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Red Hat, Inc. Message Board

  • Bibbicif Bibbicif Jun 5, 2003 10:40 AM Flag

    Good presentation

    Just heard on RHT's website its presentation live from the Lehman services conference. According to the press release from a few weeks ago, the audio and the slides will be placed back on the website in 24 hours and be available for 90 days. If you have an interest in RHT, it is definitely worth listening to.

    There were no big surprises to me, but I was pleased with the company's emphasis on several points that I think have held back the stock. The discussion in connection with slide 10 went over all the incentives RHT's management and employees have to work for the shareholders' interests, including a discussion of the requirements for bonuses, and the mandatory stock purchase plan. Our obsessive compulsive CPA here might want to give that section a listen before foaming at the mouth again.

    One aspect that has been treated as a negative by analysts, the sharp decline in US outplacement in the last two quarters compared to the post 9/11 environment the previous year, was converted quite nicely, IMO, into a positive. US ouplacement revenues dropped 19% in Q1 '03, yet operating profit margins in that business dropped only slightly, and the division was still quite profitable, although down from the previous year, of course. This shows that RHT's operating model allows good control of costs. Most businesses that had that kind of drop in sales would have gone way into the red.

    Unfortunately, most of the audio dropped out during the Q&A period. I hope that section can be restored when it shows up on the website tomorrow. The whole thing from start to finish was about 45 minutes.

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    • "No one suggested that he [Buffett] owes his success to a reasonable limit on options."

      You did exactly that. Reread what you wrote earlier in the day.

      "When employees exercise and sell, there isn't isn't enough activty in this stock to work the options in without taking the stock lower...No on has suggested either that exercising and selling is keeping the price low."

      You do exactly that, and are doing it again just a few sentences prior to denying it. Please read what you write. In fact, total sales by insiders this year are trivial, easily absorbed in a few hours trading. Data easy to find.

      "I know that there is 20% overhang waiting in the wings. That's enough to keep the interest in the stock low, keep buyers away..."

      What is so special about options being a potential source of supply? For all stocks, 100% of all shares are always waiting in the wings, if those who own the shares want to sell them. In fact, most options stay as options for many years, and are less a threat to the stock price than the shares already in existence. One should spend time analyzing what might make anyone, insider or outsider, want to sell their shares, or buy more for that matter, as many insiders have done this year; that is called fundamental analysis.

      "I think you showed your true colors with this comment "The fact that the option count so infuriates you only says something about your particular psychological issues". If you can't prevail in the discussion on factual grounds, then sling mud ? It does not "infuriate me". It amuses me. This board is entertainment during slow trading days."

      Entertainment for me too. But your fetishizing one minor factor, out of all the things affecting RHT stock, and your frequent mindless "shoot this dog" type posts, suggest a lack of balance in your viewpoint on the matter.

    • I am confident that Buffett would get a bigger laugh of your arrogant defense of a company that issues options equivalent to 20% of the shares outstanding. No one suggested that he owes his success to a reasonable limit on options. Why do you have a desire to read that into his stance on options? It's crystal clear though that companies can have a 7% options cap and still provide superior returns to shareholders. Buffett has proven this. So, why do we have to blindly accept mgt's explanation that they have to issue ungodly numbers of options to attact good people in order to provide superior returns? We don't.

      Your math no doubt provided you with some nice mental exercise this evening. But, it's worthless. The impact options have on share price is more a function of the average daily demand/supply of a stock to the number of options that will be hitting the market. Options dilution to a stock that trades hundreds of thousands of shares a day is tolerable. The stock can be worked into the market place with ease. Options dilution to a thinly traded issue acts as a huge anchor around the neck of the stock. RHT doesn't have a big following. The added shares weigh down the stock.

      Do all the mental math you want. When employees exercise and sell, there isn't isn't enough activty in this stock to work the options in without taking the stock lower.

      No on has suggested either that exercising and selling is keeping the price low. I have not done the research to see how much activity is out there with options each quarter. Have you? I don't need to. I know that there is 20% overhang waiting in the wings. That's enough to keep the interest in the stock low, keep buyers away, have those who do the homework question the credibility of the mgt team, enough to have analysts stay lukewarm on the company, enough to cast a questionable light on RHT.

