Some astute investors contacted me yesterday regarding my short pick: Answers com. They questioned my due diligence but thankfully not my integrity. I have read the 10Q’s, the 10k and the most recent conference call transcript. They pointed out that I failed to mention that ANSW revenues are growing sequentially and substantially and that they have shown several consecutive quarters of improving losses. Two investors demanded retractions and one accused me of trying to manipulate the stock. One threatened to call the SEC. Last time I checked, the First Amendment applies to bloggers, even lowly stock market bloggers like me. The key is always full-disclosure. I don’t own ANSW and I haven’t shorted ANSW.
I did indeed fail to mention ANSW’s 07 first quarter outlook projects a gap operating loss of between 295K and 465K; certainly a major improvement over 06 first quarter losses.
Also it is true the analyst at Cannacord Capital is projecting $17 million in revenues for 2007 and therefore the P/S of 5, which I said is a fair metric, is on forward basis (if you accept Cannacord’s projections)and is trading there now. Rightfully they pointed out that the P/S I gave was based on a 12 month (ttm) basis. ANSW has also modified their business model to pursue direct sales contracts such as the one they landed with AOL which should boost sales and improve margins. I might note that certain changes in other places could drastically affect ANSW revenues, such as Google deciding to change their algorithms as it relates to Answers.com (a risk factor mentioned in their latest filings). Their balance sheet is not nearly as bad as I may have suggested. In fact, for a dotcom it’s quite good. No long-term debt, cash, investment securities and cash equivalents of $9.1 million. With only 7.6 million shares outstanding that’s over $1. 00 per share.
In my conversations with these investors the term non-GAAP was used more times than Henry Blodgett whispered the word “sell!” on a stock he yelled, “buy!” The non-GAAP world is full of artists mixing black and red (and yellow) creating beautiful abstract art. If it weren’t for acquisition costs and stock-options etc. then ANSW would be profitable now. But ANSW is not profitable now. Warren Buffet recalls a famous riddle by Abraham Lincoln when unraveling the mysteries of abstract art a’ la creative accounting: “How many legs does a dog have if you call his tail a leg?” Plug this into the Answers.com search engine and you’ll get the same answer Buffet gets: four (4), because calling a tail a leg does not make it a leg. Non-GAAP profitability is not profitability.
From the ANSW 10K management says that the non-GAAP numbers cannot replace and are not superior to its GAAP reporting:
“While management uses non-GAAP financial measures as a tool to facilitate its understanding of certain aspects of the Company’s financial performance, it strongly believes that these measures cannot replace, and are not superior to, the Company’s financial information prepared in accordance with GAAP…”
The implication is: Let’s put non-GAAP on the same level as GAAP or “Let’s call a tail a leg.” Non-GAAP net loss in 2006 was $2.144 million; GAAP net loss in 2006 was $8.617 million. That’s a difference of $6 million! Let’s snap our fingers and use the magical term non-GAAP and presto, $6 million in losses disappear. Wow. How’s that for irrational exuberance? I maintain the stock is overbought at the $12-$14.00 level and thus I maintain my short call. This is not to say that ANSW is not a worthy investment at lower levels.