting (hopefully they can get this bit right) means if you get cash in the bank, it has to impact the financial statements somewhere else. The good think about these deferred revenues is that if they relate to installation, there is no risk to them having to be repaid.

Your reference to the retirement villages is also apt. For accounting purposes, they spread the defered management fee over 7 years which is the average occupancy. However, I was involved with a dispute with Inland Revenue as they wanted the revenue treated as taxable over 3 years. So who was right, the accountant, the statistical average, or the IRD? We ended up settling for 5 years as it was an academic argument anyway (the wider group was drowning in tax losses)

[robbo24]

Readers will know already that I greatly like this company and its potential, and hold a healthy amount. It won’t come as a great surprise that I have been accumulating more DIL on recent pricing weakness...

Good read SparkyTheClown, I think you've given a good run-down of the chit-chat from the past few months and tied in your regularly good analysis.

2014 will be interesting, won't it!:D

[Whipmoney]

Sounds about right Sparky. Double entry accounting (hopefully they can get this bit right) means if you get cash in the bank, it has to impact the financial statements somewhere else. The good think about these deferred revenues is that if they relate to installation, there is no risk to them having to be repaid.

Only about 11% of the deferred revenues related to installation and as such will be recognized over a nine year period. The balance relates to Licensing revenue and will be recognized in monthly installments as the service is performed (i.e. earned).

The beauty of the deferred revenues is that the company will keep a huge percentage of these (after gross margin) over and above the traditional 'recognized' revenue and therefore there is a significant disparity between the cash-flows and the P&L (the cash-flows of course being more relevant).

Whilst I haven't had the opportunity to review the individual client user agreements I suspect that if the client reneged on the service they would still be liable for a full years payment (which DIL would retain) and as such its likely these deferred revenues are always going to be collected.

[winner69]

...... there is a significant disparity between the cash-flows and the P&L (the cash-flows of course being more relevant).

.

Right on whip - so why don't we just concentrate on cash flows and forget about all this revenue (actual, earned or deferred) nonsense. After all DIL value is the estimated value of projected future cash flows.

Sparky's analysis is a good continuation of the work that the likes of Halebop have provided in the past. And the projected outcomes for 2013 are much the same as previous.

For what's it worth an extract from my cash Flow model is below. I have put Sparky's numbers which I am comfortable with (even though I have slightly higher new licence number than he has). The Cash Receipts line is the cash figure DIL receive / The Revenue line is with the deferred part in it.

Key drivers for 2013 are -

1) New licenses 651 (as per Sparky's numbers) bring in $37k of receipts each
2) The cash outgoings figure of $49m is essentially Sparky's $65m revenue less $$50m to give his $15m NPAT with $3m of depreciation and share based rem written back and allowing for $2m of investment cash flow
3) No 0ne-off costs included (ignored in this model)

The result using these assumptions are a free cash flow of US$28m (or NZ$0.28 a share on the 120 mill share number)

DIL market cap on 84 mill shares is NZ$288m. Several on this thread says the share price won't change when it becomes 120 mill - so is the market cap really NZ$411m? Just another complication when valuing

So on a undiluted basis the current price of 343 is 12 times FCF (or 10 times if adjusted for say $50m of cash in the company)

That's pretty high but if one not unreasonable in view of growth expectations. My view is still that about $5 is the top of the range of fair valuations. Even then that is 18 times current (projected) FCF on an undiluted basis (or 16 times allowing for the DIL cash

That's my view. Different from Sparky's (even though using the same numbers) but each to their own methodology. Is better than Mr Buffets (attributed to) figure of $3.33 but is a bit spooky that is what the market values it at today eh

Maybe it will all change next month when we know more detail

[winner69]

Meant to say that if this years new license numbers is 651 then the cumulative total is 2,459 which is 36% more than a year ago

(The 2012 increase was 782 with an overall 76% increase in new licenses)

[stoploss]

STC , great post . Just one question , why are DIL sick of NZX ? Surely around the other way bearing in mind it is DIL who have failed numerous times to comply . Thought MW would have been a bit more proactive as a director in keeping shareholders informed and that relationship on a good footing .

[robbo24]

Nice to see DIL with a 5% jump for the day. Let's hope it can lock in some of those gains at the close.

You're starting to sound like Moosie now, Sparky, except for the qualification that day trading profit-takers may step in...

[Whipmoney]

Perhaps I could have phrased that a little more diplomatically.

1) It's a compliance nuisance reporting on both the NZX and the USA, as they do now. They'd save a lost of hassles if they only had one regime to consider.
2) NZ was a great place for them to float, but I think they've outgrown NZ now. If you are objective, you'd have to say they are really a US company.
3) There's been plenty of commentary on this thread back in the year about how the NZX might have been more generous in their approach towards DIL, particularly in regards to auditors and their domicility, GAAP vs IFRS, and the issues over having two separate audits done with potentially two different results (you can imagine how that will look to big funds!) .
4) You will note that in recent announcements, DIL were at pains to say that they sought wavers for their compliance issues, but were declined and instead given "no action" responses. That would have been aggravating too. It would be more of a confidence boost for the stock if they had been granted wavers.

As for Mark Weldon, he would be a useful person to have on board if there was a takeover offer made. But I don't see that on the horizon for now.


I think its inevitable that DIL will migrate to the NASDAQ at some point in the not too distant future as for all intents and purposes it is a US domiciled business with US cash-flows and balance sheet cash holdings not to mention the fact that at some point David Liptak will look to convert his pref shares which will require a significantly more liquid market than the NZX.

Presumably they will start to look to list once they've gotten their governance issues behind them once and for all.

[pierre]

Should DIL migrate to the NASDAQ at some future date could someone explain what the likely pluses and minuses of that move might be for current shareholders?

[clip]

LOL. It is the best performing share on the NZX today - so far....

15 days to the limited information release.

what's that based on? I have NTL.NZX up 7.7% and allied farmers (lol :P) up 6.2%
if you're giong just by % gain then it's not the best performing is it? i see DIL up 5.5% on asbs

[Casino]

Well, looks like DIL closed up 10% for the day. Not bad at all.

Rather amazing! Almost back to Dec 3 levels.

[Whipmoney]

Well, looks like DIL closed up 10% for the day. Not bad at all.

Suspected window dressing going on...

[robbo24]

Suspected window dressing going on...

There is an intriguing dynamic occurring... Sparky comes back to say it how it is, Moosie says nothing, and winner69 refrains from posting his linear regression channel diagram... This must be a conspiracy.

The calendar day is not over yet though ;)

Note: 378 is not outside of 1 standard deviation of the regression channel.

Note 2: I like it when Sparky says it how it is, when Moosie says things, and when winner69 posts his linear regression channel diagram!

[robbo24]

Note: 378 is not outside of 1 standard deviation of the regression channel.

$4.00 is about right at the moment for the upper line... Yes?

[robbo24]

Waiting for positive news confirmation, nothing more, nothing less, before buying again. I am cautiously optimistic ;)

Good wisdom depending on your investment strategy :)

[winner69]

$4.00 is about right at the moment for the upper line... Yes?

Price on the line is 333 - upper line at 423 (0.7 standard deviations)

Todays 378 is 0.3 standard deviation from the linear regression line so not that far away

Maybe another 10% day (morning) ..... on small volumes only takes one or two keen buyers who have read about this lately as one of the stars of 2014

[winner69]

No one probably looked at my spreadsheet extract from the other day ....if you had you may have noticed that the extra revenues per new license has been increasing over the years. (assuming the logic/methodology that both sparks and myself use reflects reality)

Does that mean that they are getting more bigger customers ( with more users associated with each license)?

If so that is a good reason for 'slowing' growth in new customers? Rather have a lesser number of customers paying twice as much eh.

If all this makes sense should we using mo than $33k additional revenue for each new customer?

[Dilbert]

So, if DIL made $43.74m in revenue in 2012, and we assume that they have earned a further $21.45m in new client revenue (as my Q1-Q42013 assumptions outline above), then they are good for $65m USD in revenue.

This will likely result in NPAT of around $15.5m USD, or roughly $19m NZD at the 0.82c NZDUSD rate. With 120m shares on the register, this works out at about 15.8c in EPS NZD.



Thanks for posting this Sparky, I got similar numbers, but by trying to make a simple relationship between total customer numbers/users with revenue, and making some stabs about what total costs may be. Ended up at a similar US $15m earnings for 2013. One thing I'm not clear on is the use of 120m shares to convert it to earnings per share. This is the diluted number of shares yes? Why do we use this and not actual shares outstanding. And why is there such a big difference in DIL's case?

[winner69]

Thanks for posting this Sparky, I got similar numbers, but by trying to make a simple relationship between total customer numbers/users with revenue, and making some stabs about what total costs may be. Ended up at a similar US $15m earnings for 2013. One thing I'm not clear on is the use of 120m shares to convert it to earnings per share. This is the diluted number of shares yes? Why do we use this and not actual shares outstanding. And why is there such a big difference in DIL's case?

Good question

This was discussed here a while ago. majority thought the share price would not fall (much) when the new shares came on stream.

The other side of the argument is that the sahre price will adjsut (downwards) by the 84/120 factor.

I use the 120 mill number as does Sparky and others - if nothing else it gives us a lower valuation than based on the 84 milliion ... a safety net in our calculations almost

Somebody has the details of the timing around these Preferred Redeemable Shares (Stock)

[Whipmoney]

Good question

This was discussed here a while ago. majority thought the share price would not fall (much) when the new shares came on stream.

The other side of the argument is that the sahre price will adjsut (downwards) by the 84/120 factor.

I use the 120 mill number as does Sparky and others - if nothing else it gives us a lower valuation than based on the 84 milliion ... a safety net in our calculations almost

Somebody has the details of the timing around these Preferred Redeemable Shares (Stock)


From memory there's no pre-determined conversion date other than when conversion is triggered automatically upon the closing of an underwritten share offering by the company on a registered exchange in which it has realised at least $40m of gross proceeds.

Other than that Conversion is at the holder's (Spring Street Partners) discretion on a 1:1 basis, the shares also pay a 11% fixed cumulative dividend, have redemption rights (at 10cents per share + unpaid dividends), anti-dilution provisions, liquidation entitlement, voting rights and the right to appoint one director.

Not bad for a paltry $3.0m investment!

PS: To answer the question above.. Yes conversion of these shares will have a significant impact on the share-price as it will dilute the market cap.

[couta1]

Looks like its heading over $4 today

[robbo24]

Price on the line is 333 - upper line at 423 (0.7 standard deviations)

Todays 378 is 0.3 standard deviation from the linear regression line so not that far away

Maybe another 10% day (morning) ..... on small volumes only takes one or two keen buyers who have read about this lately as one of the stars of 2014

If we carry on your last chart though, doesn't it sit at around $4?

5256

[Wolf]

[QUOTE=moosie_900;451976]
So, while it might be rallying, the volume just isn't there to sustain this and I suspect someone is gaming the market to suck in retail buyers for a sell down before any announcement. I suggest selling above $4.00 and buying lower later.[QUOTE]

That's what i'm thinking. Or possibly theres some insider trading going on and traders/speculators are helping the price along? The low volume is my greatest concern, although being Christmas/New Years may be the reason for the low volume.

I think we're in for a good announcement soon/ or the reaudit meeting the deadline, if the reaudit doesn't meet the deadline i think we'll be into the 2's however.

[robbo24]

Robbo, see my chart on a page back (you posted seconds after me so was the last on that page).

Yep I saw it Moosie - I have NZX software suite. Let's talk volumes, are the big sellers on holiday or have they done their dash for now?

If the panic was [currently] part of the calculation then the sellers would be all over the current little run, surely...

My diagram was just carrying on winner69's sleek, smooth lines.

[robbo24]

$4 the old support and new resistance? Smash it.

[robbo24]

Bot trader ACTIVATED

[The Grinch]

Morning all,

Easily available information so imagine many have already viewed this content but FYI.

http://www.linkedin.com/groups/Hi-there-Im-looking-new-153542.S.113830305

http://www.greatboards.org/search?q=boardbooks&site=www_greatboards_org&client=greatboards&proxystylesheet=greatboards&output=xml&filter=0&oe=UTF-8&x=-1119&y=-57 (page's 6 & 7)

Found the direct comparisons of the big four to be excellent - also like how Diligent comes across. There the most expensive (which I would consider a positive in this area as it's peanuts spend wise but crucial that the company have top tier governance/security). Excellent customer service and generally comes across as a high end product.

This report is four years old though which is a life time for Diligent. If anyone has some newer material in this regard it would be appreciated.

Disc. Own Diligent

[Schrodinger]

The big boys most likely won't be back at work until next week as this one is a bit of a wash out with one abbreviated day (today) and two closed days (tomorrow and Thursday). If anything, right now will be dedicated to getting the balances and spreadsheets in order, as well as picking entry points for stocks and brushing up on research. We'll start to see the real money flow next week. Right now, it's good for a quick trade in and out on thin lines.



Au contraire mon ami, panic is thus described:

1. A sudden, overpowering terror, often affecting many people at once.
2. A sudden widespread alarm concerning finances, often resulting in a rush to sell: a stock-market panic.

Therefore, things like delays in the restatement caused instant panic where the share price dropped 20%+. If people had been living in a panic induced state for this long, I would be a) wondered at how they had survived for so long in such a state and b) calling them a doctor to give them a tailor-made white coat with extended sleeves! If a holder didn't get out around $4.00 to $3.70 (first price at market re-open after delay announcement) then they would have been smart to either hold until now, and then sell (hence where our resistance line is) or just keep on holding anyways and hope the bottom is in and that only good news is forthcoming!

Remember to consult the psychology diagram that has been posted (twice) on here. Currently probably in an upswing state (again) for most holders. Psychology has A LOT more to do with moving the market than any post I would ever put up on here. That, used in conjunction with charts, FA and realising the trend(s) is what makes people rich. :)



A true Michelangelo in the making ;)

Careful Moosie I would be worried if people start following your day trading tips. As we all know day trading is a very tough business.

