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Tangoe (TNGO) - The Misrepresented Dance Last week, a blog called StreetSweeper published a thoughtful report on Tangoe, Inc (NASDAQ: TNGO, $17.00). 1 Their expose was quite comprehensive on the investigative side, uncovering significant red flags in the Tangoe story. After doing a deep dive into Tangoe's financials, it is our belief that the company has significantly misrepresented its de novo growth rate, while demonstrating many of the telltale shenanigans and behavior that tends to be a harbinger for blow ups. We believe that an SEC investigation may be warranted based on our belief Tangoe publicly misrepresented its organic growth rates, and altered material biographic information, in front of a large secondary offering. Despite ample opportunity to expand on the StreetSweeper's material, we will instead focus this report on irrefutable facts that have been meticulously gathered from SEC documents and other corporate filings. As such, this report should be read in conjunction with the StreetSweeper report. In response to the StreetSweeper's report, a myriad of sellside analysts have produced reports in a matter of hours, attempting to defend Tangoe. These analysts have argued that Tangoe's organic growth is indeed 20-25% per year, just as management has claimed. Further, given the fact much of the sellside analysis is in fact taken directly from management, many analysts went on to note that Tangoe's management team is honest and forthcoming. Additionally, the arguments suggested that management's prior issues at Information Management Associates were simply an unfortunate situation related to the dot-com bust. In the following abbreviated report, which may be expanded in the future, we explain why we believe Tangoe's issues are much deeper than even the StreetSweeper suggests. We will present both the "bull case" based on quotes taken from sell-side analysts and "the reality." Based on the analysis below, we believe any unbiased, objective analyst will conclude that Tangoe has severely misrepresented its business model, its organic growth, as well as management's backgrounds and IMA experience which led to the CEO and CFO of Tangoe being accused of fraud. This report will highlight: 1) Tangoe is a fast growth SaaS business - FALSE We believe that Tangoe's financial profile and key business metrics are not consistent with those of SaaS peers. Non-recurring consulting services, the resale of telecommunication accessories, a deferred revenue balance showing minimal growth, BPO-like gross margins that are roughly 2000 basis points below the purported SaaS comps, and revenue per employee that is 50% lower than its "comps" all suggest Tangoe is little more than a body shop. 2) Tangoe's organic growth rate is 20% - 25%- FALSE Based on our analysis Tangoe has been systematically underreporting the revenue contribution from acquisitions, which has had the effect of misrepresenting the company's organic growth. Our analysis suggests the CFO categorically falsified the impact from a recent acquisition on the Q2'12 earnings call, understating its impact by up to 60% compared to the figures disclosed in their quarterly 10Q. This would mark the second time in the last three quarters that Tangoe has provided a lower revenue contribution from acquisitions on its calls than it ultimately discloses in SEC filings. This effectively overstates organic growth. 3) Deferred Revenue Growth is not a Reliable Business Metric - FALSE Tangoe has repeatedly claimed that changes in deferred revenues are not indicative of its organic growth rate, which would be problematic because deferred revenues have actually contracted over the last three quarters. Inconsistencies between Tangoe's disclosed revenue recognition policy for implementation fees (ratably over twice the term of the customer contract) and a declining balance of deferred implantation fees would seem to suggest Tangoe may not be growing organic new customers. Implementation fees, which should grow as the company adds new customers, have grown 0% since December 2010, the first date it reported this metric. 2
4) The REAL Organic Growth Rate We are unable to reconcile CFO Martino's public statements about organic growth. Current SEC filings combined with management's guidance at face value, leads to an implied organic revenue growth rate that IS WELL BELOW 20%. Based on our analysis, we believe Tangoe's organic growth rate may be almost 50% lower year-to-date than the rate many analysts have communicated. If we assume ProfitLine's revenue is flat year-over-year (rather than the decline management implied with their guidance) and we annualize the revenue for ttmobiles from Q1'12, then organic growth has been closer to ZERO year-to-date. 5) Based on 20%-25% organic growth - here would be the conservative estimates for Q3 and Q4 We believe that with our report, sellside "estimates" will no longer matter and Tangoe's new benchmark to demonstrate 20% growth will be based on our analysis (which is rather straight forward). We clearly illustrate why Tangoe's actual results will need to be $2.28M and $3.69M higher than the midpoint of their guidance for Q3 and Q4 respectively if they are actually growing at least 20%. This assumes they do not underreport the Symphony acquisition. 6) Squeaky clean management and VC partner - FALSE Tangoe's CEO and CFO were accused of fraud at IMA, a fact the sellside has arrogantly ignored. Further, in their last venture at IMA, their large VC-backer (who happens to be Tangoe's VC investor as well) aggressively sold stock after a fictitious earnings report. Tangoe's CEO and CFO blatantly changed their bios for the most recent secondary offering, removing the disclosures that IMA filed for bankruptcy from the original IPO filing. In neither filing do they disclose to investors that they were accused of fraud, while "recklessly issuing quarterly financial statements which materially overstated the Company's actual revenues and assets and materially understated its expenses and net loss." According to public records, we show that Tangoe was actually founded while the CEO shared duties as CEO of IMA, and at the same time the SEC had asked his other company for information pertaining to A/R balances, the collectability of A/R and revenue recognition. Further, we have found inconsistencies in management bios, including claiming to have been credited with a patent that doesn't seem to exist (or at least that we have been able to find). 7) IMA was just another dot.com bust - FALSE Contrary to the sellside story, IMA had multiple financial restatements, including IMPROPER EXPENSE RECOGNITION FOR TWO ACQUISITIONS. One particular earnings misstatement led to operating income being overstated by 257%, which led to a 200%+ increases in the stock in a mere 10 days, which was followed by aggressive insider sales. Additionally, IMA raised capital for a subsidiary called Buyingedge (which Subbloie claims he founded) at a time IMA had falsified public earnings statements that were later restated. Further, IMA fired Arthur Andersen (who took issue with the Company's bad debt reserve) and subsequently fired PwC a mere 172 days after engaging them. PwC "had identified certain transactions where the underlying documentation raises questions regarding the revenue recognition accounting afforded to the transactions." Amazingly, many of the same players are deeply entrenched in the Tangoe story, including its primary VC investor, CEO, and CFO. 8) Tangoe throws off a lot of operating cash - MISLEADING Tangoe strangely spends 87% less on capital expenditures (including capitalized software) than a broad set of its desired SaaS peers. More troubling is the potentially artificial benefit acquisitions have had on the already insignificant cash flow. Based on our analysis, we believe Tangoe may be acquiring balance sheets with positive working capital, which may create a "one-time recurring" benefit to cash flow from operations (the acquisitions are deducted from cash flow from investing which is ignored by sellside analysts in their free cash flow calculations). Our analysis suggest that excluding the potential forward working capital benefit, Tangoe's trailing 12 month operating cash flows would have been 38% lower than the measures the Company has reported. 9) Sellside analysts really believe - Paint us skeptical The Tangoe story is a bank's best friend because the one thing that all roll-ups require is capital. Tangoe has already raised $104.7 million through two public offerings in a little over a year, which may help explain the blind justification from Wall Street for asinine price targets and ignominious 3
