You are on page 1of 8

GOTHAM CITY RESEARCH LLC

www.gothamcityresearch.com

info@gothamcityresearch.com

GOTHAM CITY RESEARCH LLC

Endurance International Group:


EIGIs Adjusted EBITDA is a Meaningless Metric, as It
Does Not Correlate with Free Cash Flow 4 Questions All
Analysts Should Ask EIGI
$500M Long Term Adj EBITDA Goal Mentioned 3 Months Ago
EIGIs Adjusted EBITDA is a
poor proxy for cash flow, given
that Adj. EBITDA has
corresponded with negative
free cash flow, as shown
below.
EIGIs long-term $500M Adj.
EBITDA target (disclosed 3
months ago) will coincide with
-$254M cash losses, if history
serves as a guide.
Source: EIGI February 2015 Presentation, pg. 12; Q4 2014 Earnings Presentation, pg. 6

Every $1.00 in reported "Adjusted EBITDA" equals -$0.50 in Free Cash Flow
$ in millions Q3-2013 Q4-2013 Q1-2014 Q2-2014 Q3-2014 Q4-2014
Adj. EBITDA (Estimate)
$41.2
$38.5
$56.7
$55.3
$56.3
$60.0
Adj. EBITDA (Reported)
$49.9
$46.2
$59.1
$56.5
$58.0
$62.0
Free Cash Flow ($45.7) ($47.8) ($12.7) ($42.4) ($17.9)
($1.9)
GAAP Net Loss ($27.7)
($72.6)
($21.7)
($43.0)
($9.4)
($2.8)
EIGI buries earnouts (i.e., deferred consideration), a critical component of its acquisition
spending within the "Cash flows from financing activities" section in the stmt of cash flows.

TARGET
$500.0 ?
$500.0 ?
($253.9) ?

Disclaimer:
By reading this report, you agree that use of GOTHAM CITY RESEARCH LLCs research is at your own risk.
In no event will you hold GOTHAM CITY RESEARCH LLC or any affiliated party liable for any direct or
indirect trading losses caused by any information in this report. This report is not investment advice or a
recommendation or solicitation to buy any securities. GOTHAM CITY RESEARCH LLC is not registered as
an investment advisor in any jurisdiction. Gotham City Research LLC is not affiliated or associated with
Gotham Asset Management, LLC or any of its affiliates.
You agree to do your own research and due diligence before making any investment decision with
respect to securities covered herein. You represent to GOTHAM CITY RESEARCH LLC that you have
sufficient investment sophistication to critically assess the information, analysis and opinions in this
report. You further agree that you will not communicate the contents of this report to any other person
unless that person has agreed to be bound by these same terms of service.
You should assume that as of the publication date of this report, GOTHAM CITY RESEARCH LLC stands to
profit in the event the issuers stock declines. We may buy, sell, cover or otherwise change the form or
substance of its position in the issuer. GOTHAM CITY RESEARCH LLC disclaims any obligation to notify
the market of any such changes.
Our research and report includes forward-looking statements, estimates, projections, and opinions
prepared with respect to, among other things, certain accounting, legal, and regulatory issues the issuer
faces and the potential impact of those issues on its future business, financial condition and results of
operations, as well as more generally, the issuers anticipated operating performance, access to capital
markets, market conditions, assets and liabilities. Such statements, estimates, projections and opinions
may prove to be substantially inaccurate and are inherently subject to significant risks and uncertainties
beyond GOTHAM CITY RESEARCH LLCs control.
Our research and report expresses our opinions, which we have based upon generally available
information, field research, inferences and deductions through our due diligence and analytical
process. GOTHAM CITY RESEARCH LLC believes all information contained herein is accurate and
reliable, and has been obtained from public sources we believe to be accurate and reliable.
However, such information is presented as is, without warranty of any kind, whether express or
implied. GOTHAM CITY RESEARCH LLC, makes no representation, express or implied, as to the accuracy,
timeliness, or completeness of any such information or with regard to the results to be obtained from its
use. All expressions of opinion are subject to change without notice, and GOTHAM CITY RESEARCH LLC
is not obligated to update or supplement any reports or any of the information, analysis and opinion
contained in them.
You should assume that GOTHAM CITY RESEARCH LLC has and/or will submit the contents of this report
with the Securities Exchange Commission, and other entities.

Page 2 of 8

Table of Contents
I.
II.
III.

Disclaimer
4 Questions for EIGI
Why These Questions Matter

Page 3 of 8

4 Questions for EIGI


Gotham City Research expects:

EIGI will beat its Adjusted EBITDA estimates today (just as we expect university students to ace
self-graded exams).
Endurance will aggressively dangle its vague $500 million Adjusted EBITDA long-term goal,
hoping to fool some investors into thinking that the previously disclosed $500 million figure is
new information, when in fact, the $500 million target is old news from several months ago.