[Radler]

Looks like holding above $4 ok with a short trip to $4.29!

[Whipmoney]

$4.00 up for a re-test very soon...

Update - $4.00 busted on a big buyer. See if she can hold this area...

Looking at StocknessMonster there's a lot of 'off-market' activity. I'm suspecting that nows its on the broker lists for 2014 a few diligent brokers are churning their clients into it. Goodtimes for holders.

[winner69]

A few weeks ago I bought back all the ones I sold back when the price had a 6 in front of it - reason being that so many experts can not possibly be wrong. Goes against the grain (buying in a downtrend etc etc etc) but what the heck sometimes just as easy to follow the herd and be a sheep.

At least I now have some buffer if the impending announcement is a disaster .... but would rather hold for a long period like I did last time.

[robbo24]

A few weeks ago I bought back all the ones I sold back when the price had a 6 in front of it

Your change of tune was not subtle ;)

[winner69]

Updated chart with linear regression channel shown.

The top of the channel for today is 418 so a bit of a way to go.

Robbo - the lines are recalculated periodically to fit latest data and the days are trading days - that probably explains why your lines came out at about the 400 mark the other day

Anyway close to the top channel line ..... a break out to come .... or a sell signal like a few previous occasions. Chart don't predict do they.... but one would think that something has to give sometime soon.

[winner69]

Good to see you back on board Winner, you have been very vocal the past year or so on DIL and tis good to see the negativity has done a 180! Hope she oays you back big time now. I shall be back on the ship when I see the next announcement.

DISC - Not day-trading DIL as some would believe!

Still not totally convinced and still a bit negative at these prices .... but so many can't be wrong can they.

is that FA or TA or just some other stupid analysis?

[robbo24]

Robbo - the lines are recalculated periodically to fit latest data and the days are trading days - that probably explains why your lines came out at about the 400 mark the other day

Why do you change from .75 std dev to .70 std dev for the upper and lower lines?

[winner69]

Remember that post that globally SaaS companies seem to be priced as a multiple of sales based on future growth rates .... this guy had his formula but also posted the chart below. http://kellblog.com/2013/06/05/what-drives-saas-company-valuation-growth/

If DIL revenues thus year are about $69m that's NZ$1.00 a share. So currently DIL is priced at 4 times sales.

The box in the chart shows where, based on this guys methodology, where DIL should be priced relative to its peers - somewhere between $5.50 based on 40% growth and $7.00 based on 50% growth. (note: the line of best fit does not quite tie in with his formula).

So if the 40% to 50% future growth is what we expect to be reasonable then plenty of upside eh - DIL currently only only valued at an implied 30% growth

Probably a load of the old proverbial eh

[MAC]

And everyone shoots you down when you say its all about growth and go on to talk about DCF, receivables and other things. don't get me wrong, thos things matter, it is a business after all, but if you cannot see the single biggest reason WHY the market is pricing a stock the way it is rather than other reasons, then you need to invest elsewhere. This is exactly why Xero has always destroyed DIL price wise and why I will not buy in again unless we see much, much better growth.

What I’ve reinforced thanks to DIL is that SaaS stocks really do attract a very volatile type of investor, a big percentage of whom just buy or sell, in this case dump based on fear and herd thinking with little or no consideration of valuation or fundamentals, that’s a known technology stock risk I guess.

Moosie if you are not already holding, I don’t think it is unfair of you not to jump in just because that same investor set are showing signs of short term herding. Until a clear signal is established confirming that both sales growth is stable and the restatement is complete, the same behaviours will in all probability just continue for now.

That signal could be the Q4 sales report, but IMO it’s much more likely, if there are indeed no further restatement delays to come, to be at FY13 reporting in late February.

Don’t get me wrong, I see the forward value in DIL, I'm a long term supporter, and have consistently maintained a $7 valuation for the last six months.

Watch in March as the brokers up their price targets back up toward pre-restatement levels, but it does seem too early for all that just yet with 2-3 months of volatility yet to play out.

[MAC]

One difficulty is that there also still remains forward binary risk with the timing, DIL have presented an expectation for completing the restatement a couple of times now and yet have failed to meet those expectations, there are a few possible reasons for that, two of which are;

DIL management may just simply not be capable of competently engaging sufficient resource and to manage it in meeting a deadline, or, they are aware of the scope, required resource and schedule, and are choosing to piecewise delay to soften the market’s response, if this is the case then clearly the NZX are relatively indifferent.

So long as DIL continue to have the NZX in their pocket, investors have every right IMO to anticipate that we have not seen the last delay, some may even anticipate that it’s a greater than 50% likelihood.

Until DIL overran the 28th October restatement expectation I was prepared to believe that the directors and management had simply been let down by the incompetence of a small handful of commercial employees and the recovery scope of which kept being further discovered, and this may well still be the case, who knows, but I cannot practically now see how we can trust what DIL management present in terms of timing, in regard to this matter, their credibility is somewhat toast.

[pierre]

Mac - I think your comments may be a little harsh regarding the restatement effort. Here's a comment from the DIL report to the NZX on 4 December:

"In order to expedite the restatement process, the Company has recently
retained PricewaterhouseCoopers LLP to supplement the Company's internal
accounting resources in preparing restated financial statements. The Company
also retained two other outside financial accounting experts to support its
efforts. When such financial statements are complete, they will be audited
by the Company's independent registered public accounting firm, Deloitte &
Touche LLP. Because the restatement, reaudit and Audit Committee
investigation processes described below are ongoing, additional required
corrections to the Company's prior period financial statements may be
identified."

I'm quietly confident that DIL management will be doing their utmost to restore faith in the company by:

a) ensuring that the 28 February deadline is met, and

b) delivering positive news in mid-January on new customer numbers and retention for Q4.

If you're looking to capitalise on the upcoming news, now is the time to buy more - I have.

[blackcap]

Mac - I think your comments may be a little harsh regarding the restatement effort. Here's a comment from the DIL report to the NZX on 4 December:

"In order to expedite the restatement process, the Company has recently
retained PricewaterhouseCoopers LLP to supplement the Company's internal
accounting resources in preparing restated financial statements. The Company
also retained two other outside financial accounting experts to support its
efforts. When such financial statements are complete, they will be audited
by the Company's independent registered public accounting firm, Deloitte &
Touche LLP. Because the restatement, reaudit and Audit Committee
investigation processes described below are ongoing, additional required
corrections to the Company's prior period financial statements may be
identified."

I'm quietly confident that DIL management will be doing their utmost to restore faith in the company by:

a) ensuring that the 28 February deadline is met, and

b) delivering positive news in mid-January on new customer numbers and retention for Q4.

If you're looking to capitalise on the upcoming news, now is the time to buy more - I have.

I think you are missing Mac's point there. I am in Mac's camp in that they can make all the statements they like but first need to engender trust. Something they have not done to date. Why would DIL management do their utmost to restore faith when they have not done so in the last year?

[baller18]

One thing I don't understand, if a few of us on here are implying once the restatements are out, everything should go as planned, then how come no one, no one, from Dil have even bought one share on the market?
I mean if it is so undervalued, wouldn't the people in DIL know a lot more than we do?

[winner69]

Mac - I think your comments may be a little harsh regarding the restatement effort. Here's a comment from the DIL report to the NZX on 4 December:

"In order to expedite the restatement process, the Company has recently
retained PricewaterhouseCoopers LLP to supplement the Company's internal
accounting resources in preparing restated financial statements. The Company
also retained two other outside financial accounting experts to support its
efforts. When such financial statements are complete, they will be audited
by the Company's independent registered public accounting firm, Deloitte &
Touche LLP. Because the restatement, reaudit and Audit Committee
investigation processes described below are ongoing, additional required
corrections to the Company's prior period financial statements may be
identified."

I'm quietly confident that DIL management will be doing their utmost to restore faith in the company by:

a) ensuring that the 28 February deadline is met, and

b) delivering positive news in mid-January on new customer numbers and retention for Q4.

If you're looking to capitalise on the upcoming news, now is the time to buy more - I have.

Probably the same sort of 'positive' statements they were making in earlier announcements eh pierre

Haven't bothered to check the earlier exact words ...


We are behaving a bit like all the experts who analyse every word of Ben's statements to death to see what he is actually saying or trying to tell us ... and that's been a futile exercise

[pierre]

I think you are missing Mac's point there. I am in Mac's camp in that they can make all the statements they like but first need to engender trust. Something they have not done to date. Why would DIL management do their utmost to restore faith when they have not done so in the last year?

Mac said:

"DIL management may just simply not be capable of competently engaging sufficient resource and to manage it in meeting a deadline"

The company's statement indicates to me that they think they have engaged sufficient resource. I guess the issue is whether or not you believe what they are saying and making investment decisions accordingly.

Whatever we think or say, we'll all have to wait until mid January for the customer numbers update and 28 February (or later) for the restatement announcement - the real test will be what Mr Market thinks when those dates are reached or breached.

Meantime I've held through all the drama and topped up again last week.

[Whipmoney]

What exactly have management done that is so bad to cause the market to 'mis-trust' them? As far as I see it they were hit with a black swan (required restatement of their revenue recognition criteria) and they hired Deloitte to undertake this process on their behalf. The delays are hardly managements fault as it turns out a restatement is quite a cumbersome process. Management have said little but thats only because they have been prudent enough not to mislead the market.

[winner69]

Valuing SaaS companies is interesting. The experts seem to show skant regard for DCFs, esp in pre-mature companies, because the outcomes can vary hugely with little changes in the assumptions made. Hence they tend to go the sales multiple way.

DIL is past the start up phase and to some extent approaching maturity. Thus concepts like growth rate decay trajectories come into play, because valuations are based on future growth rates rather than the lofty high growth rates in the early stages.

DIL had 143% revenue growth (124% cash receipts growth) in 2012. Sharetrader consensus seems to be about 50% this year - growth rate decay of 65%. No history to get a meaningful trend and probably not really indicative of reality - like would growth in 2014 further decay to 17% - probably not.

Average growth rate decay for SaaS companies seems to be about 15% to 20% pa (ie a 100% growth falls to 85% the following year)

If valuations are based on sales multiples which are dependent on future expected growth rates than this growth rate decay number is important.

In DIL case current revenue growth is 50% (the expected 2013 figure).


A growth rate decay of 10% leads to a future 5 year revenue growth rate of 37% pa / 20% leads to 29% pa / 30% leads to 19% pa / 40% leads to 13% pa

Based on some reading i have done this methodology points to DIL being worth anywhere between 2 to 5 times sales, ie $2 to $5 depending on which rate used.

Maybe 'global experts' who use this sort of methodology have done their sums and this is why DIL is at $4, with the future built in to the price. The other factor to consider is this growth based on the business as it now (a one product one) or does it make an assumption that the future growth (even at 40%) has to come from more than new customers but also from new products. Maybe the implication is that the current price allows for new products?

That's my view and just another way of looking at things ......but then what the heck do I know and probably a load of the proverbial anyway

[baller18]

This beggars belief.

Firstly, and most importantly, because it would be insider trading for management or staff to buy shares on market now, as it would indicate they were in position of knowledge that the market does not have - e.g., they will know first hand how restatement is going, and we the public don't! The first thing people would think if they saw management buying now, is "they are using their insider knowledge!".

The corollary to this is "Why aren't they selling?". For exactly the same reason. You will note I don't see anyone saying "Hey, all the insider's aren't selling even though there are big governance headaches - the company must be doing ok!"

Secondly, Brian Henry, the founder of Diligent is presently before the FMA on price manipulation charges, so management would be very aware about risking their necks at such a sensitive time, even if they had legal permission.

Thirdly, some of the management probably have options and equivalents already, which they could probably exercise at a much cheaper strike rate than the current price. But they would be advised to not do so while the restatement is going on.

Thanks heaps sparky, much appreciated, cleared up my misunderstanding of the situation

[pierre]

Mac said:

"DIL management may just simply not be capable of competently engaging sufficient resource and to manage it in meeting a deadline"

The company's statement indicates to me that they think they have engaged sufficient resource. I guess the issue is whether or not you believe what they are saying and making investment decisions accordingly.

Whatever we think or say, we'll all have to wait until mid January for the customer numbers update and 28 February (or later) for the restatement announcement - the real test will be what Mr Market thinks when those dates are reached or breached.

Meantime I've held through all the drama and topped up again last week.

Someone believes the DIL story - looks like the SP will open higher again today up 13 cents at 414.

[Balance]

Just received an updated brokers' report - valuation and price target $7.30.

Start of new year today really so broker with the valuation of $7.30 :) giving the stock a bit of a push along (with private clients).

Institutions still on the sidelines until revenue/profit restatement out of the way.

If restatement clears DIL from any deliberate accounting trickery and reinforces what DIL has been saying to the market that underlying operations are trucking along, expect institutions to pile back in.

[Balance]

Buy the rumour sell the fact upcoming for quarterly next week? Still in our channel (just
..).

Quarterly will pretty much say nothing, I would have thought until restatement out of the way?

[pierre]

Quarterly will pretty much say nothing, I would have thought until restatement out of the way?

When I checked with the company back in October about progress, I received the following reply:

"Outside of the progress with the restatement, we are actually providing as much information as we can. Any financials we provide must be provided in accordance with US GAAP or reconcilable to US GAAP, with the current restatement process, it makes it impossible to provide any financials other than Cash as it would breach US SEC obligations."

So, we can expect an update on the cash situation which should give some indication as what has been happening over the past quarter, plus hopefully some news on customer gains and retentions.

[Whipmoney]

When I checked with the company back in October about progress, I received the following reply:

"Outside of the progress with the restatement, we are actually providing as much information as we can. Any financials we provide must be provided in accordance with US GAAP or reconcilable to US GAAP, with the current restatement process, it makes it impossible to provide any financials other than Cash as it would breach US SEC obligations."