analysis. We believe Tangoe's cash that is effectively "unrestricted" is closer to $17 million, compared to the $78.4 million that was reported on 6/30/12. 10) How to Value Tangoe Tangoe's "stellar profitability" (according to management and analysts) would suggest that it should be valued based on some metric of profitability. Using both forward EBITDA and EPS, as well as affording Tangoe a generous 20% premium to what we believe are the appropriate peers, yields a price target between $6.47 and $9.60 per share, representing down side of 44% to 62%. 1) Tangoe is a fast growth SaaS business - FALSE Sellside quotes in the last week: The roll-up strategy that the authors question is a reasonable thing to study, but in this case, we believe that acquisitions are a key component to the story. In most cases, Tangoe is buying small competitors simply for their clients. After the deal closes, Tangoe then converts the clients from a highly manual to technical platform a much more profitable client now. Significant gross margin expansion story. Higher profit recurring revenue doesn t lie. The model will remain 90%-plus focused on monthly recurring technology service fees and growing leverage / efficiencies in that business represent a visible path to 30%-plus growth in profits and cash flows over time. Reality: Tangoe's financial results do not look anything like the high growth, high margin models of the SaaS comps. In fact, in the most recent quarter, Tangoe's software license revenue increased a mere $200,000 while their telecommunication accessories revenue (hardly deserving of a high multiple) increased by $600,000 year-over-year. While many SaaS companies boast gross margins in excess of 70%, Tangoe's gross margin for 2011 was 52.4%, a full 2000 basis points below its purported peer group. Tangoe has attempted to argue that gross margins have been inhibited by the consulting piece of its business and margins will improve as consulting decreases as a percent of total revenue. Yet a closer examination of disclosures in Tangoe's financials does not reconcile with management's porous claim and the sellside's defensive thesis. In 2011, Tangoe's consulting gross margin was 53.9%, which is striking because this purportedly low margin segment actually carried a higher gross margin than the 52.2% Tangoe reported for its "recurring technology and services" segment. This disturbing trend has not reversed in 2012. Through Q2'12, Tangoe's consulting gross margin was 57.1%, a full 3.4% higher than the 53.7% for recurring technology and services. TNGO Gross Margin Analysis 2007 2008 2009 2010 2011 12 YTD Revenue Recurring technology and services 14,174 27,839 46,005 57,711 93,671 62,831 Consulting, Licenses and other 6,873 9,687 9,912 10,767 11,270 7,573 Total Revenues 21,047 37,526 55,917 68,478 104,941 70,404 Gross Profit Recurring technology and services 7,192 13,119 25,467 31,354 48,883 33,718 Consulting, Licenses and other 4,052 6,644 5,552 6,897 6,079 4,326 Total Revenues 11,244 19,763 31,019 38,251 54,962 38,044 Gross Margin Recurring technology and services 50.7% 47.1% 55.4% 54.3% 52.2% 53.7% Consulting, Licenses and other 59.0% 68.6% 56.0% 64.1% 53.9% 57.1% Total Gross Margin 53.4% 52.7% 55.5% 55.9% 52.4% 54.0% Source: Company filings 4
Another key metric for SaaS businesses is revenue per employee. This metric has become critical for true SaaS businesses because it demonstrates the leverage of automation and insignificant incremental costs on marginal revenue dollars. We believe that revenue per employee clearly demonstrates that Tangoe does not possess the characteristics of a SaaS model, and instead resembles a human capital intensive body shop. In 2011, Tangoe generated $104,000 of revenue per employee. A comparison of 14 of the comps that many sellside analysts list shows Tangoe looks nothing like other SaaS peers. According to the comp table of other SaaS vendors (including some with extreme challenges like Intralinks), the average SaaS "comp" was able to generate $220,600 of revenue per employee last year, greater than 2x the rate of Tangoe. While there may be some variability across businesses based on the different stages of growth, the sheer magnitude of this delta (unspoken about by many sellside analysts), combined with the massive disparity in gross margins leads us to believe that Tangoe is much more BPO than SaaS. Company Name Ticker Market Cap Enterprise Value Gross Margin # of Employees 2011 Revenue Rev per Employee Bazaarvoice Inc BV 877,280 752,079 65.7% 640 106,136 $165.8 Brightcove Inc BCOV 334,359 282,338 68.2% 312 63,563 $203.7 Concur Technologies Inc CNQR 3,989,196 3,757,238 71.9% 1,600 349,488 $218.4 Constant Contact Inc CTCT 554,135 473,034 71.3% 926 214,420 $231.6 Cornerstone OnDemand Inc CSOD 1,388,280 1,326,342 70.9% 507 73,022 $144.0 Demandware Inc DWRE 730,445 627,500 65.1% 215 56,547 $263.0 ExactTarget Inc ET 1,373,747 1,163,647 66.2% 1,133 207,493 $183.1 IntraLinks Holdings Inc IL 301,765 307,904 73.6% 601 213,504 $355.2 LivePerson Inc LPSN 901,016 800,439 75.1% 524 133,089 $254.0 LogMeIn Inc LOGM 532,550 334,091 91.1% 482 119,461 $247.8 NetSuite Inc N 3,949,246 3,784,767 70.0% 1,265 236,326 $186.8 Salesforce.com Inc CRM 20,172,881 18,877,150 78.4% 7,785 2,266,539 $291.1 SciQuest Inc SQI 374,667 311,209 75.0% 265 53,438 $201.7 Vocus Inc VOCS 398,675 450,264 81.0% 808 114,874 $142.2 Mean 73.1% $220.6 Median 71.6% $211.1 Tangoe Inc TNGO 745,755 684,949 52.4% 1,004 104,941 $104.5 Source: Bloomberg and company filings. Finally, we would point out that Tangoe presents a retention rate that could be construed as apples-to-oranges with its desired comps. One recent sellside note stated, "In the world of SaaS, customer retention is one of the most important metrics to look at in Tangoe s case, their 95% retention rate is best in class (alongside stalwarts CNQR and ULTI)." First, Tangoe does not state that its retention rate is above 95%. Rather the company states, "Since we began to fully realize the benefits of our recurring revenue model in 2009, our revenue retention rates have been higher than 90%." 2 Second, Tangoe reports its dollar retention rate rather than actual client retention rate. If one were to actually compare Tangoe's dollar retention rate to other software companies selling into enterprises, they would find that Tangoe's reported renewal rate is actually quite low. DemandWare (DWRE), ExactTarget (ET), Responsys (MKTG), and Jive (JIVE) all report dollar retention rates in excess of 100% (Jive reported a dollar renewal rate of 124.6%). 3 2) Tangoe's organic growth rate is 20% - 25%- FALSE Sellside quotes in the last week: We acknowledge that organic growth appears to have slowed from the mid/high 20's to the low 20's over the last few quarters, and mgmt's guidance does seem to imply a further deceleration of 5