      I think you showed your true colors with this comment "The fact that the option count so infuriates you only says something about your particular psychological issues". If you can't prevail in the discussion on factual grounds, then sling mud ? It does not "infuriate me". It amuses me. This board is entertainment during slow trading days.

      I don't care where you are going. I care even less about when you come back. I'll be here. And I'll be talking up the same issue ... the mgt team here are screwing the company shareholders by handing out options like they were candy.

      This company needs to be taken private.

    • I've thought about selling just because of this issue. I've found the interaction between you and cpa very interesting & appreciate your spelling out your take on it. Thanx.

    • Buffett may well have a rule on how many options should be outstanding, but I think even he would laugh at the implication that he owes much, or even a little bit, of his wealth to that rule. It is just a good rule of thumb, not THE key to wealth. If it were that simple, we'd all be rich.

      I am not arguing with you that it would be nicer if RHT had fewer options outstanding. But the number of options is already taken into account in calculating fully diluted EPS. The calculation is in every 10-K and 10-Q. Are there investors who are unaware of what is in public documents? Sure, but they aren't the big players. You seem to think that only you are aware of this deep dark secret, and it is your duty to spread the news. Well, all I can say to that, is.... yawn.

      Had RHT stuck to the 7% rule, there would be 13% fewer shares outstanding, fully diluted. If dollar earnings were unchanged, EPS would be 13% higher. (Of course, if to retain good people you had to pay them more cash in lieu of options, then dollar earnings would be lower, and EPS less than 13% higher.)

      The reason that RHT is selling for $12 rather than $22 is not that its EPS could have been $0.25 higher. That explains less than $2 of the price shortfall. The reason it is not still $22 is because no one wants to pay much of a multiple on RHT's fully diluted EPS, because they think that the earnings of the US outplacement operation will fall off a cliff as soon as the economy returns to what is perceived to be its natural state, a boom or bubble. If fully diluted EPS were a bit higher, the market, given that attitude, would not pay more than a low multiple of those earnings either.

      Your assertion that RHT's stock is being battered down by employees constantly selling shares they get from options is proven wrong by the paucity of such transactions compared to the volume. Anyway, wouldn't that contradict your complaint? If employees exercised lots of options, then there wouldn't be too many outstanding anymore, would there?

      I think you have the kernel of a legitimate argument. Yes, RHT would be selling for a point or two higher if it had issued fewer options. But that is trivial, compared to the $2 to $22 to $12 history the last three years. If it goes back up into the $20's, or heads back down into single digits, this will all happen because of the actual performance of the business and investors' expectations for the future, and not because of any aspect of the option count.

      The fact that the option count so infuriates you only says something about your particular psychological issues, not about anything of great import for RHT stock. I'll be away from the computer for several days, so foam away at your leisure, and I'll respond, if need be, after the weekend.

    • It's a bonus plan. Period. Show me another company with a fat bonus plan, and a fat options plan. One or the other. Or good balance in both. No need to be gluttonous at the shareholder's expense.

      I have to vehemently disagree with this statement "there is no logic to your assertion that employees don't have incentives that ultimately help the stock price."

      So, it's OK to issue 100%, 200%, 300% options on shares outstanding? Why not, it provides more incentive ? Right ?

      Following your logic, Warren Buffet should be on welfare. Warren Buffett's companies striclty adhere to the 5 to 7% rule when it comes to options. Are you suggesting that the employees of Buffett's organizations are that much LESS motiviated to produce superior returns? If so, how then is it possible that Warren Buffett has become one of the richest men in the world via his capital alloctaion skills? Could it be possible that the companies in which he invests have employees who are not as motivated ? No.

      There is a point at which issuing more options does absolutely nothing in terms of overall employee motivation. Beyond that point, it just becomes a plain transfer of wealth from shareholder to employee. It takes returns that should be paid to the shareholder and puts it into the pockets of the employees, at no added benefit to the stock or the stockholders.