So, we can expect an update on the cash situation which should give some indication as what has been happening over the past quarter, plus hopefully some news on customer gains and retentions.

Retentions is key (wanting to see 97%+) as is customer acquisitions and cash however acquisitions don't tell the whole story (some large clients may have many users) and cash will obviously be effected by ongoing/extensive accounting/audit costs.

[Hoop]

The reason for the red & orange arrow on the more sensitive money flow indicators is because of the low volume pushing up the price.

http://i458.photobucket.com/albums/qq306/Hoop_1/DIL03012014.png (http://s458.photobucket.com/user/Hoop_1/media/DIL03012014.png.html)

[robbo24]

The reason for the red & orange arrow on the more sensitive money flow indicators is because of the low volume pushing up the price.

Today's volumes are higher than the last couple of weeks of trading - and at significantly higher prices.

Now, where did that Moose get to?

[winner69]

Today's volumes are higher than the last couple of weeks of trading - and at significantly higher prices.

Now, where did that Moose get to?

He called it correctly at 314 and again near the 380 mark

[winner69]

Still waiting for a positive announcement. patience is a virtue; not getting burnt again!

But isn't that the wrong time to buy after your warning this mornings.....buy the rumour sell the fact

[warthog]

Still waiting for a positive announcement. patience is a virtue; not getting burnt again!

Correct Moosie. That's the way.

What's driving DIL's significant rise in the past couple of weeks?

Volume has been pretty low (thanks Hoop) which means that it might not be as substantive a rise as some think.

Still, the hog has no crystal ball (although this is being worked on).

Recall: last September saw a reasonable lift in SP only to reverse a month later.

Why?

[robbo24]

He called it correctly at 314 and again near the 380 mark

Around 300,000 shares traded today - the OBV must be rising, right?

[In4a$]

I grabbed another 500 today. most came through as 18 shares per trade, !. Glad I only got 500, blinkin notifications galore.!

[klid]

I got a little too, but pissed off I didn't earlier. If it comes down again I will get more but we're getting close to some news so it might just be that it never sees these levels again!?! :(

[clip]

Yeah I grabbed a few hundred earlier today also @ 4.26, would have got more if the car wasn't going in for a new cambelt tomorrow heh. Nice little jump since first dipping my toes in the DIL water, looking forward to the quarterly!

[pierre]

If it comes down again I will get more but we're getting close to some news so it might just be that it never sees these levels again!?! :(

There may be a few more ups and downs on the Diligent roller coaster till the mid-January announcement.

Then it's hang on tight till the restatement due end of February - that could generate quite a bit of screaming - hopefully as the SP hurtles up even higher!

[In4a$]

I dont see any real logic with the current jump in price, if the next announcement is negative might go way below $4.00 rather quickly.
My avge buy is only $3.70 so I got a bit of fat to playwith. I'll sell some if it gets to $4.50

[Blue Horseshoe]

What happens in the mean time if there is a NZX price inquiry, don't they have to keep quite until restatement or quarterly announcement.?

[KiwiGreen]

Better volume today but, overall, this has risen rapidly on very small comparative volume. I don't know if perhaps DIL being a double broker pick for 2014 has prompted some 'less-than-smart' money to enter the stock, and for short term traders to take advantage of that fact. But I would be gob smacked if this reaches $5 before it is back well into the $3's. I can only imagine some hopeful new 2014 DIL owners will be in for a fright when they find their new investment, which so easily roared from the mid $3's to the mid $4's, is back below where it started.

Thanks for the charts and accompanying posts guys. This will be an interesting week - although unlikely a telling one without any real information released. I imagine the quarterly info will come out for analysis next week? Feels like the recent surge in SP has already priced in any potential positive news so unless we get some unimaginable growth in client subscriptions/users, as has been said before, I imagine there will be a sell down on the news. In the mean time I assume it will meander around this mid $4 level.

Look forward seeing what the limited Q4 update brings, hoping it's at least better than the numbers for last quarter.

[Balance]

Sorry STC, not an expert TA'er on breakouts (or much else technical either) .... mainly a fundie.

The current action isn't dissimilar to Sep '13 action where it bounced from 4.82 to 5.90 with much more convincing volumes than now. Nope - this looks like another sucker (for longer term investors) rally - short term traders may make a few cents from it but the big boys seem to have already sorted out their positions (for now).

My point was that any technical breakout - short or long term - carries very high risk until the restatement is in.

High risk = big gains.

That's how the markets work?

[Whipmoney]

High risk = big gains.

That's how the markets work?

Sometimes.

Ironically I think this one is lower risk than PEB and currently priced better therefore it has a Lower Risk/Reward ratio.

[clip]

The way I've been looking at is they were previously valued $7.50+ and currently valued less even though revenue/sales are possibly within 8% of previously reported.. While the SP is quite possibly discounted 40-60%? Not selling any PEB to grab these but took q holding today!

[winner69]

We have blast off ...... $7 plus by Easter if not before

Robbo - as I mentioned before the regression line changes as time marches on with new prices and the number of std dev for the channel lines is just fine tuning as more data is added

Anyway the trend is broken ..... we have blast off ..... its all up up up and away from here .... and this chart is now history (belg and moosie would say it is not so I will keep ..... just in case)

The value of this exercise is that it keep me out of DIL for most of that downtrend.

[winner69]

Better hope it stays above that line then winner. Remember, relatively low volume until today as well as being in overbought territory. One swallow doth not make the spring time and we still have two huge hurdles to overcome. Confirmation, confirmation, confirmation is needed!


But but Moosie ..... so many can not be wrong can they

And I notice we seem to have a few new DIL shareholders proudly posting today as well

[robbo24]

But but Moosie ..... so many can not be wrong can they

And I notice we seem to have a few new DIL shareholders proudly posting today as well

I'm loving the role reversal here...

Moosie urging caution while winner69 superimposes a clip art rocket ship to the linear regression graph.

[alistair85]

Not a holder yet but keen to get in. Worth jumping in now after todays huge gains?? I'm guessing not.. There has to be a drop at some time.... hopefully tomorrow or next day... Hopefully for me anyway :)

[couta1]

We have blast off ...... $7 plus by Easter if not before

Robbo - as I mentioned before the regression line changes as time marches on with new prices and the number of std dev for the channel lines is just fine tuning as more data is added

Anyway the trend is broken ..... we have blast off ..... its all up up up and away from here .... and this chart is now history (belg and moosie would say it is not so I will keep ..... just in case)

The value of this exercise is that it keep me out of DIL for most of that downtrend.
I hope your right with my average buy price at $7.16 and I'm getting sick of looking at a big red arrow with minus 30 to 40k beside it would be nice to see that reduced substantially

[winner69]

Listen to your charts, they help you make decisions when info is sparse/non-existent and announcement s are a ways off.

and yes robbo, a real FUBAR situation here eh?!?!? ;)

I only hope that rocket isn't like the one that powered Challenger .... that blew up on a January 28th

[MAC]

Nice chart Winner, yours is way better than Hoop's as it comes with a forecast - just as risky as a rocket ride.

-- Will the NZX really leave DIL with a limp lettuce slap, or will they have to ensure an example is made for other companies in the future otherwise claiming precedence ?

-- Not convinced quarterly new customers will bounce back above 122 amongst ever increasing competition within the market, but would like to be proven wrong. That second product needs to come soon now.

Agree with balance though that there's reasonable medium term return for that risk and I think DIL will prosper and mature as a company but it may be volatile for a couple of months yet.

[winner69]

Headlines

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11182158

And the guru from Tyndall says The size of the share parcels being traded also indicated it was not just small retail buyers keen on the stock.

Up up and away

[warthog]

Not a holder yet but keen to get in. Worth jumping in now after todays huge gains?? I'm guessing not.. There has to be a drop at some time.... hopefully tomorrow or next day... Hopefully for me anyway :)

No place in the markets for hope.

As they say, if you don't know yourself already, the markets are an expensive place to find out who you are.

[Balance]

No place in the markets for hope.

As they say, if you don't know yourself already, the markets are an expensive place to find out who you are.

Agreed but don't be so harsh, Warthog.

They say markets are driven by greed, fear and hope.

By far the greatest emotion is fear and that's why stocks like DIL offer exceptional opportunity for those who see through the emotions.

[Whipmoney]

Agreed but don't be so harsh, Warthog.

They say markets are driven by greed, fear and hope.

By far the greatest emotion is fear and that's why stocks like DIL offer exceptional opportunity for those who see through the emotions.

Exactly.

That's all I have to say until the restatements came out.

[couta1]

No place in the markets for hope.

As they say, if you don't know yourself already, the markets are an expensive place to find out who you are.
I have to agree with Warthog on this one a bit of fear can save you a lot of money as can not getting caught up in the hype of others

[Balance]

also said in the article:

"Williamson said the sell-off in Diligent's shares had been warranted as investors had lost confidence. Investors are now saying once they have got the governance problems sorted the future performance could be quite good."

keynote: COULD. Wait for confirmation!!!

Listening to a broker you don't deal with? Tsk tsk

[couta1]

I have a methodology and im sticking to it. so sue me for being conservative for once!
Sounds like an aging Moose getting wise to me

[Balance]

I have a methodology and im sticking to it. so sue me for being conservative for once!

Good on you, Moosie.

But still tsk tsk for listening to a 'on the one hand, on the other hand' broker!

[clip]

buy orders stacking up pre-open, might see close to $5 today?

[pierre]

You're missing out big time Moosie - DIL opens at 470 today!

[Balance]

Start of new year today really so broker with the valuation of $7.30 :) giving the stock a bit of a push along (with private clients).

Institutions still on the sidelines until revenue/profit restatement out of the way.

If restatement clears DIL from any deliberate accounting trickery and reinforces what DIL has been saying to the market that underlying operations are trucking along, expect institutions to pile back in.

Some very happy clients for broker pushing the $7.30 valuation.

They will sell close to $6.50, I guess.

[Balance]

Then I shall miss out. im still making money elsewhere, wgats wrong with it being a bit slower and less hyped?

Hype = Snakk?

Buy from those who are making 24,000 % profit from Day 1?

[winner69]

just like hotcopper this site but more fun

[Balance]

I make money on hype too my friend ;)

Good on you, moosie.

Sorehead appreciates your continuous attention to Snakk? Keeps the hype going so he can book his 24,000% profit?

[Baddarcy]

Volume seems to be here today...

[Whipmoney]

Then I shall miss out. im still making money elsewhere, wgats wrong with it being a bit slower and less hyped?

I wouldn't call it hype... I call it De-Fearledgling.

[KiwiGreen]

Volume on the sell side is larger than the buy side - haven't seen that for a while. I'll pick today as short term pinnacle. Exuberance is high, does actually feel worryingly hotcoppery here currently. That NZ herald article was an amazingly non committal pump of a company - it almost sounds as if he hasn't researched DIL at all and has just told a reporter he's taking a random punt based on previous SP. Shorters will have their eyes glued to this.

I'm with you for now Moosie, have suddenly moved much closer to the sell button than the buy.

[Hoop]

I wouldn't call it hype... I call it De-Fearledgling.
I'd call it greed

[robbo24]

Good day for DIL and WYN holders :)

[Whipmoney]

I'd call it greed

How do you chalk that one up? Buying a stock (at a price under its fundamental value) is smart.

In this case it sure makes more sense that the irrational exuberance presently displayed in the PEB forum.

[KiwiGreen]

Sell side now doubles the buy side according to ASB. Turning point?

[Whipmoney]

Sell side now doubles the buy side according to ASB. Turning point?

Potentially but its not all about the limit order book. Some may trade "at market" and instos generally trade "off market".

[alistair85]

Turning point?? Would you expect price to come down or hover around this point?

[Hoop]

How do you chalk that one up? Buying a stock (at a price under its fundamental) is smart.

In this case it sure makes more sense that the irrational exuberance presently displayed in the PEB forum.

There's 3 basic anticipation behavioural states to the market when a stock has no new announcements effecting price......most media recite the first two..
1....rapid falling price is fear (get out before its too late)
2....rapid rising price is greed.. (get in before is to late)
3....stable non volatile price is Status Quo (who cares!!)

As Winner69 points out to everyone but is drowned out by the "noise" he thinks the share rise is on anticipation so apply buy the rumour sell the fact/news investment strategy... .

Whipmoney Quote ..Buying a stock (at a price under its fundamental) is smart...This is flawed logic..If they are buying at $4.80 due to under-valved fundamental thinking then they are not smart because the smart ones would've brought in or topped up a couple of weeks ago when DIL was at $3.30.

As there has been no financial update how does anyone know what the change of previous and projected forward fundamentals are now?

We have very good FA experts on ST and have spent time pouring over DIL...From their previous posts I get the feeling they think DIL is fundamentally overvalued now...In that case it seems the market is either factoring in the anticipation of exceptionally stellar news or there's a sense of belief that DIL has returned to what it was previously...

I beleive DIL is running more truly to technicals and not so much fundamentals....It's one of those stocks that is currently driven by mass investor emotional behaviour which may or may not be logical....so who knows how high this baby is going to climb in share price...we will know when it ends though..


But hey why worry about the future...we should adopt what happening at the moment and benefit from it while it lasts....they say we should learn to love the (bubble)/bomb..eh?

http://thisdistractedglobe.com/wp-content/uploads/2007/01/DrStrangelove4.jpg

[Schrodinger]

As long as the management team are not crooks huh?

Like the product not sure about the corporate governance. Tough investment choice.

[Balance]

I'd call it greed

So when there is selling, it is called charity or being generous?

:D

[alistair85]

Sell side now doubles the buy side according to ASB. Turning point?

The buyer and seller depth have evened up again on ASB

[Goldstein]

As long as the management team are not crooks huh?

Like the product not sure about the corporate governance. Tough investment choice.

