Market Leader, Inc. Message Board
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Complex Accounting?
One way to look at where accounting is reasonable is to look at the relationship between reported net income and free cash flow. Then compare this to the growth rate in revenues and earnings since generally more growth means less free cash flow.
For SOLD, over the last 3 & 3/4 years (02,03,04, 9m 05) they generated net income of $25.6m and free cash flow (after all capex and any acquisition spending) of $31.9m (or if you want to exclude stock based compensation) free cash flow was $29.5m. And over this time frame, they grew revenues at greater than 50% per year compounded.
Generally speaking, a company that generates 115% of net income in free cash flow, while at the same time growing revenues at more than 50% per year over several years, does not have any accounting issues-
If this is the beginning of the end there will be tell-tale signs for Q4-05 or Q1-06. The expenses will start rising per $ of revenue. The company conveniently publishes the breakdown. Look for changes in assumptions when booking revenues, deferred expenses or simply an outright decrease in margins. Also, if the company continues to dance around the churn-rate issue you know you have a great short.
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CFFO is king, and they have had it. This is a one story whorehouse (no fu--ing overhead) provided the business model works. The model, however, is not sustainable since:1) The true churn rate is over 75%, maybe as high as 85%. Therefore, SOLD needs revenue from new agents to keep growth and revenues growing.; 2) The real estate market is slowing. It may not burst, but the longer term trend is decling sales and there will be a shakeout of agents (most will go back to being homemakers, cab drivers or whatever);, 3)The biggest draw--the free leads--will "dry up" due to homeowners getting the information they want for free.
Sold is a short if there ever was one. -
"Generally speaking, a company that generates 115% of net income in free cash flow, while at the same time growing revenues at more than 50% per year over several years, does not have any accounting issues"
That is, of course, unless they have been misleading investors about the way they book revenues....- 2 Replies to therealtyagent
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A great issue is how they show a modest churn rate, rising revenues, AND A SIMILAR NUMBER OF CLIENTS from Q to Q. Something is amiss, and I think it is the churn rate that might be closer to 85%-90%. They have had great growth, but the market has changed. The bubble may not burst (it may be a souffle and not a bubble), but it will deflate and the numbers of realtors will be reduced.
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If they were booking revenues that were not real revenues, they they would not have the cash flow and you would see a disconnect between revenues and cash flow (for example you would see huge growth in receivables). That does not appear to be the case here as free cash flow is greater than net income despite huge revenue growth. This indicates to me, that if anything, their accounting might be on the conservative side.
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