organic growth in 2H12, even by the company's calculation method. However, if the company holds true to form in the magnitudes of its beats in 2H12, upside back to the current 20% ballpark looks achievable, we think. Previous SEC disclosures, combined with our own calculations, suggest the company maintains 20%-plus organic growth. Reality: A thorough analysis of Tangoe's public financials and obscure disclosures, leads us to believe Tangoe's management is not only misrepresenting their organic growth, but they are potentially committing a more nefarious act in the process. The general view of sellside analysts has been there are too many acquisitions, with too many moving pieces, to calculate organic growth with any real precision. We have spent significant time analyzing each of Tangoe's acquisitions. Based on our analysis, we believe Tangoe has systematically been underreporting the contributions from acquisitions, while overstating organic growth. While we are sympathetic to the challenges the sellside faces in today's commission crunch, we take issue with purported analysis that verifies the 20%+ growth rates Tangoe's management has claimed. Further, we believe that management has been extremely disingenuous (and perhaps worse) with its public commentary towards acquired revenues. Tangoe acquired ttmobiles on 2/21/12 and clearly stated in its press release that it expected ttmobiles to contribute $0.5 million in revenue during Q1'12 and $4.5 million for the full year 2012. 4 This contribution amount was again confirmed on the Q1'12 earnings call, with Mr. Martino (the CFO) stating unequivocally that the ttmobile revenue contribution was inline with the original guidance: Tom Roderick: Great. As you look at Anomalous and ProfitLine and ttmobiles just in terms what the expected contribution is on those, any change in aggregate on those three inorganic components for this year? Gary R. Martino: No. We're still in line with the guidance that we had provided related to those. It is our opinion that Mr. Martino may have blatantly lied in this public forum and that ttmobiles inorganic contribution to revenue was actually 60% higher than their "guidance." Based on the past fraud allegations towards Martino and Subbloie, the multiple IMA restatements (discussed later), and the multitude of other flags, we do not think that these misstatements should be dismissed. In Tangoe's first quarter 10Q, the Company disclosed that it "included the operating results of ttmobiles in its consolidated financial statements since the date of acquisition, including revenue of $0.8 million through March 31, 2012." 5 While it is possible that ttmobiles simply outperformed in Q1 relative to management's expectations, Mr. Martino misled investors with his Q&A commentary. What may be equally troubling is that ttmobiles appears to be on a significantly higher run-rate based on Q2 performance than management indicated at the time of the acquisition. The net result would of course be a much lower organic growth rate than Tangoe has communicated. In Tangoe's Q2 10Q, the company stated that it "has included the operating results of ttmobiles in its consolidated financial statements since the date of acquisition, including revenue of $2.5 million through June 30, 2012, of which $1.7 million was recurring technology and services revenue." Since ttmobiles contributed $800,000 in Q1 revenue (all of which we believe to be recurring since Tangoe only broke out the segments in Q2), the implied contribution was $1.7 million in Q2 revenues. By using the $1.7 million Q2 run-rate for the rest of 2012 (it is after all supposed to be a recurring software business), it would appear ttmobiles will generate at least $5.9 million in revenue in 2012, which is $1.4 million, or 31.1% greater than management's original guidance AND seems quite conservative for the actual ttmobile impact. 6
ttmobiles Quarterly Revenue Q1 12 Q2 12 Q3 12E Q4 12E 2012 Actual / Run Rate 800 1,700 1,700 1,700 5,900 Management Guide 500 1,333 1,333 1,333 4,500 $ Difference 300 367 367 367 1,400 % Difference 60.0% 27.5% 27.5% 27.5% 31.1% Source: Company filings, management conference calls. Second, since $1.7 million of the revenue increase was due to recurring technology and services, we can conclude that $800,000 was due to "consulting, licenses, and other." Given that Tangoe reported Q2'12 consulting, licenses, and other revenue of $4.2 million compared to $3.4 million in Q1'12, the entire sequential increase would appear to have been due to Tangoe's acquisition of ttmobiles. Tangoe Consulting Organic Growth $ in 000s Q1 12 Q2 12 $ Diff. Consulting, licenses, and other 3,391 4,182 791 ttmobiles impact 800 800 Organic Growth 3,391 3,382 (9) Source: Company filings Finally, Tangoe's most recent 10Q filing provides another method to conclude that management is misallocating ttmobiles revenue to enhance "organic" growth. The company reported $70.4 million in revenue through the first half of 2012. 6 In addition, Tangoe reported pro forma results for the six months ended June 30, 2012 "as if the acquisitions of HCL-EMS, Telwares, ProfitLine, Anomalous and ttmobiles occurred at the beginning of 2011" of $72.2 million. 7 Since HCL-EMS, Telwares, and ProfitLine were all acquired in 2011, and Anomalous was acquired on 1/10/12 and is only expected to contribute $1.0 million in revenue in 2012 (so therefore likely contributed immaterial revenue in the first nine days of 2012), we can therefore determine that the entire revenue difference between reported and pro forma numbers is due to ttmobiles. Since Tangoe's Q1 10Q filing revealed that ttmobiles contributed $800,000 in revenue post-acquisition, we can therefore determine that ttmobiles Q1 revenue was $2.6 million, 100% higher than management's $1.3 million revenue per full quarter guidance. tttmobiles Revenue Contribution Pro-forma revenue for H1 12 72,238 Reported revenue for H1 12 70,404 ttmobiles Q1 revenue prior to acq. 1,834 ttmobiles revenue post-acq. 800 Total ttmobiles Q1 revenue 2,634 ttmobiles Q1 run-rate 10,536 Management guide 4,500 $ difference 6,036 % difference 134.1% Company filings. 7
While Tangoe has suggested in the past that its acquisitions have declining revenue, we are completely unable to reconcile how ttmobiles could go from a $10.5 million runrate to a $5.33 million runrate in several weeks (we get $5.33M by taking the implied quarterly runrate in management's guidance of $1.33M in Q2-Q4). It is our belief that Tangoe may be misappropriating the delta ($5.17M) from ttmobiles to its organic growth disclosure. Adding credence to our belief that Tangoe's management never learned its lesson from its Arthur Anderson and IMA days, we believe that management also provided two sets of numbers on ProfitLine to the analysts and the SEC. At the time of Tangoe's acquisition of ProfitLine on 12/19/11, management stated "we currently expect ProfitLine to contribute approximately $400,000 in revenues during the fourth quarter of 2011 and for the full year 2012, we expect ProfitLine to contribute between $14 million and $15 million in revenue." 8 However, on its Q4 earnings call in February 2012 (46 days after the 4th quarter had closed), management again indicated ProfitLine revenue of "an additional little over $0.4 million." 9 However, in Tangoe's 2011 10K, the company states it "has included the operating results of ProfitLine in its consolidated financial statements since the date of acquisition, including revenue of $0.5 million through December 31, 2011." 10 While $100,000 is not a disaster in a vacuum, these misrepresentations do not occur in a vacuum, and they consistently seem to misrepresent acquired growth on the low side. We also highlight management's inability to tell a story that reconciles around its 2012 guidance for ProfitLine. According to the prospectus filed on 3/12/12 for Tangoe's secondary offering, ProfitLine generated $16.9 million of revenue in 2011 prior to being acquired by Tangoe. 11 Since the company reported ProfitLine revenue of $500,000 after its acquisition, we can determine ProfitLine generated $17.4 million in revenue for the full year 2011. ProfitLine Historical Revenue ProfitLine Revenue - 1/1/11-11/19/11 16,919 ProfitLine Revenue - 11/19/11-12/31/11 500 Total ProfitLine 2011 Revenue 17,419 On Tangoe's call announcing the acquisition of ProfitLine, CFO Martino boasted about Tangoe's ability to acquire businesses and subsequently turn them around, "We have a proven ability to acquire companies, migrate their customers on to our market leading software as a service platform and then expand customer relationships over time through incremental product sales and expansion across both business units and geographies. As Al discussed, we believe there is an attractive opportunity to do the same with ProfitLine." 12 While ProfitLine was a declining business prior to Tangoe's acquisition, given management's remarks and confidence in their ability to in fact expand the business, we find it perplexing as to why management guided for the business to decline again in 2012 to $14M - $15M. Our suspicion is that ProfitLine may represent just one more area where the lines are blurring between what is organic and what is acquired. 3) Deferred Revenue Growth is not a Reliable Business Metric - FALSE Sellside quotes in the last week: customers are often invoiced on a more periodic basis (monthly or quarterly versus 12 months upfront), which contributes to lower deferred revenue balances than otherwise noted with other SaaS stories we follow. Calculated billings (revenue + change in deferred revenue) is a common demand metric calculation among other SaaS companies. With Tangoe s periodic invoicing 8