Gotham City Research believes investors will gain a more accurate understanding of the companys
health and prospects, by asking the following questions (see the next few pages to understand why):
1. Average Revenue per Subscriber (ARPS): What are the total number of end subscribers and
resellers you had for each year between 2012 and 2014? How many currently? What % of your
total revenues are sourced from resellers for those years?

Endurance does not Disclose End Subscriber Numbers


2012
2013
2014
Current
End Subscribers Undisclosed Undisclosed Undisclosed Undisclosed
Resellers Undisclosed Undisclosed Undisclosed Undisclosed

2. Churn Rate: What is EIGIs monthly churn rate, from 2012-Present? You claim, Our MRR
retention rate was 99% for all periods presented. How is this possible, given Endurances data
center outages, under-investment in core infrastructure, negative customer/employee reviews,
and industry peers skepticism regarding your implied churn?

3. International Revenue, Directi, and your undisclosed subsidiary


a. What was your 2014 International revenue?
b. Explain the Directi revenue inconsistencies found within your 2014 10K (that is, why do
they not add up?) See our report for context.
c. Who is the Domain Name Business (i.e. the undisclosed subsidiary) that you
purchased from a company associated with the founders of Directi Holdings?

4. Does your long-term target $500 million adjusted EBITDA suggest positive Free Cash Flow as
well? Your historical Adjusted EBITDA has not corresponded with positive Free Cash Flow.

Page 4 of 8

Why These Questions Matter


Summary: Gotham City Research believes Endurance International Group utilizes unconventional
accounting practices, hoping investors will not diligence EIGIs suspect business practices or accounting
any further. EIGI hopes investors will rely on spoon-fed propaganda from EIGI management and Wall
Street analysts, rather than talk to former employees, customers, etc. EIGI and its management correctly
believe (so far) they can fool some of the people, all of the time.
Astute investors, on the other hand, will look past EIGIs obfuscation, focusing on EIGIs true ARPS/ARPU,
churn, EIGIs international business, free cash flow, etc.
Astute investors will disregard EIGIs previously disclosed $500 million Adj. EBITDA long-term target,
noting Adj. EBITDA has not historically corresponded with positive free cash flow. Moreover, the stock
prices of tech companies with deteriorating ARPU & churn crash years before fat profits are generated.
For example, Blackberrys share price, ARPU, and churn deteriorated years before revenue & profits did:

As shown above, Blackberrys stock price peaked in 2008 (just as ARPU and churn began trending
negatively). By 2011, Blackberry and EPS grew multi-fold, yet the stock had already crashed 80%+ by
then. We believe Endurances stock price today is where Blackberrys stock price was ~2008.

Page 5 of 8

EIGI Conceals its True ARPS/ARPU and Churn Trends In Order to Buy Time (so mgmt can unload stock?)
Gotham City Research believes:

EIGI is playing tricks with its ARPS/ARPU definitions to conceal a material decline in its
ARPS/ARPU (we calculate ARPS/ARPU actually declined ~-13% in 2014 vs EIGIs claimed ~+11%
growth). The companys ARPS/ARPU has recently mix shifted into lower ARPS/ARPU business
with the Directi acquisition. Historically such a mix-shift merits a lower valuation.
Actual churn is very high, and the company knows it. The company hides its true churn
deterioration hoping that investors, EIGIs peers, and the public at large wont learn about the
suspect business means by which it has masked its churn and propped EIGIs revenues (for now).

Godaddy, the industry leader, has a rather simple, easy to understand definition of subscribers:
Godaddys ARPU/ARPS is simple and easy to understand. GDDY uses 63 words, 4 lines to define total
customers whereas EIGI uses 233 words and 12 lines to define it.
Godaddys definition is simple:
We define total customers as those that, as of the end of a period, have an active subscription. A
single user may be counted as a customer more than once if the user maintains active
subscriptions in multiple accounts. Total customers is an indicator of the scale of our business
and is a critical factor in our ability to increase our revenue base.
Endurances definition is needlessly complicated (why else would it be complicated, but to deceive?):
We define total subscribers as those that, as of the end of a period, are identified as subscribing
directly to our products on a paid basis. Historically, in calculating total subscribers, we included
the number of end-of-period subscribers we added through business acquisitions as if those
subscribers had subscribed with us since the beginning of the period presented. Since the first
quarter of 2014, we have included subscribers we added through business acquisitions from the
closing date of the relevant acquisition.
Additionally, in the fourth quarter of 2014, we modified our definition of total subscribers to
better reflect our expanding product mix by including paid subscribers to all of our subscriptionbased products, rather than limiting the definition to paid subscribers to our web presence
solutions. We do not include in total subscribers accounts that access our solutions via resellers
or that purchase only domain names from us. Subscribers of more than one brand are counted as
separate subscribers. We believe total subscribers is an indicator of the scale of our platform and
our ability to expand our subscriber base, and is a critical factor in our ability to monetize the
opportunity we have identified in serving the small- and medium-sized business (SMB) market.
Total subscribers for a period may reflect adjustments to add or subtract subscribers as we
integrate and/or are otherwise able to identify subscribers that meet this definition of total
subscribers.
Page 6 of 8