Can't agree more. Publicly listed companies not only have to do the right thing, they have to be seen to do the right thing at every turn. If not it will hurt them next time they try to raise capital.

[Whipmoney]

There's 3 basic anticipation behavioural states to the market when a stock has no new announcements effecting price......most media recite the first two..
1....rapid falling price is fear (get out before its too late)
2....rapid rising price is greed.. (get in before is to late)
3....stable non volatile price is Status Quo (who cares!!)

As Winner69 points out to everyone but is drowned out by the "noise" he thinks the share rise is on anticipation so apply buy the rumour sell the fact/news investment strategy... .

Firstly you're assuming that the recent rise is entirely attributable to "anticipation" of the upcoming Q4 results (which I expect to be released next Tuesday):

1) How can you be sure of this? Or at least how can you be sure that this is the only factor at play...?

2) If you're above behaviour states truly exist then potentially this the after-effect of State 1 (fear) playing out from the previous announcement. We clearly saw that the price dropped significantly upon the last announcement (a further delay of the restatements) with the SP falling to circa $2.96, recovering to $3.80 and settling again at around $3.50 before the most recent rise. It seems to me that some of the fear/uncertainty is slowly wearing off.

3) We know for a fact that DIL was added to not one but two Broker Recommendations (Macquarie and Hamilton Hindin Greene). Given the convenient timing for the recent rise (which kicked off Friday 3 Jan when the instos/brokers came back on board) and the fact that a large amount of the trades were "off-market" I would suggest that a combination of insto buying and brokers churning their clients into this stock are the principal factors behind the recent run-up.



Whipmoney Quote ..Buying a stock (at a price under its fundamental) is smart...This is flawed logic..If they are buying at $4.80 due to under-valved fundamental thinking then they are not smart because the smart ones would've brought in or topped up a couple of weeks ago when DIL was at $3.30.


1) Well as a Value Investor I bought in recently sub $3.30 and from memory Sparky attested to topping up around these levels.

2) The market is not rational. As Winner69, Moosie etc have all pointed out that they want "confirmation" of up-trend before buying in. The up-trend was self-confirming and it seems punters jumped on the train. I'm under the impression Winner69 got back in however Moosies waiting for clarity of the Q4 numbers.




As there has been no financial update how does anyone know what the change of previous and projected forward fundamentals are now?

Mmmm Scenario modelling..? One can build their own forward estimates based around differing growth trajectories and then present value these using DCF.



We have very good FA experts on ST and have spent time pouring over DIL...From their previous posts I get the feeling they think DIL is fundamentally overvalued now...In that case it seems the market is either factoring in the anticipation of exceptionally stellar news or there's a sense of belief that DIL has returned to what it was previously...

I stated various times that my own analysis (which is built around reasonably conservative growth estimates) gives a base value of NZD $5.50.

Sparky has also provided some excellent analysis and prices (above $6) and there have been numerous comments regarding broker valuations (First NZ, Macquarie etc) which seem to range between $6.20 and $7.30.

From memory only one or two people suggested that the Fundamental Value was in the threes and this was based on a very basic "Benjamin Graham" calculation which I would hardly find applicable to a SaaS company.



I beleive DIL is running more truly to technicals and not so much fundamentals....It's one of those stocks that is currently driven by mass investor emotional behaviour which may or may not be logical....so who knows how high this baby is going to climb in share price...we will know when it ends though..

But hey why worry about the future...we should adopt what happening at the moment and benefit from it while it lasts....they say we should learn to love the (bubble)/bomb..eh?

This makes no sense when you yourself can't even identify what broke the down-trend? Or are you suggesting that it hasn't been broken and will fall below $3.50 again?

[In4a$]

worst thing about big price jumps like this, is now the do I sell or hold, sell or hold, sell or hold, aaaahhhhhh whats going to happen tomorrow, oh well, toss a coin I think, probably the same method a lot of the recent buyers have been using.

[Schrodinger]

Firstly you're assuming that the recent rise is entirely attributable to "anticipation" of the upcoming Q4 results (which I expect to be released next Tuesday):

1) How can you be sure of this? Or at least how can you be sure that this is the only factor at play...?

2) If you're above behaviour states truly exist then potentially this the after-effect of State 1 (fear) playing out from the previous announcement. We clearly saw that the price dropped significantly upon the last announcement (a further delay of the restatements) with the SP falling to circa $2.96, recovering to $3.80 and settling again at around $3.50 before the most recent rise. It seems to me that some of the fear/uncertainty is slowly wearing off.

3) We know for a fact that DIL was added to not one but two Broker Recommendations (Macquarie and Hamilton Hindin Greene). Given the convenient timing for the recent rise (which kicked off Friday 3 Jan when the instos/brokers came back on board) and the fact that a large amount of the trades were "off-market" I would suggest that a combination of insto buying and brokers churning their clients into this stock are the principal factors behind the recent run-up.



1) Well as a Value Investor I bought in recently sub $3.30 and from memory Sparky attested to topping up around these levels.

2) The market is not rational. As Winner69, Moosie etc have all pointed out that they want "confirmation" of up-trend before buying in. The up-trend was self-confirming and it seems punters jumped on the train. I'm under the impression Winner69 got back in however Moosies waiting for clarity of the Q4 numbers.




Mmmm Scenario modelling..? One can build their own forward estimates based around differing growth trajectories and then present value these using DCF.



I stated various times that my own analysis (which is built around reasonably conservative growth estimates) gives a base value of NZD $5.50.

Sparky has also provided some excellent analysis and prices (above $6) and there have been numerous comments regarding broker valuations (First NZ, Macquarie etc) which seem to range between $6.20 and $7.30.

From memory only one or two people suggested that the Fundamental Value was in the threes and this was based on a very basic "Benjamin Graham" calculation which I would hardly find applicable to a SaaS company.



This makes no sense when you yourself can't even identify what broke the down-trend? Or are you suggesting that it hasn't been broken and will fall below $3.50 again?

To be fair you cant quote a fair valuation without accurate financials. I would be very skeptical of what these numbers are as the company has already proven that they are not following GAAP rules. Even if they release "revised" numbers these could be dodgy.

You wont be getting accurate sales numbers for sometime so a price range is irrelevant. Investing at this stage is a punt and the risk factor is massive so I would expect a huge potential return >50% to compensate for that risk.

[KiwiGreen]

Nothing broke the downtrend other than some positive media that led to a more positive sentiment that led to some momentum which confirmed the positive media to new buyers, and a cycle of inter reliant positive justifications ensued to help 'technically' break DIL out of downtrend (I'm no TA so that's according to the TA's here). It has now rapidly gained ground, for me, to an unsustainable SP in the absence of any real information.

Talking about FA is a waste of time really at the moment - this rise is not based on any FA. I can give you a SP in the $2,3,4,5,6 just depends on what risk (discount rate) you'd like to assume, and your best bet at what revenues will be for 2013, 14, 15..etc. For sure FA assumptions will become valid again when the limited quarterly numbers come out, but really doubt those numbers are too hot and even if they are the current SP is too tempting for traders not to manipulate down short term anyway. By the way I noticed recently that the massive increase in deferred revenues should reduce NTA/share by about 25% (according to my calculations) - not that I think high growth SaaS investors care too much about that.

On the topic of discount rates would be interested what sort of rates most of you guys have found yourselves using for SaaS companies in general over the last year?

[Schrodinger]

Good question. Most of the companies are high risk plays and therefore I would expect these to be rather high..

http://bridgesdunnrankin.com/valuing-a-software-company/

They are quoting 20%+ which indicates this risk.

[Schrodinger]

Sparky, what I mean to say is all the past revenue numbers are not accurate so attempts to predict revenue cannot be relied upon. Until they release 'accurate' numbers.

[Hoop]

....
This makes no sense when you yourself can't even identify what broke the down-trend? Or are you suggesting that it hasn't been broken and will fall below $3.50 again?

Don't take this post the wrong way Whipmoney...I use to be a fundy for 25 years and so know the disciplines well..but now I trade using investor behaviour/momentum as primary factor...therefore with reference to my discipline nearly all posts on the DIL thread are irrelevant...
So as I'm now mostly a TA investor there is little need try to understand what breaks a downtrend..There is no need to know the fundamental price of a share...that is all irrelevant to a TA investor ... it is outside TA discipline to consume time to search for fundamental reasons why a stock price does what it does, to try to second guess what it is going to do, or try to crystal ball what the stock may do in the future using all sorts of fundamental variable possibilities including forward analysis techniques..It's still great fun talking about it on ST but nowadays for me I'm TA disciplined or (try to be)... if the market triggers a buy I buy, if it triggers a sell I sell....

See my yesterdays chart post#5400 (http://www.sharetrader.co.nz/showthread.php?5408-Diligent-Boardbooks-IPO/page360) DIL triggered a buy signal at $3.90 last week I waited for confirmation at $4.12 for it be safer buy entry...for me (and other TA's) what happens now outside of the charts is of no importance, all the posts and media is considered distracting noise..A pure TA's only important thing now is to watch for the next sell signal to exit...

[Whipmoney]

To be fair you cant quote a fair valuation without accurate financials. I would be very skeptical of what these numbers are as the company has already proven that they are not following GAAP rules. Even if they release "revised" numbers these could be dodgy.

You wont be getting accurate sales numbers for sometime so a price range is irrelevant. Investing at this stage is a punt and the risk factor is massive so I would expect a huge potential return >50% to compensate for that risk.

DCF Valuations are based off cash-flow not NPAT.

Based on all of DIL's correspondence to date, they have specifically stated that there is no effect on the underlying cash-flow or contracts, rather it is a change to the revenue recognition criteria which will invariably result in some sales,installation revenues and some costs being deferred to later periods.

Given that deferred revenue is captured in the FCFF (under the changes to working capital) the ultimate effect of the restatement is automatically accounted for in the DCF analysis and therefore included the valuation.

[Schrodinger]

So the big variable for your DCF is the DR? I would have a very high figure in there...

[Whipmoney]

So the big variable for your DCF is the DR? I would have a very high figure in there...

No what I'm saying is that it doesn't matter what the change to the revenue recognition criteria is. Even in the unlikely event that all of the company's revenue were 'restated' as deferred revenue then this would still have no bearing on the ultimate FCF, as the change to the net working capital position would automatically offset any reduction in operating cash-flow.

DCF essentially ignores the accrual aspect of accounting and therefore is a proxy for the underlying cash-flows of a business.

[Schrodinger]

Yes I understand what you are saying. Getting back to the valuation this is still a high risk investment and therefore the DR needs to reflect it.

[Whipmoney]

Yes I understand what you are saying. Getting back to the valuation this is still a high risk investment and therefore the DR needs to reflect it.

Just curious but why exactly do you deem this to be a high risk business?

DIL uses a subscription business model (where cash is received up front), has next to nothing in term borrowings, has exhorbitant amounts of cash on hand and a world class (in SaaS) 97% rentention rate in an under-saturated market. Furthermore by the nature of being a SaaS company it can achieve significant scalability at minimal cost and therefore it will invariably improve its GM as a function of sales growth.

To me its a fairly solid business whose biggest risk is a security breach followed by a significant decline in client retention and overall I would actually consider it safer than some other bricks & mortar subscription models such as publishing.

[KiwiGreen]

FA is NOT a waste of time in understanding DIL. It just requires you to be rational and open minded to realise that the company had been dramatically oversold beyond the worst case assumptions people had.

Why should the accounting for deferred revenue change the share price one cent? Does it affect their cash held? Once you realise that DIL still rakes in the cash and banks it, but merely report it on the balance sheet rather than the income statement, you will realise why the panic was so silly! See my comments at 5323 (http://www.sharetrader.co.nz/showthread.php?5408-Diligent-Boardbooks-IPO&p=451707&viewfull=1#post451707)

FA is 'not' a waste of time....ever. But but talking about it in relationship to the recent exuberance in the DIL SP is a waste of time for me right now. We had all the same information at our fingertips months ago when this SP was in the high $2s, and mid $3s which is when FA decisions were being made. But everyone didn't just suddenly just take a second look at their spread sheets at new year and say hang on a sec....

I think the panic has been unjustified around the accounting issues too, but don't forget while this restatement dilemma has ensued it has almost acted as a cover up for falling revenue growth. If we were expecting the same revenue growth rate in 2013 as 2012 then the SP would not be close to where it is, but in reality we'll be counting our stars if we can achieve half of 2012's growth. And of course the adjustment of the accounts itself does effect the SP, even for a high growth SaaS company, as it will reduce recorded revenues for 2012 and 2011 as well as other minor things. If it was cash accounting no problem but we live in ac-cruel world ; )

[In4a$]

If you already hold, id say sit tight this close to the quarterly as the margin is nor your protection for a worse than expected occurrence. if you dont already hold, wait for positive confirmation :)

Thanks Moosie. DIL was my first pick for comp this year, if all the news is good it could get back to $7, I will resist the temptation to take some profit and wait.

[Schrodinger]

I am more worried about the trustworthiness of the management team therefore the risk for me is high (personal preference).

I like product and the business model although am I not sure how a company can get the financial reporting completely wrong. The rules are quite clear.

[KiwiGreen]

No what I'm saying is that it doesn't matter what the change to the revenue recognition criteria is. Even in the unlikely event that all of the company's revenue were 'restated' as deferred revenue then this would still have no bearing on the ultimate FCF, as the change to the net working capital position would automatically offset any reduction in operating cash-flow.

DCF essentially ignores the accrual aspect of accounting and therefore is a proxy for the underlying cash-flows of a business.

I actually still think your incorrect on this Whipmoney. Working capital is CURRENT assets - CURRENT liabilities. So yes 1/9th of it does come back in to offset the lower operating cash flow through net working capital. but 7/9ths of the installation revenue becomes a 'NON-CURRENRT' liability thus eliminating it from the net working cash flow calculation - (the other 1/9th obviously being recorded as revenue in the year in question). It becomes a bit of a nightmare figuring all this out but I've done the maths and there is a net effect on FCF caused by the increased deferred revenue - essentially because it is not being deferred 1 year - current liability - but 8 years - longterm liability.