model and challenges in properly extrapolating off of end-of-quarter deferred revenue levels, billings comparisons with its peer group are difficult. Reality: Despite the fact Tangoe wants to be comped to the faster growing, and more profitable SaaS companies, their financial model somehow fails to look like the other SaaS vendors. With that said, we understand the argument that monthly, or even quarterly billings will not produce the same deferred revenue on the balance sheet. However, one of the reasons that the SaaS space receives such high multiples is based on the GAAP P&L visibility of recognizing quarterly revenues from the balance sheets. Additionally, these peers receive large amounts of cash upfront (negative cash conversion cycles) and also provide investors with greater levels of confidence (as opposed to a "trust-us-the-contracts-are-good-it's-just-off-balance-sheet" argument). On Tangoe's Q2'12 earnings call, Martino defends Tangoe's weak deferred revenues by claiming, "It's important to appreciate that deferred revenue is not an indication of business activity for Tangoe for two primary reasons. First, we are predominantly on a monthly billing term, so new sales do not contribute much of anything to deferred revenue. Second, we still have deferred revenue that is related to legacy maintenance contracts, which is amortized annually and we are not adding to this base with our subscription contracts." 13 We find this statement odd because Tangoe states in its 2011 10K, "we sell our on-demand software and related services primarily on a subscription basis under contracts that typically have terms ranging from 24 to 60 months." 14 While we appreciate Martino's logic that subscriptions may be invoiced monthly (hence no deferred revs), once again Tangoe's SEC filings don't seem to reconcile with their story. Tangoe's 2011 10K clearly states, "We invoice our services to many of our customers in advance, with the intervals ranging from 1 to 12 months." 15 Barring a mix shift in average billing intervals, this would imply that deferred revenues should be growing consistently, even if the growth is not at the same rate as the overall blended growth rate. Yet, this has not been the case at Tangoe as deferred revenues have been relatively stagnant. TNGO Deferred Revenue Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Current portion of deferred revenue 8,304 8,973 8,492 9,252 9,051 9,457 9,470 Long-term deferred revenue 1,788 2,036 2,036 2,483 2,624 2,274 1,889 Total deferred revenue 10,092 11,010 10,528 11,735 11,675 11,731 11,359 QoQ Growth 9.1% (4.4%) 11.5% (0.5%) 0.5% (3.2%) YoY Growth 24.6% N/A 15.7% 6.6% 7.9% % of recurring technology and services 63.1% 55.2% 44.8% 48.0% 45.3% 38.1% 35.4% Source: Company filings. While it would be fair to point to the second piece of Martino's argument regarding legacy maintenance contracts as the reason for muted deferred revenue growth, it is important to note that in Tangoe's 2011 10K, the company states it "began to fully realize the benefits of [its] recurring revenue model in 2009." 16 Given that this is the case, we would argue that legacy maintenance contracts should have had minimal impact on deferred revenue by mid-2012, 42 months after the business model changed. What is perhaps most disturbing is the lack of growth in deferred implementation fees. Tangoe breaks out the deferred implementation fees in SEC filings, which comprise a portion of deferred revenue. These fees are recognized ratably over twice the term of the customer contract, and to 9
our knowledge there has been no change in the revenue recognition policy for these fees. Based on our understanding of Tangoe's business model, as well as VSOE GAAP accounting, if Tangoe were growing customers organically, we would expect to see growth in deferred implementation fees. This has not been the case, which leads us to believe Tangoe's organic customer growth may be closer to flat. TNGO Implementation Fees Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Implementation fees 2,000 2,000 2,100 2,200 2,100 2,000 2,000 QoQ Growth 5.0% 4.8% (4.5%) (4.8%) YoY Growth N/A 5.0% (4.8%) Source: Company filings. 4) The REAL Organic Growth Rate Given the analysis above, it is our opinion (one that we believe is irrefutable) that Tangoe management is overstating organic growth by underreporting revenue from its acquisitions. By simply taking current filings and management's guidance at face value where better information does not exist (i.e., for Anomalous Networks and Symphony), we can pinpoint a more precise organic growth number - AND IT IS WELL BELOW 20%. In fact, based on our analysis, we believe Tangoe's organic growth rate has been almost 50% lower year-to-date than the 25% growth rate many analysts have forecasted. Further, based on Tangoe's second half guidance (more on this later), we believe organic growth may collapse into the mid-single digits in 2H'12. TNGO Organic Growth Analysis Acq. Date Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 2012 Reported Revenue / Guide 27,312 29,241 34,147 36,257 39,450 41,896 151,750 ProfitLine 19-Dec-11 (500) (3,625) (3,625) (3,625) (3,625) (14,500) Anomalous Networks 10-Jan-12 (250) (250) (250) (250) (1,000) ttmobiles 22-Feb-12 (800) (1,700) (1,700) (1,700) (5,900) Symphony 08-Aug-12 (2,700) (4,800) (7,500) Organic Revenue 27,312 28,741 29,472 30,682 31,175 31,521 122,850 QoQ Growth 5.2% 2.5% 4.1% 1.6% 1.1% Implied Compound Annual Growth 22.6% 10.6% 17.5% 6.6% 4.5% Source: Company filings, company conference calls. Painting an even starker contrast versus the promoted growth rate, if we assume ProfitLine's revenue is flat year-over-year (rather than the decline management implied with their guidance) and we use the correct revenue levels for ttmobiles annualizing Q1'12, then implied annual organic growth has been close to ZERO year-to-date. 10
TNGO Organic Growth Analysis Acq. Date Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 2012 Reported Revenue / Guide 27,312 29,241 34,147 36,257 39,450 41,896 151,750 ProfitLine 19-Dec-11 (500) (4,355) (4,355) (4,355) (4,355) (17,419) Anomalous Networks 10-Jan-12 (250) (250) (250) (250) (1,000) ttmobiles 22-Feb-12 (800) (2,634) (2,634) (2,634) (8,702) Symphony 08-Aug-12 (2,700) (4,800) (7,500) Organic Revenue 27,312 28,741 28,742 29,018 29,511 29,857 117,129 QoQ Growth 5.2% 0.0% 1.0% 1.7% 1.2% Implied Compound Annual Growth 22.6% 0.0% 3.9% 7.0% 4.8% Source: Company filings, company conference calls. No matter how we slice our numbers, we come to the conclusion that Mr. Martino was being less than truthful, and perhaps a bit evasive with his unwillingness to provide a precise organic growth rate on the Q2'12 earnings call, instead stating, "On an organic basis, we estimate that our organic recurring revenue growth was in the low-to-mid 20% range." Based on the public filings and commentary from management, we can not reconcile Mr. Martino's organic growth assertions. 