Tuesday, June 19, 2007

The difficulty in valuing Global Voice

Global Voice is a technology company which is extremely difficult to value, in terms of intrinsic value. It rose from the ashes of Horizon through a reverse take-over, and has only recently sold off its unprofitable legacy businesses in order to focus on its core competency: Private Fibre Networks. Because it was loss-making for FY 2006, PER isn't an appropriate measure. In addition, the following factors about GV make it all the harder to value:-

1) Contract values are not stated in their announcements of deals signed due to confidentiality requirements. Apparently, this is common within the IT industry where other competitors may use such information to benchmark their pricing. Thus, most press releases only contain details of the customer and the services being provided, as well as a short commentary by the CEO or another executive.

2) Gross margins and net margins are not known for each contract. For that matter, we don't even know the number of staff to be deployed for each customer and how costs are shared. Also, there is the matter of "purchases" in the Profit and Loss (for FY 2006). Just what does this relate to ? Technically, GV has all the assets it needs, it just needs to deploy them and allocate manpower. Thus, I can understand staff costs and contracting costs, but what constitutes "purchases" ?

3) Contract durations are only occasionally mentioned, also probably because of confidentiality requirements. Without an inkling of how long a contract lasts, it will be impossible to determine the recurrence of revenue for a particular contract/customer. A helpful point here is that GV did mention most contracts are of the 3-5 year duration type, thus we can safely conclude that most of the contracts captured and announced in late FY 2006 and FY 2007 will be recurrent in nature.

4) The re-branding of GV a.k.a EuNetworks has led to a significant increase in sales force as well as marketing personnel. The exact payroll cost increase is difficult to ascertain as some of the sales staff may be on fixed wages, while others may be incentivized through commissions. Furthermore, part of the costs may include outsourced personnel to handle the data storage solutions which GV is implementing.

5) Since late FY 2006 and for FY 2007, GV has embarked on promotional activities to raise its profile and also incurred A&P for its extensive re-branding exercise. It is difficult to estimate the extent of A&P expenses incurred so far as most of these are held in countries such as Holland and Germany of which most locals are unfamiliar with. Also, GV has sponsored several events in order to speak about the company's capabilities, and thus necessarily incurs costs which may or may not result in greater brand awareness and subsequent contract wins.

6) Cash flows are uncertain as well. In order to estimate intrinsic value, some value investors employ DCF methods which estimate a stream of cash inflows and outflows to the present. The only certain cash outflow is the interest expense of the convertible bonds of EUR 40 million. The coupon rate is 3% paid semi-annually which means an interest expense of about EUR 0.6 million every half-yearly (19 April and 19 October). Most of the deals mentioned are silent over the cash flow stream, meaning that the reader will not know the mode of payment arrangement between GV and the customer. This fuels further uncertainty.

The above factors serve to highlight the difficulty in assigning an intrinsic value to GV. Currently, the market price is hovering between 19 and 20 cents and this is the only indication of the "value" of GV, though I have alwqays reiterated that price seldom equals value. For those who are astutely wondering why the price is stagnant even though so many deals have been announced, the above 6 reasons should serve as a good guide.

Simply put, the market simpy DOES NOT KNOW what to expect from GV, and how to value such a company as there is no close equivalent of GV within the SGX. I have not done any research to find out if there are similar companies listed in Europe which can be used to benchmark against GV, but the uniqueness of their business model should be taken into account as well. Thus, there may not be any close comparables at all. Contributions are welcome if they are pertinent (just type it into the "comments" column, I will always read and reply).

The best thing to do now will be to wait for the HY 2007 results to be released in late August 2007. This will give an idea of GV's revenue growth as well as profit margins (assuming they are profitable). Hopefully too, the CEO and Chairman can shed more light on the uncertainties which I had highlighted and give some guidance on the future of the company in the next 3 years or so.


Anonymous said...

Hi Musicwhiz

Nice piece on GV. Just one comment. The interest every 6 months on the 40million Euro bond is 1.2million Euros and not 0.6million Euro as the coupon rate of 3% is for 6 months (i.e. not per annum.


Musicwhiz said...

Hi Rocman333,

Thanks for the info, I will take note of that in future postings on GV.

Have a great weekend !