- the capital letters are just to help people quickly understand what i'm expressing.

[Whipmoney]

I like product and the business model although am I not sure how a company can get the financial reporting completely wrong. The rules are quite clear.

Well simply put: It's an ill-fated cocktail of dual financial reporting jurisdictions (US Gaap & IFRS), dual compliance reporting jurisdictions (NZX and SEC), a high growth company with an ill-equipped CFO, and throw in a splash of the NZX requiring that the company change their auditors to a NZX approved firm and whaalaa.. you have a severe amount of panic and uncertainty.

I don't think the board/management acted in bad faith or negligently. I think its just a case of a good company being ill-equipped to handle the financial rigour of listing in one country and operating off-shore.

[klid]

Different people are around now, and CFO right... and they've been rather forthcoming with all their shortcomings?

Curious in opinions... if the SP hovers until Q4 announcement and there are say 150 new signups, what the effect will be. I thought positive but with this increase not so sure!?!?!?

[Schrodinger]

Well simply put: It's an ill-fated cocktail of dual financial reporting jurisdictions (US Gaap & IFRS), dual compliance reporting jurisdictions (NZX and SEC), a high growth company with an ill-equipped CFO, and throw in a splash of the NZX requiring that the company change their auditors to a NZX approved firm and whaalaa.. you have a severe amount of panic and uncertainty.

I don't think the board/management acted in bad faith or negligently. I think its just a case of a good company being ill-equipped to handle the financial rigour of listing in one country and operating off-shore.

And dont they work with an auditor to make sure things are hunky dory? Which one of the big four signed these off.... reminds me of Enron, Tyco

[winner69]

I actually still think your incorrect on this Whipmoney. Working capital is CURRENT assets - CURRENT liabilities. So yes 1/9th of it does come back in to offset the lower operating cash flow through net working capital. but 7/9ths of the installation revenue becomes a 'NON-CURRENRT' liability thus eliminating it from the net working cash flow calculation - (the other 1/9th obviously being recorded as revenue in the year in question). It becomes a bit of a nightmare figuring all this out but I've done the maths and there is a net effect on FCF caused by the increased deferred revenue - essentially because it is not being deferred 1 year - current liability - but 8 years - longterm liability.

- the capital letters are just to help people quickly understand what i'm expressing.

KG I agree with Whp. FCF should be not affected by any restatement of revenues

Below is past FCF for DIL and a forecast for this year. The driver of this is how much is received by way of revenues (albeit whether it gets counted as current or deferred revenue)

The line to look at the Cash Receipts one - from a FCF point of view that is the line that matters insofar as income goes - the amount of cash that goes into the bank

[winner69]

Good question. Most of the companies are high risk plays and therefore I would expect these to be rather high..

http://bridgesdunnrankin.com/valuing-a-software-company/

They are quoting 20%+ which indicates this risk.

I read this as using a reasonable discount rate in the DCF and then discounting the firm value (the answer) by 20% as a margin for safety (like Sparky does in his intrinsic value calculations)

A good point made is that one should only go out 5 years for software companies. The Terminal Value in any DCF generally makes up a large proportion of the NPV

Question then .... how long a life does DIL actually have .... does it keep growing forever and forever

[MAC]

Like many I see the short term value play up to where I contingently value DIL at $7.15, and this is great if you are a tax paying short term trader, but for longer term investors there may be better longer term growth options in the NZX for you at this time.

Thus, a conundrum, unless the pending Q4 report provides a result in excess of last quarters new customers of 122, it may well confirm my anticipation that the rate of growth for DIL, qualified on a single product basis, will level off lower this year.

DIL grew over the last several years as the leader in claiming market share, however the market is now absolutely saturated with competition, a random selection of just five of very many is below.

The difficulty DIL now have in bringing out a second ‘management’ level product is that it may not now be the leader in the market, 18 months ago perhaps, but not now. They will be competing in this space with even greater existing competition, and will have an overlap with Oracle type reporting products also.

DIL I think will continue to grow at a modest pace over the next few years but not at historical growth rates.

If you are a long term investor looking to get in at this point, my recommendation is do consider the competitive risk that a single product company poses. But, balance this against some level of forward growth and the fact that DIL do have lots of cash on the books.

DISC: Awaiting the Q4, but probably out for the long term.

ICSA:
http://www.icsasoftware.com/clients/index.asp?PagePosition=1&whatSector=

Boardpad:
http://www.boardpad.com/about/

Accelus BoardLink:
http://accelus.thomsonreuters.com/products/accelus-boardlink?id=701E00000006Bdh&ls=GooglePPC&lsd=BoardLink&gclid=COrYsZOM67sCFao8pgodNEgAFg

LeadingBoards:
http://www.leadingboards.com/en/board-portal.html

Pervasent:
http://www.pervasent.com/

[Whipmoney]

I actually still think your incorrect on this Whipmoney.

Working capital is CURRENT assets - CURRENT liabilities. So yes 1/9th of it does come back in to offset the lower operating cash flow through net working capital. but 7/9ths of the installation revenue becomes a 'NON-CURRENRT' liability thus eliminating it from the net working cash flow calculation - (the other 1/9th obviously being recorded as revenue in the year in question).

It becomes a bit of a nightmare figuring all this out but I've done the maths and there is a net effect on FCF caused by the increased deferred revenue - essentially because it is not being deferred 1 year - current liability - but 8 years - longterm liability.

- the capital letters are just to help people quickly understand what i'm expressing.

Firstly, in essence your points above are both valid and correct, however;

1) The majority of DIL's Revenue (90%) comes from Licencing Fees which are amortised over the 12 month term of their contract so in response to your point above any deferral in recognition of these WILL show up the CURRENT Liabilities heading.

2) As per the FY12 annual accounts Installation revenues only make-up circa 10% of their Total Revenues, so if 8/9's of this is deferred to a later date (i.e. non-current) then the total impact of this is an 8.8% decrease in FCFF (8/9*10%).

3) Even if you are correct the effect wouldn't be as dramatic as an 8.8% decrease overall as these amounts would be deferred to the changes in working capital for subsequent years.

4) Whilst i've searched extensively I can't find any precendent for either the inclusion or exclusion of NON-CURRENT Deferred Revenues from the Changes to Working Capital and while I can understand your logic if you think about what DCF analysis is actually trying to achieve then (to me) it would make more sense to include the deferred revenue even (if by accounting standards) it isn't classfied as current.


My rationale is that with regard to ALL of the Revenue and Deferred Revenue, DIL collects all of the Cash up-front. Now we know that under DCF analysis, the FCFF component specifically relates to calculating the Free Cash to the Firm by working out the 'sources' of cash (e.g. revenue/deferred revenue and accounts payable which provides a source of cash/funding) and then deducting the 'uses' of cash (e.g. opex, capex and tax in addition to inventory & debtors. both of which tie up cash).

In a given year, e.g. this year DILS sources of cash will comprise their Revenue, all of their Deferred Revenue and a small amount of accounts payable (which helps fund their working capital positon). As such for this year it would make no sense (under DCF analysis) to defer/allocate any of the Deferred Revenue (current or non-current) to a later year as the cash is received in this financial year and therefore should be discounted in this year. The same will apply to each successive year.

As you can see it doesn't matter whether the installation revenues are amortised over 1, 10 or 20 years as it shouldn't effect the underlying logic of DCF analysis which is to strip out the acrrual effect of accounting and to focus on the real cash inflows and outflows.

[blobbles]

Just catching up with all this, interesting discussion.

I would just like to poke my tongue out at all the people that were telling me to not buy at <$4 because it was going against the trend and their suggestions that I would lose a lot of moolah. With an average buy price of just under $3.40 now, I will be holding for a while longer yet, through the restatements and hopefully introduction of a new product. So :p

It really does pay to DYOR and not listen to "smart people" who tend to always be wrong, possibly intentionally. A little bit of FA of DILs books when the SP was <$4 would have told you that the company is severly undervalued. I posted mine up, was corrected nicely (thanks Moosie and others) then posted up another more accurate FA which many of the "smart people" people promptly ignored (post 5006), still showing DIL to be undervalued and broadly in line with Sparkys FA. I think this is a good lesson for everyone new to this game, take everything that is said on sharetrader with a huge grain of salt. There are many people here who it appears are trying to influence prices through their posts both up and down for many reasons. This is sometimes because they are working on a different time scale to you (short term investments vs long term) and sometimes intentionally to try and affect the market. Choose whose opinions to respect very wisely (Sparky is one of them who deserves a lot of kudos pointing out undervalued companies very honestly and with good research to boot).

In summary DYOR and listen to your own research and pick who you listen to on ST. I think it would be a good idea to listen to the people who choose their competition picks and end up near the top of the board at the end of the year and who post on those same company threads during the year with honest and accurate information. Those that end up near the bottom of the board who give little analysis and seemingly intelligent (but on examination unresearched) opinion should be broadly ignored IMHO.

[winner69]

Valuing SaaS companies is interesting. The experts seem to show skant regard for DCFs, esp in pre-mature companies, because the outcomes can vary hugely with little changes in the assumptions made. Hence they tend to go the sales multiple way.

DIL is past the start up phase and to some extent approaching maturity. Thus concepts like growth rate decay trajectories come into play, because valuations are based on future growth rates rather than the lofty high growth rates in the early stages.

DIL had 143% revenue growth (124% cash receipts growth) in 2012. Sharetrader consensus seems to be about 50% this year - growth rate decay of 65%. No history to get a meaningful trend and probably not really indicative of reality - like would growth in 2014 further decay to 17% - probably not.

Average growth rate decay for SaaS companies seems to be about 15% to 20% pa (ie a 100% growth falls to 85% the following year)

If valuations are based on sales multiples which are dependent on future expected growth rates than this growth rate decay number is important.

In DIL case current revenue growth is 50% (the expected 2013 figure).


A growth rate decay of 10% leads to a future 5 year revenue growth rate of 37% pa / 20% leads to 29% pa / 30% leads to 19% pa / 40% leads to 13% pa

Based on some reading i have done this methodology points to DIL being worth anywhere between 2 to 5 times sales, ie $2 to $5 depending on which rate used.

Maybe 'global experts' who use this sort of methodology have done their sums and this is why DIL is at $4, with the future built in to the price. The other factor to consider is this growth based on the business as it now (a one product one) or does it make an assumption that the future growth (even at 40%) has to come from more than new customers but also from new products. Maybe the implication is that the current price allows for new products?

That's my view and just another way of looking at things ......but then what the heck do I know and probably a load of the proverbial anyway

KG et al- note the comment about experts skant regard for DCFs when looking at SaaS companies. The resulting valuations can vary a lot with just small changes in the assumptions (like schroningers discussion about discount rate to use etc)

Many of the punters buying or advising on the purchase/sale of these companies are tending to go the sales multiple way .... and using the growth rate decay methodology to come up with future growth rates

Since the post the other day I have investigated further and been advised that most would us the past CAGR for revenues as the base, nor the current years growth rate I have used.

For DIL that is 90% pa ..... if we apply a 15% growth decay rate to that (average for SaaS companies I believe) you end up with a future growth rate of 56% over the next 5 years ...... implying a enterprise value of about 7 times revenues or about $7

Pretty close to your number MAC ... maybe we both gurus ..... along with the brokers who have much the same sort of valuation .... so many can not be wrong

[winner69]

In case we overlooked today's action from the NBR market wrap

Diligent climbed 8.4 percent to $4.78, Xero rose 2.7 percent to $34 and SLI Systems rose 4.6 percent to $1.83.

"Diligent was obviously oversold late last year," Williamson (HHG)said. "Investors are now starting to think the reinstatement of its financial accounts is not too far away and we can focus on the growth again."

[Harvey Specter]

And dont they work with an auditor to make sure things are hunky dory? Which one of the big four signed these off.... reminds me of Enron, Tycono big four signed it off. They were using a third tier from what I understand.

Deloitte replaced them, found the issue, and has insisted they fix it.

Any other BS you want to make up??

[KiwiGreen]

Firstly, in essence your points above are both valid and correct, however;

1) The majority of DIL's Revenue (90%) comes from Licencing Fees which are amortised over the 12 month term of their contract so in response to your point above any deferral in recognition of these WILL show up the CURRENT Liabilities heading.

2) As per the FY12 annual accounts Installation revenues only make-up circa 10% of their Total Revenues, so if 8/9's of this is deferred to a later date (i.e. non-current) then the total impact of this is an 8.8% decrease in FCFF (8/9*10%).

3) Even if you are correct the effect wouldn't be as dramatic as an 8.8% decrease overall as these amounts would be deferred to the changes in working capital for subsequent years.

4) Whilst i've searched extensively I can't find any precendent for either the inclusion or exclusion of NON-CURRENT Deferred Revenues from the Changes to Working Capital and while I can understand your logic if you think about what DCF analysis is actually trying to achieve then (to me) it would make more sense to include the deferred revenue even (if by accounting standards) it isn't classfied as current.


My rationale is that with regard to ALL of the Revenue and Deferred Revenue, DIL collects all of the Cash up-front. Now we know that under DCF analysis, the FCFF component specifically relates to calculating the Free Cash to the Firm by working out the 'sources' of cash (e.g. revenue/deferred revenue and accounts payable which provides a source of cash/funding) and then deducting the 'uses' of cash (e.g. opex, capex and tax in addition to inventory & debtors. both of which tie up cash).

In a given year, e.g. this year DILS sources of cash will comprise their Revenue, all of their Deferred Revenue and a small amount of accounts payable (which helps fund their working capital positon). As such for this year it would make no sense (under DCF analysis) to defer/allocate any of the Deferred Revenue (current or non-current) to a later year as the cash is received in this financial year and therefore should be discounted in this year. The same will apply to each successive year.