5) Based on 20%-25% organic growth - here would be the conservative estimates for Q3 and Q4 As discussed above, as well as in the StreetSweeper blog, Tangoe's management has demonstrated impressive acumen playing the beat-and-raise game. As we highlighted above, we believe the driver for their game is accounting shenanigans underreporting the contribution from acquisitions. We believe that with our report, sellside "estimates" will no longer matter and Tangoe's new benchmark to demonstrate 20% growth will be based on our analysis (which is rather straight forward). When Tangoe reported their Q2'12 earnings, they simultaneously announced the acquisition of Symphony. As we illustrated above, the implied guidance appears to consider a collapse in organic growth. We believe this simply sets Tangoe up to "beat" unless organic growth turns negative. If analysts are intellectually honest, which many buysiders are, they will be looking at what the appropriate numbers should be based on Tangoe's presumed organic growth rates (the whisper number). We analyzed what Q3'12 and Q4'12 guidance should look like if the company was indeed growing 20%-25% organically. Below, we applied a year-over-year mid-point organic growth rate of 22.5% for Q3'12 and Q4'12. We believe this assumption is very generous because we give Tangoe organic growth "credit" for any cross-sell and up-sell business from Tangoe's former acquisitions. We then include the quarterly run-rate revenue reported in Tangoe's SEC filings for ttmobiles and management guidance for its other acquisitions (which we would again argue is conservative based on prior discrepancies between management guidance and actual performance of acquisitions). Based on this analysis, if Tangoe was indeed growing 20%-25% organically, then Q3'12 and Q4'12 revenue guidance should be $2.3 million and $3.7 million higher, respectively. We believe that buyside investor revenue estimates will be for at least $41.73 million in Q3'12 and $45.58 million in Q4'12 (assuming there are no incremental acquisitions) 11
TNGO Pro forma Organic Growth Analysis Sep-11 Sep-12 Dec-11 Dec-12 Organic Revenue at 22.5% Organic Growth 27,312 33,457 28,741 35,208 % Growth 22.5% 22.5% ProfitLine 3,625 3,625 Anomalous Networks 250 250 ttmobiles 1,700 1,700 Symphony 2,700 4,800 Acquired Revenues 8,275 10,375 Total Implied Revenue at 22.5% Organic Growth 41,732 45,583 Midpoint of TNGO Guidance 39,450 41,896 $ Difference 2,282 3,687 Source: Company filings, company conference calls. 6) Squeaky clean management and VC partner - FALSE Sellside quotes in the last week: We see the management team as solid at the top level and would further note that the company has shown a unique ability to retain many of the leaders of the companies it has acquired to build a much deeper management "bench" than most investors recognize. Strong VC backers vetted and built the team to attest to a well-chosen group. IMA backdrop an unfortunate historical footnote for management, but not one we feel they have hidden from. Reality: Edison Ventures, the "strong VC backers" that supposedly thoroughly "vetted and built the team" is the same group that backed and built Information Management Associates, which was accused of fraud in a class action lawsuit, had a merry-go-round of auditors, and red flags that went far beyond the dot.com bust. While StreetSweeper did a nice job covering some of the IMA background, we do not believe they were critical enough of the highly questionable patterns that emerged with IMA and its large sponsor Edison Ventures. First, its VC backer was a huge beneficiary of the earnings misstatements. According to public records, Edison Ventures was aggressively selling stock immediately following the company's earnings release, which was later restated on 8/12/99. IMA's stock price more than tripled in just 10 days after the earnings results that were ultimately proven to be fabricated. While the sales by Edison may have been totally innocent, given the diabolic accusations towards the management team, it is our opinion that Edison would have had to be incompetent not to be aware of the accounting problems. 17 12
Information Management Associates Share Price and Volume (July 1997 - April 2000) $16.00 16,000,000 $14.00 14,000,000 $12.00 12,000,000 $10.00 10,000,000 $8.00 8,000,000 $6.00 6,000,000 $4.00 4,000,000 $2.00 2,000,000 Jul-97 Aug-97 Sep-97 Oct-97 Nov-97 Dec-97 Jan-98 Feb-98 Mar-98 Apr-98 May-98 Jun-98 Jul-98 Aug-98 Sep-98 Oct-98 Nov-98 Dec-98 Jan-99 Feb-99 Mar-99 Apr-99 May-99 Jun-99 Jul-99 Aug-99 Sep-99 Oct-99 Nov-99 Dec-99 Jan-00 Feb-00 Mar-00 Source: Capital IQ Volume Share Price We believe that management may not have been as "open" about their past indiscretions as the sellside has implied. In fact, it would appear management has done just the opposite, effectively trying to hide the IMA debacle and pernicious accusations from the investment community. Tangoe's original S-1 filed 7/21/11 contained the disclosure "In July 2000, IMA filed a voluntary petition for bankruptcy under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court" under the bios for both Subbloie and Martino. However, this critically important disclosure was quietly removed from the company's follow-on prospectus filed 3/12/12, a decision that we believe may have given investors an incomplete picture when 13
assessing the competence and integrity of management. If Subbloie and Martino had nothing to hide, why was this statement removed? Original S-1 (7/21/11) Revised Prospectus for Follow-on (3/12/12) Original S-1 (7/21/11) Revised Prospectus for Follow-on (3/12/12) 14
What is also concerning about management is that it would appear Subbloie founded Tangoe while he was still CEO of IMA. According to the Commercial Recording Division for the state of Connecticut, Tangoe was registered and commenced operations in February, 2000. If the public filing records are correct, it would appear Tangoe was actually birthed six months prior to IMA's bankruptcy and while Subbloie still served as President and CEO of IMA. 18 While the StreetSweeper does a good job identifying many of the issues that would cause us extreme consternation towards this management team, we have found a plethora of inconsistencies (at best) and flat-out lies (at worse) about the achievements of management: There are several discrepancies in Subbloie's biographical information. First we have found several different bios for Subbloie. According to an eweek Article from 2010, he "founded Information Management Associates (IMA) in 1984 and guided the company's growth to more than $50M in sales and 300 customers in seven offices worldwide." 19 According to public filings, IMA was not registered in the state of Connecticut until 1990. Additionally, SEC filings show the peak sales in a calendar year for IMA was 1998, when it did $49 million in revenue - not "more than $50M." While within the realm of a rounding error, taken in context with all of the other misrepresentations we believe have occurred, it is just another example (we also concede that perhaps this was not a calendar year metric). Multiple bios found online also state, "Albert is credited with one of the patents for reverse auction theory, the leading Internet paradigm in most shopping Websites today" and this same language is found on Tangoe's own webpage. 20 However, we were unable to find any patents assigned to Albert Subbloie other than one for computer based energy management (we think this is likely a different Subbloie). Further a web search for "reverse auction theory+subbloie" only returned results that were taken directly from Mr. Subbloie's bio. A more generic search for "reverse auction theory" shows that FreeMarkets and Glen Meakem pioneered reverse auction theory. 21 Mr. Subbloie does 15
