Gotham City Research said that 40%-100% of Endurance International Group Holdings, Inc.’s profits were suspect. Gotham City said the company had overstated its organic growth by 3x, its domains hosted 1,000s of spam and malware-related sites, it hosted terrorist websites “as recently as a few weeks ago” Gotham says that the firm has an undisclosed subsidiary, had lied to the government about its credentials, and it was free cash flow negative. Gotham City gave the stock a PT $0. Shares are down 16% in the few minutes since the report was released.
Full presentation below but stay tuned for more coverage.
Endurance International Group: A Web Of Deceit by Gotham City Research
Endurance International Group is an extraordinary company. EIGI’s stock has risen 2x since going public in late 2013, handily outperforming its peers. The company has also generated industry-leading margins:
The first London Value Investor Conference was held in April 2012 and it has since grown to become the largest gathering of Value Investors in Europe, bringing together some of the best investors every year. At this year’s conference, held on May 19th, Simon Brewer, the former CIO of Morgan Stanley and Senior Adviser to Read More
Yet Endurance also appears to be an extraordinarily poor company, bleeding cash:
We tend to get excited when we see such diverging qualities in a company, so we decided to examine further. These initial red flags troubled us, as they tend to be indicative of extraordinarily bad companies:
- High debt level for a traditionally low ARPU and high churn business.
- Related party transactions between EIGI and entities tied to EIGI CEO.
- No International revenue disclosure, despite promoting itself as an international growth story.
- Suspect accounting, some of which widely deviates from its peers.
We dug deeper. Our due diligence spanned across several continents and included industry experts’ input. We have come to believe that Endurance is, indeed, an extraordinary company – just for all the wrong reasons. Once we learned that CEO Hari Ravichandran has been spending an unusual amount of time promoting the stock rather than running the business in recent months – 15+ investor meetings in recent months – we decided to share our findings with the public.
Gotham City Research believes 40%-100%+ of reported profits are suspect, and that normalized profits do not cover interest expense for the following reasons:
- Related party transactions account for 17% of EBITDA, and resemble transactions with it-self.
- ARPU declined -13% yet EIGI’s 10K claims ARPU grew +11%.
- Accounting irregularities found with its International business.
- A significant undisclosed subsidiary lied to the US government about its credentials.
- The company hosts terrorist-related websites, and a high % of malware/spam-related accounts.
- Churn is high as a result of service outages, poor customer support, and slow loading speeds. EIGI claims otherwise, yet EIGI has under-invested in its business, spending 80% less on infrastructure vs. Godaddy.
Endurance’s EBITDA Margins are Exceptionally High Relative to its Peers
EIGI’s adjusted EBITDA margins handily outperform its web hosting peers’. Godaddy, the industry leader, is twice as large as Endurance yet its reported Adjusted EBITDA margins are half that of EIGI’s1:
Although improbable, it’s possible that EIGI is actually a great business, leadings its peers, in an otherwise commoditized industry. Endurance attributes its ‘superior performance’ to ‘best in class cloud enablement technology platform’, ‘high quality products’, and ‘high quality subscribers’:
Gotham City Research believes that the company’s above representations are not in agreement with reality. In fact, it seems that the Company is characterized by low quality products, low quality subscribers, mediocre/poor technology platforms. The remainder of the report details how exactly. We first begin by explaining how we believe EIGI uses related parties to overstate earnings.
EIGI Uses Related Parties, Improper Accounting, & Other Dubious Practices to Overstate Earnings
We believe the keys to EIGI’s success have been its Ravichandran related parties, suspect accounting, & other dubious business practices (these have helped the CEO unload ~30% of his shares recently). With respect to the related parties, we believe the company has engaged in two parallel schemes:
- EIGI uses the Ravichandran entities and its other captive vendors to overstate profits:
- Ravichandran entities sell its services to EIGI at below-market prices (while harming customers via poor user experiences), allowing EIGI to achieve an artificial cost advantage:
The Largest Related Parties are Secretly Controlled by the Company Itself
Gowex, Quindell, Tile Shop, Crazy Eddie’s, Sino-Forest, and many other frauds shared (at least) one common characteristic: material related party transactions with captive or quasi-captive entities. In many cases, these captive or quasi-captive entities were substantially the companies themselves.
Gotham City Research believes that EIGI’s largest “related parties” are substantially EIGI itself for the following reasons:
- Endurance CEO Hari Ravichandran and/or immediate family were and/or is a director and/or owner of related parties, Glowtouch Technologies and Innovative Business Services (“IBS”).
- The transactions are material to EIGI, as the transactions have accounted for at least 16.5% of 2012-2014 EBITDA.
- EIGI’s payments to Glowtouch account for the majority of Glowtouch’s revenues.
- Glowtouch currently staffs and operates the HostGator India (an Endurance subsidiary) business.
- Glowtouch/Endurance employees name Glowtouch/Endurance as if they’re the same entities on linkedin or other on-line profiles.
- http://www.glowtouch.co.in/ website doesn’t work as of April 17, 2015.
- We have documentation that shows Glowtouch pays &/or receives payment-in-kind from EIGI.
- Pattern of related party transactions beyond those involving Ravichandran, including loans at favorable rates between Endurance and its management & “consulting” contracts.
- EIGI was exempted from the auditor attestation requirements in the assessment of internal control over financial reporting, because it technically qualifies as an “emerging growth company” per the JOBS Act (despite being in business since the late 1990s).
See full PDF below.