As you can see it doesn't matter whether the installation revenues are amortised over 1, 10 or 20 years as it shouldn't effect the underlying logic of DCF analysis which is to strip out the acrrual effect of accounting and to focus on the real cash inflows and outflows.

I get what you're saying, but all Saas companies complying with the accounting standards must be being valued this way i.e. all deferred revenue over a year out not being included in working capital calc for a DCF. Therefore even if it makes sense to include that deferred revenues you wouldn't be comparing apples with apples. In a strict sense my logic/method seems correct and therefore for me I have to go by that - non-current liabilities are never included in working capital and strictly the majority of the deferred revenues are long term liabilities. The difference isn't huge but it isn't insignificant either.

[winner69]

KG - how do you handle the Share Based Compensation (an expense) in your FCF?

I think you FCF formula is giving you problems ......life is not all that simple.

[KiwiGreen]

For DIL that is 90% pa ..... if we apply a 15% growth decay rate to that (average for SaaS companies I believe) you end up with a future growth rate of 56% over the next 5 years ...... implying a enterprise value of about 7 times revenues or about $7

When you say 56% do you mean year on year 56% growth? i.e. average of 56% growth pa? Or over 5 years it will grow 56%, i.e. average 10.xx pa? For me a 56% growth rate pa would be outrageously overstating what DIL are in line to achieve over the next 5 years. Even for 2014, 56% doesn't seem at all in reach given what we know. On the other hand I would be very surprised (and disappointed) if they were to only record 10% growth pa.

[winner69]

KG - re Cash Flows

You are causing yourself unnecessary grief. Your formula is wrong (only a good guide to create a cash flow statement if you don't have one)

Sparky and myself are only trying to help you

Take half an hour to study the actual Cash Flow statement from Diligent (FCF is Operating Cash Flow less Investing Cash Flow) and I am sure you will actually see how the DIL FCF is calculated - esp deferred revenues and the non cash expenses (like the share based remuneration I mentioned). It might help if you had the Income Statement handy as well - like how the $9,151,945 is made up and then follow through the lines on the Cash Flow statement DIL preent

Promise

[Whipmoney]

I get what you're saying, but all Saas companies complying with the accounting standards must be being valued this way i.e. all deferred revenue over a year out not being included in working capital calc for a DCF. Therefore even if it makes sense to include that deferred revenues you wouldn't be comparing apples with apples. In a strict sense my logic/method seems correct and therefore for me I have to go by that - non-current liabilities are never included in working capital and strictly the majority of the deferred revenues are long term liabilities. The difference isn't huge but it isn't insignificant either.

KG, with all due respect i'm not sure you know what you're talking about.

Sure under accounting standards (e.g US Gaap or IFRS) any deferred revenues that are being recognized over a term of greater than one year will invariably be recorded as non-current however this has no bearing on DCF analysis exercise whatsoever.

The whole point of DCF analysis is to discount expected cash-flows to the firm, i.e. the residual cash-flows after meeting all operating expenses, capex, taxes and changes in working capital (+/-).

Given that all deferred revenue (collected this year) is a cash in-flow then it should be included (as per the statement of cash-flows). As such even non-current deferred revenues should be included as they are received this year.

Refer to the answers in the following link for more info:

http://www.wallstreetoasis.com/forums/what-is-excluded-from-current-liabilities-when-calculating-nwc-for-dcf

[winner69]

When you say 56% do you mean year on year 56% growth? i.e. average of 56% growth pa? Or over 5 years it will grow 56%, i.e. average 10.xx pa? For me a 56% growth rate pa would be outrageously overstating what DIL are in line to achieve over the next 5 years. Even for 2014, 56% doesn't seem at all in reach given what we know. On the other hand I would be very surprised (and disappointed) if they were to only record 10% growth pa.

Sorry - it is a CAGR so should be 56% pa

Remember this is on the assumption of a 15% growth decay rate..... different rates give different 5 year CAGR. Only used 15% as an example because that is the average

Maybe DIL are worse than average

Just shows what changes in assumptions can make to valuations eh

[KiwiGreen]

I'm not sure you are getting it.

I think you are missing the part where Diligent banks all the cash but merely accounts for a small portion of it over a long period of time.

I have used the analogy of the retirement village companies before. These village operators can't book all their paper profits at once, they stress underlying earnings which exclude the fair value movement of buildings and land. Yet those buildings and land will be delivering greater profits to those companies over time. They just can't book the value of the building of the value and land until they've sold a slice of it at a higher price. This does not cause me to view RYM and SUM in a negative fashion.

The same is true of DIL. Accounting treatment does not affect its cash.

If you are doing a 'DCF', based on FCF - not talking about other valuation techniques - then strictly speaking the FCF that determine your value ARE affected by having to restate INSTALLATION revenues so they are spread over 9 years - because a large chunk of the deferred revenue strictly becomes a non-current liability. It is confusing and if you don't sit in front of a spread sheet and spend ages going back and forth between your adjusted P&L, balance sheet and cash flow statement along with valuation definitions then it can be hard to grasp. And yes you can say well screw 'strictly speaking' because cash flow is cash flow and they still have the same cash in and out..., however you need to put DIL in the context of its piers and if you value DIL based on its incorrect accounting and all other companies based on their accounts that meet the standards then you are skewing your numbers in DIL's favour.

If you can prove through maths and definition that I'm wrong then I am still all ears. Logically this is just the end point I reached and so far no one has been able to 'prove' me otherwise. Message me your email and I'll send you the spread sheets. I would be keen for someone like you to look over it anyway.

[Roadrunner]

Great to see DIL heading in the right direction after all the carry on.I`ve been accumulating more on the way up after selling my remaining PEB.I really feel this year will put them back where they were before all this happened and I don`t expect anything untoward in the restatement(apart from a huge bill!)I finally sold the Porsche this week so I could buy a few more:)Yes the shares have been oversold and people will buy purely on that but I`m intrigued by the growth initiatives mentioned by Sodi which we will hear about in due course.Surely no business would increase it`s staffing substantially if it didn`t expect it`s growth to be sustainable.That every increasing pot of cash as well....maybe there will be some leeway for some sort of bonus offering for the loyal followers after a tough 6 months?New product on or before the AGM,can`t be far away either one would think?Who knows....but one thing is for sure Diligent is a quality company with a product it`s customers love.

[KiwiGreen]

KG - re Cash Flows

You are causing yourself unnecessary grief. Your formula is wrong (only a good guide to create a cash flow statement if you don't have one)

Sparky and myself are only trying to help you

Take half an hour to study the actual Cash Flow statement from Diligent (FCF is Operating Cash Flow less Investing Cash Flow) and I am sure you will actually see how the DIL FCF is calculated - esp deferred revenues and the non cash expenses (like the share based remuneration I mentioned). It might help if you had the Income Statement handy as well - like how the $9,151,945 is made up and then follow through the lines on the Cash Flow statement DIL preent

Promise

Are you suggesting I just go 22,712,648 - 2,460,112? Where do you get the $9,151,945 figure from? Calculating FCF this way means you should include the preferred dividends in the equation, which was why I avoided it.

When you do a 5 year forward cash flow analysis using this method do you then just take that number and multiply it by your growth expectations before discounting it etc?

[KiwiGreen]

There's a guy called Snoopy on the Heartland thread that I think you'd get along real well with. He loves paralysis through analysis.

Diligent banks all the cash. It accounts for a small portion of it (installations) over a period of time, which you say affects its values. What happens to that cash? Does it sit in a separate bank account with a big "do not touch until nine years are up" sign on it? Or does it have full use of that cash for business or shareholder purposes?

I'm not expecting an answer to those questions, as I am in agreement that Diligent is not the right investment for you.

Haha you surely see I get what you're saying. Of course I know in reality nothing changes with cash, it takes very little thought to instantly come to that conclusion. They-have-not-received-any-less-cash. DIL's bank accounts don't look any different (apart from the dent in having to pay accountants overtime). But you haven't taken the time to explore what I'm putting in front of you and I don't blame you, it's complicated and not worth the reward - I don't recommend it - I only bothered with it for my own learning and thought I would share it here. Whippmoney understands my point and has obviously considered the same scenario yet decided against creating more ambiguity and left the idea out which I think is fair enough. You are still welcome to my spreadsheets if you want them anyway. And I am very happy to look at yours.

[Snow Leopard]

It is nearly as good to see the endless debate as it is to see the SP going up.

What still baffles me is the need to amortize installation fees over more than about 5 minutes.

Best Wishes
Paper Tiger

[Schrodinger]

The point I was trying to make is that I see DIL as a high risk investment and it is fruitless to make a guess on its valuation due to this and other factors due to management.

This doesn't mean it won't be high reward but it also means that you can expect a higher than normal chance of capital loss.

Some people view this as a sure thing...not quite.

[winner69]

Are you suggesting I just go 22,712,648 - 2,460,112? Where do you get the $9,151,945 figure from? Calculating FCF this way means you should include the preferred dividends in the equation, which was why I avoided it.

When you do a 5 year forward cash flow analysis using this method do you then just take that number and multiply it by your growth expectations before discounting it etc?

Sorry mate I have fat fingers and it should have been 9,141,295 being the net income/ earnings for the year

No doubt you spreadsheet has all these p&l items in it and you,like me, put in numbers for each for the future.

I only put in DIL version of their cash flow statement to try and get you to understand how to treat deferred revenues and a few other non cash items. Note the annual change in deferred revenues is included in the operating cash flow.

Your understanding and insistence on using your formula for FCF is flawed. I get the impression that you are unwilling to understand why, just an opinion.


Not with you about those preferred dividends you mention

As a matter of interest what valuation does your spreadsheet come up with? Mine says $4.98 on very conservative assumptions and it is more sophisticated than what you make out.

[winner69]

With all this worry about restatements, deferred revenues, current or non current provisions and all that many seem to have overlooked that there is one number in DIL accounts that is almost 100% correct and not to be the restated - the Cash on Hand number, the bank balance.

KG seems to have trouble understanding that the Cash Flow Statement is a record of how the Cash on Hand number has grown year on year - essentially cash receipts from customers (the money actually paid to DIL) less all the cash expenses paid including investment stuff plus or minus any financing activity.

Sounds simple - essentially it is and not as complicated as the likes of KG is trying to make it.

Anyway what ahead for DIL share price today today ..... probably a bit consolidation and only small change in price today .... although that increased volume yesterday could indicate that the demand out there is yet to be filled. Heck a long way to go to get to what brokers are saying DIL is worth and remember the man from HHG said DIL was seriously oversold.

[Whipmoney]

Haha you surely see I get what you're saying. Of course I know in reality nothing changes with cash, it takes very little thought to instantly come to that conclusion. They-have-not-received-any-less-cash. DIL's bank accounts don't look any different (apart from the dent in having to pay accountants overtime). But you haven't taken the time to explore what I'm putting in front of you and I don't blame you, it's complicated and not worth the reward - I don't recommend it - I only bothered with it for my own learning and thought I would share it here. Whippmoney understands my point and has obviously considered the same scenario yet decided against creating more ambiguity and left the idea out which I think is fair enough. You are still welcome to my spreadsheets if you want them anyway. And I am very happy to look at yours.

I haven't decided against creating more ambiguity... what i'm saying is that your logic for excluding non-current Deferred Revenues from changes to working capital (on the grounds of it being a non-current asset) goes against the whole rationale of DCF analysis in the first place.

What you are essentially saying is that just because 8/9th's of the Current Deferred Revenue are suddenly re-classified to Non-Current Deferred Revenue, then they are no longer eligible to be included in the Changes to Working Capital component of the FCFF calculation.

As you have stated above I see why you believe this, and essentially your rationale comes down to excluding Non-Current Liabilities on the grounds that they don't fall within the accounting definition of "Working Capital". Fair enough I can see your point, but what I am saying is that the FCFF calculation doesn't care for accounting definitions... rather it cares for sources and uses of cash, with the FCFF being the residual of the two.

Consider the following excerpt from Aswath Damodaran (Corporate Valuation guru):

"The entire reason we consider working capital when computing cash flows is because investments in working capital are considered wasting assets that don't earn a fair rate of return. Thus, money invested in inventory is wasted because inventory sits on your shelves and does not earn a return. Until a few decades ago, the same could be said of cash that would be invested in a checking account. Today, cash at most reasonably run publicly traded firms is invested in commercial paper or treasury bills, earning a low but a fair rate of return (given the lack of risk in these investments). Hence, cash is no longer a wasting asset at most firms and should not be considered part of working capital."

With regard to DCF Analysis "Working Capital" is generally defined as Non-Cash Current Assets (inventory and accounts receivable) and non-debt current liabilities (accounts payable, deferred revenue etc). The reason debt is excluded is because it relates to the financing structure.

So where does Non-Current Deferred Revenues fall? Well consider what they are exactly. Non-Current Deferred Revenues are cash received up front for services to be earned (rendered) at a later date, which in this case is over the course of several years.

How do these fit in relation to the working capital? Well if you follow the rationale in the quote above then you will easily realise that Working Capital is a use of cash. Precious cash is tied up in stock and debtors and isn't earning a fair return. Accounts payable and Deferred Revenues on the other hand (non-cash, non-debt liabilities) are a source of cash as these can be used to finance the Stock & Debtors. Therefore in the case of Non-Current Deferred Revenues, this line item is helping finance the working capital position, in the case of DIL providing excess cash over and above their working capital requirements.

If you include ALL deferred revenue in Year 0, then any reduction to this (e.g. conversion to actual Revenue) will be accounted for in the Change in Working Capital for the subsequent years.

[Whipmoney]

Kiwigreen - Further to my post above, try considering the considering the corollary to your argument.

If expenses (use of cash) are suddenly Capitalised then what you are effectively saying is that just because they are now classfied as a long-term Asset (and not an expense) then suddenly they have no bearing on the Cash-flows/DCF and therefore should be removed. Obviously they will be picked up under the Capital Expenditure Function of the FCFF calculation (which no doubt you would point out to me).