not seem to be associated with this patent anywhere on the Internet that we could find, aside from his own biography. We are deeply troubled by the interconnected nature of Tangoe's Board of Directors, a subject we may examine in more detail in a future report. We would highlight that Subbloie and Martino have been together for over 40 years, and "achieved their first success as the Connecticut Little League state champions in 1972." 22 While this is not inflammatory, the incestuous relationships between Edison Ventures, affiliates of Edison, and IMA legacy personnel could signal that many of the issues we have identified occurred because of the lack of Board oversight and independence. 7) IMA was just another dot.com bust - FALSE Sellside quotes in the last week: Past business failings involving Tangoe s CEO and CFO are explainable. Bears appear to have latched onto the company and industry specific struggles that confounded Information Management Associates, where Tangoe s CEO and CFO formerly had executive management positions as representing a harbinger for Tangoe somehow. Information Management Associates ran into challenges associated with customer concentration with weaker contact center/offshore provider customers and was forced to restate revenue (reflect license revenue on a cash collection basis versus upfront with signed contract) in order to deal with collectability issues associated with specific liquidity-strapped customers. We believe Tangoe s business is much more stable with high level of recurring revenue serving more vibrant CLM space and in which Tangoe is an undisputed leader based on revenue, customers and telecom spend under management. IMA backdrop an unfortunate historical footnote for management, but not one we feel they have hidden from we believe the series of events surrounding IMA's business shortcomings and associated bankruptcy filing in July 2000 have been events that CEO Al Subbloie and CFO Gary Martino have addressed publicly and spoken openly about we think investors are broadly aware that the world got tough in a hurry for a number of technology vendors as the Dot Com boom turned to bust in a rapid period of time. Reality: The defensive quotes from the sellside are borderline irresponsible. We believe that any independent analysis (versus talking to management) of the IMA debacle could not lead a prudent analyst to conclude that this was just one of many dot.com busts. Beyond the fact Subbloie and Martino removed the lawsuit disclosures, we would point out that IMA/management was accused of inflating revenues, violating GAAP accounting, producing "fictitious results", running through different auditors, and raising much needed capital through a preferred stock offering that was accomplished with financials that were called fraudulent by a lawsuit. Yes, IMA had issues regarding customer collections and accounts receivable that may not be relevant to Tangoe; this is well documented. However, IMA had a prior restatement directly related to acquisitions the company had made, which given Tangoe s current acquisition pace, we find highly relevant. On 11/4/98, IMA filed a restatement to its Q2'98 10Q (it's 2nd restatement in fact; the first was related to improper recognition of service and maintenance fees) related to improper expense recognition for two acquisitions completed on 3/30/98. 23 Tangoe's current CFO was also the CFO at IMA. 16
What is perhaps more disturbing is that these restatements, which occurred in 1998, should have served as a lesson to management regarding proper accounting treatment. Yet Tangoe's CEO and CFO, who were also in those same roles at IMA, misstated revenues and expenses the following year, which led to a 257% overstatement of operating income in the quarter, which in turn led to a 200%+ increase in IMA s stock price, which in turn allowed Edison Ventures and other insiders to sell their IMA stock at inflated prices prior to IMA s bankruptcy 11 months later. Information Management Associates Q2 1999 Income Statement Jun-99 Jun-99 $ % Original Restated Change Change License fees 6,640 3,390 (3,250) (48.9%) Service & maintenance 6,463 6,463 Total Revenue 13,103 9,853 (3,250) (24.8%) Cost of license fees 62 63 1 1.6% Cost of service & maintenance 4,210 4,209 (1) (0.0%) Total cost of revenue 4,272 4,272 Gross Profit 8,831 5,581 (3,250) (36.8%) Sales & marketing expense 5,440 5,305 (135) (2.5%) Product development expense 2,970 3,432 462 15.6% G&A expense 1,696 1,695 (1) (0.1%) Provision for doubtful accounts 476 1,395 919 193.1% Total operating expenses 10,582 11,827 1,245 11.8% Operating income (loss) (1,751) (6,246) (4,495) 256.7% Source: Company filings, Capital IQ. What is more alarming than the size of IMA s Q2'99 restatement is the reason why, in our opinion, IMA's earnings were overstated - the company was desperately in need of cash. Between 12/31/98 and 6/30/99, IMA's cash balance declined by 85% to just $2.0 million. 24 At the cash burn rate, if IMA did not raise money immediately, the company would have run out of cash in less than two months. In conjunction with IMA issuing fictitious results, the company announced that it secured $5 million in financing, a commitment for an $8 million credit facility, and a $10 million investment in IMA's Buyingedge.com subsidiary. 25 While a portion of the restatement was due to revenue recognition, IMA also disclosed an additional $581,000 expense related to Buyingedge.com (formation costs and issuance of common equity to minority shareholder). 26 It is unclear if this additional information would have hindered IMA's ability to 17
raise funds for Buyingedge.com, but it is evident that investors did not receive a full picture of the financial condition of the business. It is important to note the apparent extent of Buyingedge.com's deceit, which Subbloie founded according to his biography. On the date of the outside investment on 8/12/99, four venture capital firms invested $10 million in Buyingedge.com for 29% of the fully diluted equity of the company, representing a $34.5 million equity value. 27 (note that Edison Ventures, the venture capital backer of both IMA and Tangoe and the firm with logically the greatest understanding of the IMA and buyingedge.com businesses, did NOT participate in the $10 million fundraising round, furthering our uneasiness about the transparency of the transaction) On 6/23/00, less than 11 months after this investment, IMA sold its interest in Buyingedge.com for a meager $172,000. 28 Finally, if IMA was simply a casualty of the dot-com bust, then why then did the company need to change auditors two times? On 9/16/99, prior to IMA restating its financials on 11/18/99, the company fired Arthur Andersen as its auditor. 29 In its press release, IMA stated: In the course of preparing the Company's Form 10-Q for the quarter ended September 30, 1998, the Company and Arthur Andersen engaged in a number of discussions regarding the appropriate amount of the bad debt reserve to be recorded for such period. Arthur Andersen recommended a higher reserve than the Company initially proposed. Based upon further consideration of the facts and Arthur Andersen's analysis and recommendation, management concurred that the final amount of the bad debt reserve to be recorded for the quarter should be in accordance with Arthur Andersen's recommendation. 30 While IMA stated that it agreed with Arthur Andersen's recommendation regarding its accounting treatment for bad debt reserve during its Q3'98 restatement, it still terminated Arthur Andersen as its auditor, only to utilize the exact same mistreatment to overstate its earnings during Q2 99 by underreporting its provision for bad debts by $920,000. 31 Further, in IMA's release announcing the termination of Arthur Andersen, it conceded that Arthur Andersen reported to IMA's audit committee that "in connection with its audit of the Company's financial statements for the fiscal year ended December 31, 1998 that the Company's accounting procedures reflected a material weakness relating to lack of enforcement of receivable obligations and inadequate accounting oversight in accounting for non-standard transactions." 32 On 9/23/99, IMA engaged PriceWaterhouseCoopers (PWC) as its auditor. 33 On 3/13/00, exactly 172 days after engaging PWC, IMA dismissed PWC as its independent accountant. 34 In IMA's press release announcing the dismissal of PWC, it stated: During the Company's most recent fiscal year, no "reportable events" (as described in Item 304(a)(1)(v) of regulation S- K) have occurred, except for PricewaterhouseCoopers' communication to the Audit Committee in connection with its engagement for the period referred to in 4(a)(i) that: (A) the Company's accounting procedures reflected a material weakness in internal controls necessary to ensure proper revenue recognition accounting for software and associated services, and (B) PricewaterhouseCoopers had identified certain transactions where the underlying documentation raises questions regarding the revenue recognition accounting afforded 18