A High Churn Business Utilizing Suspect Practices to Conceal Deterioration, Bolster Results (for now)
EIGI has experienced some terrible (and worsening) service outages recently:
Service Outages are Worsening

Date
Aug-13
Dec-13
Apr-14
May-14
Oct-14

Duration
24 hours of downtime
3 days of downtime
24 hours of downtime
9 hours of downtime
5 days of downtime

EIGIs service outages are unsurprising, given how little the company spends on core infrastructure:

RESEARCH & DEVELOPMENT SPENDING


GDDY
WWWW
WIX
EIGI
EIGI as % of GDDY

2012

2013

2014

19.3%
8.4%
38.4%
4.7%
24.5%

18.4%
6.6%
36.9%
4.5%
24.3%

18.3%
5.5%
40.8%
3.1%
16.9%

R&D Spending per Subscriber Comparison


2012

Godaddy
EIGI
variance

2013

2014

$17.14 $17.95 $20.02


$4.28
$6.63
$3.89
(75.0%) (63.1%) (80.6%)

Former employees comment about customers leaving:


Everything takes a backseat to customer acquisition in order to replace the hoards of existing
customers fleeing Former Employee A
They are incredibly cheap and would rather lose a customer than provide a decent level of service. They
buy new companies to make up for customer loss rather than listening to issues Former Employee B
Company went downhill in all departments starting in 2013. They simply do not care for their employees.
You Do not want to work here. Trust me. They recently fired lots of people to include upper management.
That should speak volumes. Former Employee C
One of Endurances industry peers doubts Endurances disclosed churn figures:
EIGI uses a churn model/definition that is not industry common practice, while using industry
terminology.

Page 7 of 8

International Revenue, Directi, and your undisclosed subsidiary


EIGI did not disclose its 2014 International revenue, despite reporting international profits/losses and
tangible long-lived assets. This is highly unusual behavior. We think we know why. We believe
Endurances shift into international via Directi signals (I) slow-down in its core domestic business and (II)
greater reliance on suspect business in order to compensate for churn. The following support our beliefs:

Directis revenue figures within EIGIs 2014 10K do not add up.
EIGI is depending on the controversial Turakhia brothers, Directis management, whose
company Radix shamelessly lied to the US government (and got caught doing so).
Directi and other Turakhia-related businesses are flagged for engaging in an unusually high
percentage of suspect activities (e.g. malware, and similar).
If the Domain Name Business (i.e. the undisclosed subsidiary) is NOT Radix, it is still a Turakhia
brothers company: purchased from a company associated with the founders of Directi Holdings
Why do business with suspect characters, if your core business is chugging along smoothly?

Adjusted EBITDA does not Correlate with Free Cash Flow


EIGI may have beat Adj. EBITDA estimates (akin to a child acing self-graded exams), but it also
concurrently burned significant amounts of cash:
Every $1.00 in reported "Adjusted EBITDA" equals -$0.50 in Free Cash Flow
$ in millions Q3-2013 Q4-2013 Q1-2014 Q2-2014 Q3-2014 Q4-2014
Adj. EBITDA (Estimate)
$41.2
$38.5
$56.7
$55.3
$56.3
$60.0
Adj. EBITDA (Reported)
$49.9
$46.2
$59.1
$56.5
$58.0
$62.0
Free Cash Flow ($45.7) ($47.8) ($12.7) ($42.4) ($17.9)
($1.9)
GAAP Net Loss ($27.7)
($72.6)
($21.7)
($43.0)
($9.4)
($2.8)
EIGI buries earnouts (i.e., deferred consideration), a critical component of its acquisition
spending within the "Cash flows from financing activities" section in the stmt of cash flows.

TARGET
$500.0 ?
$500.0 ?
($253.9) ?

One reader asked us how we calculated EIGIs Free Cash Flow. He pointed out that Cash flow from
operating activities less Cash flow from investing activities led to higher figures. This is correct. EIGI,
unsurprisingly, hides earnouts (acquisition-related payments) in its Cash flow from financing activities
section (EIGI refers to earnouts as Payment of deferred consideration):

Page 8 of 8

You might also like