The point is that whether they are considered expenses or Capex, it doesn't matter. They are a use of cash and therefore need to be reflected in the FCFF. Therefore by logic the same should apply to all sources of cash.

[Dilbert]

...take everything that is said on sharetrader with a huge grain of salt.

Amen to that

[Hoop]

http://www.sharetrader.co.nz/images/misc/quote_icon.png Originally Posted by blobbles http://www.sharetrader.co.nz/images/buttons/viewpost-right.png (http://www.sharetrader.co.nz/showthread.php?p=452916#post452916)

...take everything that is said on sharetrader with a huge grain of salt.



Amen to that

Hmmm....not everything..every now and then some educational stuff surfaces
There has been been some very high quality Fundamental posts of late on this DIL thread

[Balance]

Nice little orphaned child on the charts yesterday eh Hoop? Hope the sp doesn't start faultering now for holders.

After a strong run like that, inevitable that sp will give up some of the gains.

Unless it is a case that DIL surprises the market with an early resolution to the restatement.

Then, it is a case of whoosh to $7.00.

[Whipmoney]

After a strong run like that, inevitable that sp will give up some of the gains.

Unless it is a case that DIL surprises the market with an early resolution to the restatement.

Then, it is a case of whoosh to $7.00.

The Q4 numbers should be out next Tuesday which may provide more of an impetus for market activity than the restatements themselves.

[Balance]

The Q4 numbers should be out next Tuesday which may provide more of an impetus for market activity than the restatements themselves.

Don't think so myself.

Institutions are on the sidelines until restatement in place. Then, they will move.

Past price action tells us the institutions can move the sp in leaps and bounds.

[Whipmoney]

Don't think so myself.

Institutions are on the sidelines until restatement in place. Then, they will move.

Past price action tells us the institutions can move the sp in leaps and bounds.

Yet the recent rise over the past few days has largely been due to insto activity (a high level of off-market parcels)..?

You could be right in that it's just brokers churning their clients...

[winner69]

Nice little orphaned child on the charts yesterday eh Hoop? Hope the sp doesn't start faultering now for holders.

I see no abandoned babies when I went for a run this morning .....apparently they are very rare anyway

Was it intraday then moosie

Stop putting the ****s into the punters please

[winner69]

Dont be so nervous about hanging onto this gains Winner :p

Was there a real abandoned baby or did you imagine one

I looked up the book and I see no abandoned babies on DIL 5 day chart

[KiwiGreen]

Thanks for all the replies.

To Winner69: I'm not unwilling, just determined to get the 'right' answer not just for DIL but for all companies I value now and in future. The preferred dividend bit is because the equation for FCF calculated via a cash flow statement should (according to what I read) be "Net cash provided by operating activities - Net investment - Dividends" I think preferred dividends are US$320,000 or so off top of my head.


To Whip: I understand the logic and if I am to follow it, that means I will surely need to be consistent and always add in any non-current deferred revenue for every company I value. So want to be sure.

Can everyone involved in this, post their FCF for 2011 and 2012 (non-adjusted). With the calculation that goes with it. Like what Winner69 said, you end up with a long DCF that kind of looks like a P&L with bits added on the bottom. So from that what is the equation you use to calculate FCF into the future - because of course if you're just applying a growth figure to Net cash from operating activities Minus Net investment that is a pretty simplified way to forecast FCF, that misses a lot of analysis...

I currently first figure out Net income (based off of trends in GP margins, operating cost margins and tax margins) - Net investment (which I generally define as capital expenditure - depreciation) - Net working capital (defining this as Current assets less cash, term deposits and notes - Current liabilities).

For 2012 (unadjusted) that gives me $US17,643,928 FCF. 2011 = $7,969,294.

I've got to run off to gym but any feedback on this is helpful, will check in later.

[winner69]

Kg - fact 1 ....DILcash pile increased by $24,381k to $33.311k in 2012

Some $3,939 of the increase came fron Financing Activities and there was a $70k exchange rate adjustment.

Therefore cash flows from operations including investment spend was $20,371k.

you say fcf is $17,644 - what have you done with the other $2,727k?

[Hoop]

Nice little orphaned child on the charts yesterday eh Hoop? Hope the sp doesn't start faultering now for holders.


I see no abandoned babies when I went for a run this morning .....apparently they are very rare anyway

Was it intraday then moosie

Stop putting the ****s into the punters please

No sign of abandoned baby not even on the 15min charts...If DIL had opened at say 4.60 today and dropped further during the day then that wouldv'e qualify as a bearish abandoned baby pattern...but it didn't!!!

..yes they are a very rare candlestick pattern

So far, todays fall back to and bouncing off yesterdays gap up opening price (4.70) has to be seen as consolidation..I healthy breather after a gap up...

Moosie are you a bit miffed at missing this DIL party...?

[alistair85]

I get the feeling DIL hasn't been "missed" entirely. Still plenty of rises to come this year. Especially after the upcoming positive quarterly results.... fingers crossed....

[KiwiGreen]

I get the feeling DIL hasn't been "missed" entirely. Still plenty of rises to come this year. Especially after the upcoming positive quarterly results.... fingers crossed....

Average quarterly 'Net new client subscriptions' for the 2012 year were 196 per quarter. Average for this year has been 166 per quarter.

Q1 = 207
Q2 = 168
Q3 = 122
Q4 = .....?

The blatant trend is why my confidence in a Quarterly report boost is low and I think more likely it will hit the SP. I would be happy with anything over 160. I considered my valuations reasonably safe using 136, so anything below that I would be disappointed (hoping last quarter was a blip).

Anyone linked into a DIL salesperson???

[clip]

Wonder how far this trace back will go? Jumped out at 4.75 again yesterday (in at 4.26). Will be looking to get back in around 4.45 levels if that happens before Tuesday, after that will be waiting to see an announcement or restatement before getting back in

[KiwiGreen]

Wonder how far this trace back will go? Jumped out at 4.75 again yesterday (in at 4.26). Will be looking to get back in around 4.45 levels if that happens before Tuesday, after that will be waiting to see an announcement or restatement before getting back in

I don't think it will track back much until after the quarterly. Mid 4's for now you'd think.

[winner69]

Moosie

If it closes today we have a doji candlestick .....yes?

For the abandoned baby pattern to form does it matter how long the tails are on the doji are?

I am really worried about abandoned babies so want to see if one appears tomorrow ...that's assuming today is a doji .....otherwise no worries

Don't know much candlesticks except hammers and hangman ones

[winner69]

Today will be a dragonfly doji at present rate which may be a market turning point. Abandoned baby did not happen as there was no gap down. Keep holding at these levels until quarterly next week is my advice. :)

But if it gaps up tomorrow would that be a abandoned baby (if today is doji)

So is a doji different from a dragonfly? A doji has open/close the same .....yes? But seems like only short tails?

I realise abandoned babies are 3 day patterns

[winner69]

Omg ...just looked up the Bible (Bulowski?) and there is 11 doji patterns

Like the look of the southern star one though

[In4a$]

The, Doji, candlestick, dragonfly, Hammer, hangman ??? are you guys talking shares or been reading the kamaSutra because that will lead to these babies youre talking about !! and please dont abandon them !! LOL

[Xerof]

There are no abandoned babies (on the daily chart), abandon this idea NOW, or else you will be beaten over the head with a hammer, strung up to the harami cross, picked at by three black crows, then whats left will be handed to the hangman for last rites

oh, and happy new year to all :)

look for a possible backfill to close that recent gap ~ 4.40 area

back Monday

[alistair85]

There are no abandoned babies (on the daily chart), abandon this idea NOW, or else you will be beaten over the head with a hammer, strung up to the harami cross, picked at by three black crows, then whats left will be handed to the hangman for last rites

oh, and happy new year to all :)

look for a possible backfill to close that recent gap ~ 4.40 area

back Monday

Dont think it'll get quite that low. 4-60 mark until Tuesday then over 5's on the upcoming god news ;)

[KiwiGreen]

Dont think it'll get quite that low. 4-60 mark until Tuesday then over 5's on the upcoming god news ;)

'God' news is probably about right, we need some godly sales numbers to get us up over $5.

Look at Xero go today. I used the formula (growth rate % / 10) + 1 = forward revenue multiple (the one Winner69 posted up recently) and it gives a value of $3.40/share for Xero. Kept rechecking it but pretty sure it's right based on 2013 accounts. My DCF gives a very different value, interesting to see how different methods can give such varied results - valuing a Saas company takes a lot of guess work.

[winner69]

'God' news is probably about right, we need some godly sales numbers to get us up over $5.

Look at Xero go today. I used the formula (growth rate % / 10) + 1 = forward revenue multiple (the one Winner69 posted up recently) and it gives a value of $3.40/share for Xero. Kept rechecking it but pretty sure it's right based on 2013 accounts. My DCF gives a very different value, interesting to see how different methods can give such varied results - valuing a Saas company takes a lot of guess work.

I Take it you never be buying XRO shares then KG

[KiwiGreen]

Do you use V = EPS x (8.5 + 2g) or EPS x (8.5 + 2g) x 4.4?

[KiwiGreen]

I Take it you never be buying XRO shares then KG

Haha never say never. I can definitely value them above their current $5b market cap - though I'm surprised to say it.

If they don't let their revenue growth drop more than 15% pa (i.e 86%, 73%, 62%, 52.7%, 44.8%...) and can get control of their operating costs then there could still be room for their SP to rise. So hard to predict their FCF going forward though.

My assessments are also lacking in that I haven't trawled through the accounts of enough established software companies to see what Xero/DIL's margins might flatten out to in 5-10 years, as they become an established companies. That's next on my list.

[KiwiGreen]

V = EPS X (7 +2G), X 4.4 / RFR

I use 7 rather than 8.5 as the P/E for a company with zero growth. Just being a bit conservative, thats all.

Yeh I've heard of a few people using 7. Do you use; Square root (22.5 x EPS x book value per share) for fair value much? I haven't used it up until now but probably should add it to the list of tools. More relevant to some industries than others your reckon? - i.e. book value of software companies is generally incomparable to manufacturers etc.?

[alistair85]

Sparky where you picking diligent to be at by the end of the month?

[In4a$]

I abandoned this baby today. Made a tidy profit, I'm guessing it might go flat until next annoucment after which I'll be in again.

[Whipmoney]

I abandoned this baby today. Made a tidy profit, I'm guessing it might go flat until next annoucment after which I'll be in again.

Next announcement should be tuesday (pre-open)

[In4a$]

Next announcement should be tuesday (pre-open)

Thanks Whipmoney, wasnt sure just when it would be, I'll be watching

[winner69]

I abandoned this baby today. Made a tidy profit, I'm guessing it might go flat until next annoucment after which I'll be in again.

But there was no abandoned baby candlestick

[Roadrunner]

148 Moosie
Quarterly, quarterly, quarterly, quarterly

Quarterly, quarterly

Quarterly, quarterly, quarterly, quarterly

Quarterly, quarterly

QUARTERLY!!!

Tuesday morning all, bright and early. my money is in cash waiting for a number better than 122. Anyone else want to give figures!

[winner69]

Has to be more than 152 .... markets already factored in that expectation?

[MAC]

Way more competition out there than there used to be and DIL only have a single product cycle. I’m going to say in the 90 to 160 range, but the trend is clear, Winner might say they are in a channel ?

5300

A selection of just five at random:

ICSA:
http://www.icsasoftware.com/clients/...=1&whatSector= (http://www.icsasoftware.com/clients/index.asp?PagePosition=1&whatSector=)

Boardpad:
http://www.boardpad.com/about/

Accelus BoardLink:
http://accelus.thomsonreuters.com/pr...Fao8pgodNEgAFg (http://accelus.thomsonreuters.com/products/accelus-boardlink?id=701E00000006Bdh&ls=GooglePPC&lsd=BoardLink&gclid=COrYsZOM67sCFao8pgodNEgAFg)

LeadingBoards:
http://www.leadingboards.com/en/board-portal.html

Pervasent:
http://www.pervasent.com/

[winner69]

Interesting list there MAC

All seem to have FTSE100 or Fortune 1000 of Forbes whatever clients. Must bear this in mind when I read the DIL hype in their announcements

Interesting in Q1 DIL announcement they said 34% of FTSE100 but DIL website now says 40 FTSE100 clients .... that's good eh

That ICSA outfit says Boardpad has 25% of FTSE100 but that 78 of the FTSE use ICSA software of some sort (other than Boardpad presumably)

Those websites have a certain similarity to them .... maybe only one way to see these things

[MAC]

I tried to google for market share info, but it seems to be all locked up unless you pay for one of those reports, perhaps someone has ?

[MAC]

I’m seeing DIL as a company of two tales now:

First is the tale of a maturing single product company, the restatement prospect may continue to ramp the SP for a quick taxable traders profit then possibly we may see a spend of DIL cash on a buy back to boost the SP again, not much but perhaps a little further. Then stable growth from there on for this product in the low digits.

The other tale is of other uses for the cash pile. Acquisition ?, though I’m not investing long term in DIL if I don’t know what they will buy, could be a dog. A second product ?, too much competition in the governance market now for big time growth, it would have to be something totally different within the SAAS sector. Again, I’m not investing long term in DIL if I don’t know what they are developing.

IMO DIL is now a traders stock, the risks have increased dramatically over the last year as a long term investment and unless DIL happen to launch two successful products in a row the risk reward balance is not what it was. There are better long term propositions in the market.

DISC: Watching, but out for now.

[MAC]

Sure, if DIL were to use every penny on a buyback at an SP of $4.56 with NZ$57.1M, or thereabouts, of cash on hand across an undiluted market cap of NZ$382M it would represent a 15% gain.

And, if they do it, it would leave nothing for future growth and their one product is rapidly maturing/matured, but at least short term investors would get a quick 15%.