to the transactions, and which if further investigated could possibly result in the restatement of previously issued 1999 interim financial statements. 35 While the frequency and size of IMA s '98 and '99 restatements are astonishing, we also note that IMA s 11/18/99 restatement was not the end of the proverbial dance. On 2/28/00, IMA issued an 8-K stating, "In connection with the Company's internal review, the Company believes it will be required to record certain adjustments to revenue that will result in a restatement of the Company's financial statements for the second and third quarters of 1998 the Company is continuing its internal review, and other adjustments to revenue relating to transactions in 1999 or in certain quarters prior to 1999 may be required. Restated financial statements for those periods requiring restatement will be issued upon completion of the review. 36 IMA never finished its review, nor did it file its restated financials, which would have been its fourth restatement by its third auditor in two years. Instead, the Nasdaq halted trading of IMA stock on 4/10/00 37 ; IMA was delisted on 5/19/00 38 ; Subbloie and Martino resigned from the IMA board on 7/11/00 39 ; and IMA filed for bankruptcy on 7/24/00 40. But in February, 2000 Subbloie was founding Tangoe while shareholders were losing everything. WE CAN'T STRESS ENOUGH THAT WE DO NOT THINK THIS FACT PATTERN IS CONSISTENT WITH SIMPLE DOT.COM DEMISES. Tangoe appears to us to be the same 'ole management with a different story. 8) Tangoe throws off a lot of operating cash - MISLEADING Sellside quotes in the last week: In our opinion the company offers a visible path to increasingly large cash flow generation, and hence remaining a self-funded entity longer term. The company requires minimal capital expenditures as well as other fixed expenses for that matter and we assume over 80% y/y growth in free cash flow growth in 2012 to $17.4 million. Reality: It is true that technically Tangoe has generated $14.1 million in cash from operations and $12.9 million in free cash flow over the last twelve months. The company and analysts are quick to point out that Tangoe is profitable and generates free cash flow, while requiring minimal capital expenditures. However, we tip our caps to Martino and Subbloie for the potentially shrewd creation of cash flow from operations out of GAAP nuances. Before discussing what we believe may be a quasi-ponzi of operating cash flow generation, it is true that Tango requires minimal cash to run its existing business. In fact, Tangoe requires such nominal capital expenditures that we find it odd for a SaaS business. As discussed earlier, management and analysts have portrayed Tangoe as a software-as-a-service business. For a company that is supposedly in the business of developing software, we find it strange that Tangoe's capital expenditures, which include capitalized software development costs, are only 0.8% of revenue. This is 87% lower than the real SaaS peer group average of 6.2% revenues. Further, the minimal investment in software development begs the important question: Is this a software company and is there really any free cash flow if acquisitions are integral to software and product development? In 2011, Tangoe's spent $37.6 million on acquisitions. Based on this acquisition model, it would seem logical and reasonable that Tangoe will continue to buy its growth in a role-up, multiple boot strapping scheme. As such, we would consider acquisitions to be ongoing "growth" capital expenditures (thereby reducing free cash flow if this recurring acquisition spend was viewed synonymously with capex). Ignoring this dilemma, it is clear once again that Tangoe looks very little like a software company: 19
Company Name Ticker Market Cap Enterprise Value 2011 Revenue 2011 Cap Ex Cap Ex % of Rev Bazaarvoice Inc BV 868,757 743,556 106,136 5,119 4.8% Brightcove Inc BCOV 340,373 288,352 63,563 4,064 6.4% Concur Technologies Inc CNQR 3,977,099 3,745,141 349,488 27,932 8.0% Constant Contact Inc CTCT 576,703 495,602 214,420 18,106 8.4% Cornerstone OnDemand Inc CSOD 1,354,677 1,292,738 73,022 784 1.1% Demandware Inc DWRE 758,372 655,427 56,547 3,473 6.1% ExactTarget Inc ET 1,375,729 1,165,629 207,493 31,161 15.0% IntraLinks Holdings Inc IL 302,316 308,455 213,504 5,115 2.4% LivePerson Inc LPSN 917,155 816,579 133,089 7,268 5.5% LogMeIn Inc LOGM 546,408 347,949 119,461 2,322 1.9% NetSuite Inc N 3,953,501 3,789,022 236,326 8,586 3.6% Salesforce.com Inc CRM 20,197,854 18,902,121 2,266,539 171,300 7.6% SciQuest Inc SQI 373,997 310,539 53,438 2,058 3.9% Vocus Inc VOCS 399,917 451,506 114,874 13,758 12.0% Mean 6.2% Median 5.8% Tangoe Inc TNGO 745,755 684,949 104,941 853 0.8% Source: Bloomberg and company filings. What is most concerning to us about the assertions regarding Tangoe's operating cash flow is that we believe acquisitions may be materially overstating the actual cash flow numbers. We believe that Subbloie and Martino are incredibly at presenting of the numbers to fit their objective (within the realm of GAAP accounting of course). Based on our analysis, we believe that operating cash flow may benefit from the purchase accounting treatment of balance sheets, which can by its very nature lead to misleading operating and free cash flow as defined by many analysts. Given the positive working capital dynamics of the acquired companies (and future positive cash conversion), we think Tangoe may stand to benefit from working capital changes of the companies they are acquiring. This would seem especially true given the supposedly muted, to declining revenue profiles of Tangoe's acquisition targets. We believe that Tangoe management has shrewdly protected themselves (after their IMA lawsuit fiasco) by pointed out these nuances but not adjusting numbers for them. When Tangoe purchased Symphony on 8/8/12, the Company communicated "as part of the transaction, Tangoe will be acquiring a balance sheet for the TEM Business, which includes net positive assets of approximately $4.0 million." 41 As reported in the purchase price allocation for Tangoe's prior acquisitions, Tangoe has been acquiring working capital of its target companies. We believe that the net effect is a "recurring one-time" boost to operating cash flow as can be seen from the ttmobiles allocation example below: ttmobiles Purchase Price Allocation 42 20
Since each target company had positive net working capital at the time of the acquisition, Tangoe has been able to generate cash from operations by simply collecting the net cash from its new subsidiary. While this is proper acquisition accounting treatment according to GAAP, it provides a misleading picture of internal cash generation. In essence, when Tangoe makes an acquisition, the cash outflow is in investing (which is not included in the general definition of free cash flow). Subsequently, there is a cash inflow from operations when the acquiring company later collects the cash owed to it residing on its balance sheet. If we adjust Tangoe's operating cash flow over the last 12 months for the cash collected through its acquisitions, cash generated through operations declines by $5.4 million, or 38.1%. TNGO Cash Generated from Operations HCL-EMS Telwares ProfitLine Anomalous ttmobiles Total Initial purchase price 6,390 7,320 23,174 7,000 8,674 52,558 Current assets 2,394 2,402 3,183 1,140 2,469 11,588 Accounts payable and accrued liab. (1,271) (532) (3,167) (394) (848) (6,212) Net cash to be collected 1,123 1,870 16 746 1,621 5,376 Trailing 12 month reported cash from operations 14,111 Cash collected from acquisitions % of total TNGO CFO 38.1% TNGO CFO excluding working capital from acquisitions 8,735 Source: Company filings. 