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Endurance EIGI stock gets trashed

Thu, 14th May 2015, 20:59

Generally speaking, except in those all too often cases of insolvency and ineptitude, Hostjury prefer to leaves the financial underscoring of various webhosting firms to those introverted bean counting types that thrive on that sort of financial knitpicking, preferring instead to focus on the day to day necessities like uptime, support, services offered, and the ever present fine print hidden in those Terms of Service (ToS). Alas, sometimes the implications of the communique divulged contravenes logic and can't be ignored!

Earlier this month, the company that controls many of the web’s most recognized hosting brands (eg: BlueHost, JustHost, HostGator, Arvixe, HostMonster) released their first quarter earnings report. Hari Ravichandran, chief executive officer and founder of Endurance International Group commenting on the reported stated:

We are excited to have started the fiscal year with a quarter that exceeded expectations for both adjusted revenue and adjusted EBITDA. Our first quarter results demonstrate that our two-pronged strategy of growing subscribers and growing average revenue per subscriber is an effective approach to addressing what we continue to believe is a large and exciting opportunity.

These core components of our strategy continue to anchor our overall approach to the marketplace and position us well to meet our longer-term goals for growth and profitability.

The Highlights included

  • GAAP revenue was $177.3 million, an increase of 22 percent compared to $145.7 million in the first quarter of 2014.
  • Adjusted revenue was $178.7 million, an increase of 17 percent compared to $152.8 million in the first quarter of 2014.
  • GAAP cash from operations was $50.2 million, an increase of 32 percent compared to $38.0 million in the first quarter of 2014.
  • Unlevered free cash flow (UFCF) was $59.9 million, an increase of 22 percent compared to $49.0 million in the first quarter of 2014.
  • Free cash flow (FCF) was $45.8 million, an increase of over 29 percent compared to $35.5 million in the first quarter of 2014.

First Quarter Operating Highlights

  • Total subscribers on platform were approximately 4.206 million, an increase of approximately 119,000 in the first quarter.
  • Average revenue per subscriber (ARPS) was $14.37, an increase of 1 percent compared to $14.18 for the first quarter of 2014.

Although I’m no expert, even for a layperson those average revenue per subscriber numbers, considering the annual inflation rate, may raise eyebrows. That said, I don’t own the stock so if it doesn’t raise concerns with the aforementioned bean counting types, who am I to question the equation… except someone did.

 

Gotham City Research

Gotham City Research LLC, a company claiming to focus on due diligence-based investing released a 60 odd page report entitled “Endurance International Group: A Web of Deceit”.

(Editor’s suggests readers forgo the urge to jump to conclusions and follow the money: Gotham City Research clearly discloses that on the publication date of their articles, they may have long or short equity positions in the companies covered).

So in short the Gotham City Research report suggested:

  • EIGI shares will go to $0.00 per share, as the company will struggle to service its debt. Normalized EBITDA margins do not cover interest expense.
  • Recent years’ reported EBITDA benefited from attracting Blinkx-like revenue (spam/malware, terrorism, etc.).
  • EIG profits at the expense of its customers (service outages, poor customer service, etc.).

The report also starts by summarizing the findings of Gotham City Research stating:

  • 40%-100%+ of EIGI’s reported profits are suspect.
  • 2014 Average Revenue per Subscriber (ARPS) actually declined -13%. EIGI’s 10K claims ARPS grew +11%.
  • Organic growth overstated ~3x. We calculate organic growth to be ~5.6%, not 13.0%-15.0% as EIG claims.
  • Directi’s revenues per the Indian filings are 30%-67% lower than reported in EIGI’s 10K.
  • Directi revenue figures within the EIGI 10K do not add up.
  • EIGI paid 17% of its ’12-’14 EBITDA to a related party tied to the CEO. The related party seems to be Endurance.
  • No international revenue disclosures, despite promoting itself as an ‘international growth’ concern.
  • An undisclosed subsidiary falsely claimed to the US Government that the FBI “recommended” them.
  • EIGI’s BlueHost, JustHost, HostGator and HostMonster hosted terrorist websites as recently as few weeks ago.
  • EIGI domains hosted 1,000s of spam/malware-related sites per spam/malware watchdogs (the hosting world’s Blinkx).
  • EIGI spends ~1/6th on core infrastructure vs Godaddy.
  • Customer reviews are consistently poor.
  • A 15+ year industry executive states EIGI uses a churn model/definition that is “not industry common practice, while using industry terminology.”
  • EIGI is free cash flow negative. Godaddy is FCF positive.
  • The management team (including the CEO) recently sold ~30% of their stake in EIGI.

As one would expect…

Shares of Endurance Int’l Group Holdings, Inc (EIGI) plunged nearly 20% to $18.23 in early trading Tuesday, following a report from Gotham City Research suggesting EIGI shares will go to zero.

Endurance International Group never took long firing back and released a statement in response to the Gotham City Research report. The company said,

“The claims in this ‘report’ are baseless and not rooted in reality. The reality is, since going public, Endurance has beat expectations every quarter, showing consistent growth throughout the company. Endurance senior executives still own a significant stake in the company and are deeply invested in its future success.”

To read the full release click here.

 

The Fallout

It is not within the realm of this article to suggest or even comment on  any ulterior motives and/ or intentions to manipulate the Endurance International Group and/or GoDaddy stock prices. To do so without a more intimate knowledge or awareness would be baseless.

What has become apparent according to the NASDAQ Exchange is that the report has spawned a growing list of ambulance chasing legal types launching Class Action Lawsuits and investigations against Endurance International and its officers.

 

Conclusion

Could the stockholder and legal issues surrounding Endurance International impede its performance? Invariably any energies focused elsewhere, rather than their core business, could become problematic. Certainly in the short term it should have very little or no direct impact on the day to day operations for clients utilizing the services of EIG numerous web hosting brands. Aside from sharing mutual datacenter infrastructure, the brands have at least the appearance of operating as separate entities.

Still the Gotham City report does raise at least one interesting point that could have repercussions for EIG clients. The report highlights a rash of datacenter failures affecting the servers for thousands of hosting clients. Linking all these failure to aging infrastructure as suggested in the report, demonstrates a clear lack of understanding of the industry by the report authors. Its not sound reasoning.

While the downtime rationale is somewhat faulty, the report is correct inasmuch as numerous EIG competitors are expending considerable amounts of resources upgrading their infrastructure and business models to meet the ever increasing demands of businesses and netcitizens alike. As in any industry, firms failing to recognize and adapt to the evolving climate soon disappear from the landscape.

 

About Endurance International Group

Endurance International Group is a publicly traded (Nasdaq:EIGI) technology company that helps power small and medium-sized businesses online. Through its proprietary cloud platform, Endurance provides web presence solutions including web hosting, eCommerce, eMarketing and mobile business tools to approximately 4.2 million subscribers around the globe. The company's world-class family of brands includes Bluehost, HostGator, iPage, Domain.com, A Small Orange, MOJO Marketplace, BigRock and ResellerClub, among others. Headquartered in Burlington, Massachusetts, Endurance employs more than 2,600 people across the United States in Utah, Texas, Washington and Arizona and in the United Kingdom, India, Israel and Brazil.

 

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