The best thing for DIL cash IMO is further development, with all that innovation in-house, it's just a bit disappointing they have not delivered a second revenue stream, it would have been beautifully timed from inception around 12 months ago.

Still who knows what’s around the corner, it could be a best kept secret, if so let's just hope that it's bigger than post-it's.

[Balance]

Dear lord, that would require much more patience and DILIGENCE than I can currently give! heres one you can follow though ;)

http://www.timeanddate.com/countdown/retirement?iso=20140114T10&p0=264&msg=DIL+Quarterly&swk=1

Well done, Moose!

[Whipmoney]

I’m seeing DIL as a company of two tales now:

First is the tale of a maturing single product company, the restatement prospect may continue to ramp the SP for a quick taxable traders profit then possibly we may see a spend of DIL cash on a buy back to boost the SP again, not much but perhaps a little further. Then stable growth from there on for this product in the low digits.

The other tale is of other uses for the cash pile. Acquisition ?, though I’m not investing long term in DIL if I don’t know what they will buy, could be a dog. A second product ?, too much competition in the governance market now for big time growth, it would have to be something totally different within the SAAS sector. Again, I’m not investing long term in DIL if I don’t know what they are developing.

IMO DIL is now a traders stock, the risks have increased dramatically over the last year as a long term investment and unless DIL happen to launch two successful products in a row the risk reward balance is not what it was. There are better long term propositions in the market.

DISC: Watching, but out for now.

I'd have to say I disagree with most of the above analysis.

1) In terms of DIL as a maturing single product company, the have the Market Leading product in their field and are the largest player in the FTSE 100 & Fortune 500 space. You mention the word 'mature' several times but you have to remember that this is hardly a sunset industry, and the market for board applications as a whole is estimated to be significantly under-penetrated. Sure DIL may have picked most of the low hanging fruit but there is still significant opportunity out there, their retention is good, and if you compare to more established companies like Trademe then it still has a phenomenal growth rate.

Given DIL has strong sales, low debt, significant cash reserves and actual profitability then its actually quite an easy company to run DCF analysis on to work out its underlying value. As such I wouldn't say its just a traders stock.... sure the priced dropped significantly due to the Restatement ordeal and whilst that may have presented itself as a perfect traders opportunity for some, for others it also represented a significant value play.

2) Its my understanding that DIL is currently in the process of building a second product which is speculated to be aimed more at senior executive management. Whilst the pricing/margins won't be as good for this product it is an easy bolt-on for their main board-books clients and even if only 20% of their clients adopt this in the first year I'm sure that will have a very favourable effect on both their sales and bottom line.

3) In terms of the cash pile I suspect a buy-back is unlikely as it would be tax inefficient. It's my understanding that companies can only perform a buy-back up to the amount of their subscribed capital (in order for it to be deemed a capital distribution), and over that level it is considered income distribution and is therefore becomes taxable. I may be incorrect here (can any accountants help out?) and obviously the rules may be different in the US where they may decide to list.

4) Acquisitions: An acquisition play could be very interesting as DIL may look to acquire one of its smaller competitors in order to instantly grab market share. Obviously there will be significant synergies as DIL have a world class sales and support team, and given that their SaaS platform is easily scalable. Instead of a just a straight cash acquisition, it is likely that some of the smaller players would also be interested in a merger where they receive some cash in addition to shares in DIL. If DIL can achieve a merger/acquisition at the right price and successfully increase their scale (sales) and therefore their operating margin then we might see a significantly more valuable company on the other side.

[Harvey Specter]

3) In terms of the cash pile I suspect a buy-back is unlikely as it would be tax inefficient. It's my understanding that companies can only perform a buy-back up to the amount of their subscribed capital (in order for it to be deemed a capital distribution), and over that level it is considered income distribution and is therefore becomes taxable. I may be incorrect here (can any accountants help out?) and obviously the rules may be different in the US where they may decide to list.
You're thinking of a pro- rata distribution of capital. Similar to what TWR has done and AIA have planned.

I would have thought the easiest would be an on market buy-back - signals they have excess cash and they think the SP is undervalued. What would happen to the price if they said they are willing to buy upto $7!!

[MAC]

Do consider Whipmoney a comparison of the risk reward position in 2011 compared with 2014.

2011: DIL were close to being the only player in the market, they had only a single product and the risk that came with it, the dilution overhang was 43%, one of the highest in the NZX if not the highest. However, the growth rate in new customers was 570/1026 = 56%, and the risk/reward position looked ok to most.

2014: There is now enormous competition in the market, take up levels in the FTSE and fortune 500 company list is much higher, DIL still only have a single product and the risk that comes with it, and the dilution overhang is the same. The growth rate however in new customers has dropped to (122x4)/2305 = 21% and continues in a downward trend.

I do hope DIL can use that cash and can spur growth and prosper with a second product cycle, but right now for investors that is all speculation rather than the formation of an announced strategic plan, and when or if that announcement comes it will take time for revenues to flow and grow.

Clearly the risk/reward position is not what it was. As investors we can get close to 21% growth in the retirement village sector with a mere fraction of the risk.

[couta1]

Mac your last sentence I found thought provoking as a holder of DiL at $7.16 and making the mistake of buying more on the downtrend I ask myself if Dil shares went to over $7 next week would I keep them or sell out and put that money into Sum or Rym ? and that's without considering how much I have missed out on since June last year by having 85 k tied up in Dil instead of Rym or Sum,makes you think,cheers

[Harvey Specter]

If it rocketted back up to $7 I'd definitely be holding on for more!I think I'd take some profits as I am overweight even at its current share price. Was too slow to take profits when it went over $8 last time.

[couta1]

I think I'd take some profits as I am overweight even at its current share price. Was too slow to take profits when it went over $8 last time.
Definitely,wish I'd sold my complete holding when it hit $8 in June and bought back now,lessons galore

[Whipmoney]

Do consider Whipmoney a comparison of the risk reward position in 2011 compared with 2014.

2011: DIL were close to being the only player in the market, they had only a single product and the risk that came with it, the dilution overhang was 43%, one of the highest in the NZX if not the highest. However, the growth rate in new customers was 570/1026 = 56%, and the risk/reward position looked ok to most.

2014: There is now enormous competition in the market, take up levels in the FTSE and fortune 500 company list is much higher, DIL still only have a single product and the risk that comes with it, and the dilution overhang is the same. The growth rate however in new customers has dropped to (122x4)/2305 = 21% and continues in a downward trend.

I do hope DIL can use that cash and can spur growth and prosper with a second product cycle, but right now for investors that is all speculation rather than the formation of an announced strategic plan, and when or if that announcement comes it will take time for revenues to flow and grow.

Clearly the risk/reward position is not what it was. As investors we can get close to 21% growth in the retirement village sector with a mere fraction of the risk.

Whilst I wasn't invested in DIL in 2011 I would find it hard to believe that DIL were the only player in the market as BoardVantage (DIL's main competitor) and Boardlink (Thomson Reuters) were both available on the in 2010, with Boardlink being available on the ipad sept 2010 and boardvantage following shortly after in 2011.

Secondly, you mention the risk/reward proposition which is interesting however im still trying to understand your logic.

FY11: Sales $17.996m, NPAT $3.302m.
FY12: Sales $43.736m, NPAT $9.141m
FY13: Sales $50-60m?? NPAT $12 - $17m??

With the share-price being around 85c in early 2011 then sure this share had plenty of upside (reward) however there was significantly more risk as its growth path wasn't guaranteed.

Obviously the share-price is quite a bit higher (~5.3x) in 2014 however the company has significantly more confirmed sales, a ton of cash on hand, better margins, a high retention ratio (97%) and very solid growth (for what you seemingly call a mature company).

All in all I think that whilst the return has reduced the risk has reduced considerably. The company's product has proven itself sticky (clients love it so much that they recommend it to other boards) hence the high retention ratio so even if growth slows then the company is still in a good position as it has a great cash-flow stream and will eventually be able to pay dividends.

[MAC]

Thought I'd thrown in my 2c worth re quarterly numbers predictions. Note I have done very little research on DIL so not sure what the market is expecting. Based on extrapolating the last year of quarterly customer numbers changes forward to Q4 (both YoY and QoQ - and sorry left the exact numbers at home) I get a range of roughly 140 to 145 estimated new customers for the quarter.

Can anyone advise roughly what we believe the market is pricing in at this stage and therefore what a number with SP upside/downside might be??

Cheers

It’s hard to say isnt Tumeric what’s priced in, there seems to be an expectation that the SP will go to pre-restatement levels. However, if we see a third quarter of lower growth in new customers below historical levels it may well send analysts into a spin with downward forward revenue forecasts.

Two quarters in a row can just be noise and I don’t think analysts have priced in a downward trend in growth just yet, but three could be interesting.

Let’s hope for a good result, but even 160 wouldn’t make the plot look much better.

5305

[Whipmoney]

It’s hard to say isnt Tumeric what’s priced in, there seems to be an expectation that the SP will go to pre-restatement levels. However, if we see a third quarter of lower growth in new customers below historical levels it may well send analysts into a spin with downward forward revenue forecasts.

Two quarters in a row can just be noise and I don’t think analysts have priced in a downward trend in growth just yet, but three could be interesting.

Let’s hope for a good result, but even 160 wouldn’t make the plot look much better.

5305

Thanks for the Graph, it's interesting to note.

Just one thing I want to point out is that ~90% of DIL's FY12 deferred revenue should convert to revenue in FY13 (with the other 10% or so relating to instalations).

FY12: Revenue = $43.736m
FY12: Deferred Revenue (90%) = $15.823m
--------------------------------------------------------
FY13 Baseline revenue (no growth) = $59.559m

[winner69]

Thanks for the Graph, it's interesting to note.

Just one thing I want to point out is that ~90% of DIL's FY12 deferred revenue should convert to revenue in FY13 (with the other 10% or so relating to instalations).

FY12: Revenue = $43.736m
FY12: Deferred Revenue (90%) = $15.823m
--------------------------------------------------------
FY13 Baseline revenue (no growth) = $59.559m

Just one thing I want to point out deferred revenues dont impact cash flows

Reported cash revenues FY12. $52,822 (cash flow statement)
Impact of deferred revenues .......ZILCH
Baseline cash revenues for FY13. $52,822 (no growth)


52,822

[jonu]

Certainly a certain amount of n-n-n-nervousness in the sp today. About the only thing that is certain. I just rechecked on their announcement timing. It only said mid-Jan, so take your pick as to the actual date.

[Whipmoney]

Are you basing this on direct info from DIL?

Historically they have announced on the second tuesday of January (pre-open). That date would also roughly coincide with the mid January date as per their last announcement.

[jonu]

Historically they have announced on the second tuesday of January (pre-open). That date would also roughly coincide with the mid January date as per their last announcement.

They may stick to that pattern, but HISTORICALLY they haven't had this restatement drama. Besides Moosie says most things with a clarity only posessed by gypsies.:)

[Hoop]

Deep Thought has finally got an answer after computing for a very very very long time...and has delivered it to us before DIL management was able to....

http://i458.photobucket.com/albums/qq306/Hoop_1/computer.jpg (http://s458.photobucket.com/user/Hoop_1/media/computer.jpg.html)

[jonu]

Deep thought has finally got an answer after a very very very long time...and has delivered it to us before DIL management was able to....

http://i458.photobucket.com/albums/qq306/Hoop_1/computer.jpg (http://s458.photobucket.com/user/Hoop_1/media/computer.jpg.html)

Yes Hoop, but what was the question?

[Xerof]

Yes Hoop, but what was the question?

er, how many sales in last quarter?

Anyway, as I postulated last week, PA should fill the gap back to $4.40. All done, so if all goes to plan, uptrend can resume now please.

[jonu]

er, how many sales in last quarter?

Anyway, as I postulated last week, PA should fill the gap back to $4.40. All done, so if all goes to plan, uptrend can resume now please.

I was just giving a nod to Douglas Adams, but that ? is as good as any.

[Whipmoney]

They may stick to that pattern, but HISTORICALLY they haven't had this restatement drama. Besides Moosie says most things with a clarity only posessed by gypsies.:)

Q3 updated (limited results) came out in second week of October so I don't see why they wouldn't report Q4 in the first two weeks of Jan.

Sure the Q2 results took a bit longer (6th August) vs 12th July however this was when they were first having their restatement issues and it probably took some time to get some clarity as to what they can actually report in order to comply with the Continous Disclosure rule 10.1.1 yet without affecting their SEC filings.

[Lorne Ranger]

Ha! Late trading out of stock ahead of announcement likely for tomrw. Not a dumb move given recent history, but hope they're proved wrong : )

[winner69]

Methinks new customers will be 150 and cash balance about 58m and the shareprice wil have a 3 in front of it vp on Wednesday

[robbo24]

Methinkss new customers will be 150 and cash balance about 58m and the shareprice wil have a 3 in front of it vp on Wednesday

$30.00 a share, winner69, that is a bold call!

[alistair85]

You guys have got me nervous with all this negativity!!

[couta1]

You guys have got me nervous with all this negativity!!
Remember the News ain't News until its in the News

[winner69]

You guys have got me nervous with all this negativity!!

Jeez you be a wreck if there aint any news tomorrow eh

After all it is only Moosies assumption it is tomorrow morning .... but Moosie right most of the time so no worries

[goldfish]

Ill be watching ready to jump in if it crashes or if its good news and starts a uptrend.

[Monty]

news looks ok. maybe we will start to see a recovery. Need to fully read the release but I take more positive than negative.

[clip]

Looks fairly positive to me. good&increasing cash balance, accelerating plans to expand into europe, focussing energy on the restatement too "The Company is working toward providing its preliminary half year announcement, half year report and preliminary full year results for 2013 by 28 February 2014." I guess if people are expecting high growth then perhaps this announcement will not be taken well by the punters, not sure.