9) Sellside analysts really believe - Paint us skeptical As discussed earlier, it was heroic how responsible analysts could come out with such forceful rebuttals of the StreetSweeper blog in a matter of hours. Our skepticism that the appropriate levels of independent work occurred is magnified by the potential for conflicts of interest. While it is entirely possible that the sellside simply believes organic growth has to be what management says, that Tangoe truly is a subscription-based SaaS business, and that management's former issues with IMA were merely a blip on the road to broader success, it is also possible that banking may be influencing the extreme motivation to defend Tangoe. The Tangoe story is a bank's best friend because the one thing that all roll-ups require is capital. Tangoe has already raised $104.7 million through two public offerings in a little over a year. We would expect that based on the laughably low guidance for Q3 and 2H'12 that Tangoe was hoping to be back at the well before the end of 2012, despite posting a cash balance of $78.4 million as of 6/30/12. Accounting for the $29.2 million in cash paid at closing on 8/8/12 for the acquisition of Symphony, Tangoe currently has a cash balance of $49.2 million. Considering deferred compensation to Symphony of $10.8 million over the next year, plus $17.6 million in other earn-outs for prior acquisitions, Tangoe has an unrestricted net cash position of $20.8 million. If we include Symphony's contingent earn-out of an additional $4.0 million, Tangoe's net cash balance falls to $16.8 million. 21
TNGO Pro Forma Cash Analysis Cash reported at 6/30/12 78,442 less: cash paid at closing for Symphony on 8/8/12 (29,200) Pro forma gross cash 49,242 Current portion of notes payable at 6/30/12 17,310 Long-term portion of notes payable at 6/30/12 325 Guaranteed deferred compensation for Symphony 10,800 Pro forma short-term debt 28,435 Net cash before contingent earn-outs 20,807 Symphony contingent earn-out (4,000) Net cash after contigent earn-out 16,807 Source: Company filings. With only $16.8 million in net cash, and the incessant need for additional acquisitions to fuel growth, the music for Tangoe will stop soon unless it raises additional capital (especially if its equity currency ultimately reflects the mundane organic growth of a typical BPO). While Tangoe will argue that it will generate cash over the next 12 months in order to satisfy earn-out payments, we will point out once again that Tangoe's operating cash flow generation is actually rather miniscule and may be overstated due to the unique accounting characteristics of balance sheet acquisitions. 10) How to Value Tangoe Sellside quotes in the last week: With solid profitability and organic growth, we believe Tangoe warrants a premium valuation due to its category killer status in the TEM space and its ability to augment organic growth with a welldefined and proven accretive acquisition strategy. Now trading at 4.3x run-rate revenues versus its peer average of 5.8x, our $30.00 target assumes a 7.0x run-rate revenue multiple applied to our 2Q13 run-rate forecast. Reality: There was a time when a 5x sales multiple was reserved for preeminent growth companies. Yet, SaaS vendors have changed the multiple framework given the unprecedented level of visibility upfront subscription models create. We do not believe that Tangoe's financials or business model are akin to enterprise SaaS providers. The mere argument that software delivered via a webbased subscription model automatically warrants a 5x multiple is almost unfathomable. Nonetheless, the argument may be moot as investors come to realize that Tangoe's growth and model are indeed more aligned with its BPO brethren than some software comp group. Given Tangoe's lack of organic growth, minimal internal free cash flow generation, and the apparent consulting nature of the business, we believe Tangoe should be valued like other consulting / business process outsourcing (BPO) businesses. We would argue that given the highly questionable history of management, as well as the significant forensic red flags, Tangoe should actually trade at a steep discount to whatever comp group ultimately makes sense. Tangoe's "stellar profitability" (according to management and analysts) would suggest that it should actually be valued based on some metric of this profitability, either EPS or EBITDA. Should Tangoe trade at a more reasonable 15x forward earnings multiple (a 25% premium to the average 12x multiple of Tangoe's consulting/bpo peer group) to the consensus 2013 EPS estimate of $0.64, then fair value would be approximately $9.60. If we instead value Tangoe based on its EBITDA, and apply a 20% premium forward average EV/EBITDA multiple for 22
Tangoe's BPO peer group of 7.8x (6.5x for peers) consensus 2013 EBITDA estimate of $31.4 million (which assumes 45% growth over 2012 consensus EBITDA and only $15.8 million of trailing 12 months EBITDA), we believe $245 million would be a fair enterprise value. Adding back Tangoe's $16.8 million of pro-forma cash, we believe a fair equity value is closer to $6.47 (based on 41.1M shares out). Regardless of which ratio is used, giving Tangoe a generous 20% premium to its real peer group would lead to a stock worth a fraction of where it can be sold today. 1 http://www.thestreetsweeper.org/undersurveillance_archive.html 2 http://www.sec.gov/archives/edgar/data/1182325/000110465912057854/a12-14001_110q.htm 3 http://sec.gov/archives/edgar/data/1462633/000119312511339396/d211300d424b4.htm 4 http://www.tangoe.com/2012-press-releases/tangoe-inc-acquires-ttmobiles.html 5 http://www.sec.gov/archives/edgar/data/1182325/000110465912037557/a12-8896_110q.htm 6 http://sec.gov/archives/edgar/data/1182325/000110465912057854/a12-14001_110q.htm 7 Ibid. 8 http://investor.tangoe.com/events.cfm 9 TNGO Q4 12 earnings call (2/15/12) 10 http://www.sec.gov/archives/edgar/data/1182325/000104746912003496/a2208466z10-k.htm 11 http://www.sec.gov/archives/edgar/data/1182325/000104746912002469/a2207581zs-1.htm 12 TNGO Acquisition of ProfitLine (12/19/11) 13 TNGO Q2 11 earnings call (8/23/11) 14 http://sec.gov/archives/edgar/data/1182325/000104746912003496/a2208466z10-k.htm 15 http://sec.gov/archives/edgar/data/1182325/000104746912003496/a2208466z10-k.htm 16 http://sec.gov/archives/edgar/data/1182325/000104746912003496/a2208466z10-k.htm 17 http://thestreetsweeper.org/ckfinder/userfiles/files/imalawsuit%282%29.pdf 18 http://www.concord-sots.ct.gov/concord/online?sn=publicinquiry&eid=9740 19 http://www.eweek.com/c/a/mobile-and-wireless/how-to-understand-corporateliable-vs-individualliable-mobile- Assets/3/ 20 http://www.tangoe.com/the-company/management-team.html 21 http://en.wikipedia.org/wiki/reverse_auction 22 http://global.factiva.com/redir/default.aspx?p=sa&an=scbj000020011108do6m0004q&cat=a&ep=ase 23 http://www.sec.gov/archives/edgar/data/871696/0000898080-98-000264.txt 24 http://www.sec.gov/archives/edgar/data/871696/0000950109-99-002975.txt 25 Ibid. 26 http://www.thefreelibrary.com/ima+announces+third+quarter+results+and+adjusts+second+quarter...- a057630196 27 http://global.factiva.com/redir/default.aspx?p=sa&an=djon000020020329dv8i03fp8&cat=a&ep=ase 28 http://www.sec.gov/archives/edgar/data/871696/000090311200000937/0000903112-00-000937-0001.txt 29 http://sec.gov/archives/edgar/data/871696/0000898080-99-000265.txt 30 http://sec.gov/archives/edgar/data/871696/0000898080-99-000265.txt 31 http://www.thefreelibrary.com/ima+announces+third+quarter+results+and+adjusts+second+quarter...- a057630196 32 http://sec.gov/archives/edgar/data/871696/0000898080-99-000265.txt 33 Ibid. 34 http://www.sec.gov/archives/edgar/data/871696/0000950109-00-001026.txt 35 Ibid. 36 http://www.sec.gov/archives/edgar/data/871696/0000950109-00-000714.txt 37 http://www.thefreelibrary.com/nasdaq+halts+trading+of+information+management+associates,+inc.+and...- a061801208 38 http://global.factiva.com/ga/default.aspx 39 http://www.sec.gov/archives/edgar/data/871696/000090311200001006/0000903112-00-001006-0001.txt 40 http://www.sec.gov/archives/edgar/data/871696/000111667900000014/0001116679-00-000014-0001.txt 41 http://www.tangoe.com/2012-press-releases/2012-tangoe-announces-the-acquisition-of-symphony-telecas-telecomexpense-anagement-business.html 42 http://sec.gov/archives/edgar/data/1182325/000110465912057854/a12-14001_110q.htm 23