      If Warren Buffett has become a Billionaire 30 times over through investments in companies with motivated employees having options of no more than 5 to 7% of the shares outstanding, well I'd say that's a good sign that 5 to 7% is the point beyond which options become gluttonous and just plain theft.

      And 20% is 3x Buffett's going rate. That's why RHT will never produce superior returns over the long term. That's why this stock is stuck in the mud now. That's why this company needs to be a private company.

    • No it's not a trivial obsession. It's a major problem. Whenever the stock tries to muster any strength, employees will be there to exercise, sell, and beat it back down. It's a cap that will keep the stock down for a lengthy period of time. It will take a long, long time for another 20% of the float to be digested by the market.

      No, the stock price does not reflect the existence of options. Contrary to popular belief, the market is not a perfect discount mechanism for all information. Especially information buried deep in the footnotes of the financials. How many investors reaserch the options issue prior to buying a stock ? 2%, 1%, probably less.

      If I am correct, in prior posts you have accused the analysts of not understanding this company. Not giving it more credit. I strongly suspect if they were free to speak(without fear of their firms losing the potential to do business with RHT in the future), you would find out that the bloated options plan and Richard's inability to address this issue are some of the primary factors why they don't support the company.

      It is not all that rare to find companies with 20% options outstanding? You are just plain wrong about that. I am very much in tune with the options issue. I frequently short stocks coming out of IPO lockups. It takes tons of culling through 424B filings and study of the details of employee options to be successful at these trades. It is very rare to find a company with options that approach 20% of shares outstanding. Very rare.

      This mgt team is reckless. They want to give away the shop. Well fine. Let them do it. With their own money. Quit picking the pockets of RHT shareholders. Take the company private.

    • "Richard's respone - well then, I need to hold options constant and start paying big bonuses too !"

      The bonuses only get paid if the company achieves its 15% fully diluted EPS growth target--that's 15% after bonuses are paid, not before. If options cause extra dilution, then dollar earnings have to be just that much higher for bonuses to be paid.

      The large number of options that employees have, as well as the large number of shares that they are required to buy with their own money, and the fact that bonuses depend on the growth of after tax fully diluted EPS, all force the employees to be pro-shareholder. Sometimes conditions are such that that may not be good enough to make earnings go up as much as we would like, but there is no logic to your assertion that employees don't have incentives that ultimately help the stock price.

    • "Otherwise, the options overhang is just going to kill this POS."

      How exactly?

      The existence of options lowers fully diluted EPS. The $1.80 goal for this year is fully diluted. Once earnings have been fully diluted, they don't get diluted a second or third time. The $1.80 reflects all the options outstanding. If RHT earns less than that this year, it will be because of disappointing operating performance, not because of the options about which you are so obsessed.

      To the extent that investors are bothered by the number of options outstanding (many of which have striking prices above market), they don't buy the stock, or they sell it at lower prices than they otherwise might. So the stock price already reflects the existence of the options. In other words, it has been discounted, is old news, ancient history, and has nothing to do with future stock action.

      BTW, it is not all that rare to find companies, especially small cap stocks, with options outstanding well north of 20% of shares outstanding. Nevertheless, suppose RHT had only 7% that you consider the limit for "good companies". Therefore, to follow your thinking, by not "cheating" outside shareholders out of that extra 13% of the company, the stock, instead of closing today at $12.75, would presumably have closed instead at $14.41, which is 13% higher.

      Do you see how trivial your obsession is? Less than three years ago RHT was $2.52, about a year ago it was $22.38, and you are whining that it is now $12.75 when it might have been $14.41.

      I would suggest you lack a sense of proportion.

    • Not only that. It gets worse. The bonus plans at RHT didn't used to be so lucrative. The CEO indicated on the last conference call that he had received so many comments from analysts and institutional investors about their fat options plan, that he had to start paying nice bonuses in order to keep and attract people.

      Can you believe that utter BS ?

      Institutional investors communicate to Richard that he's issued 2x to 3x more options than normal to his employees. That has a dilutive effect on the shares. It supresses the stock price. He needs to address this.

      Richard's respone - well then, I need to hold options constant and start paying big bonuses too !

      When I heard Richard address this issue in the last conference call, my immediate thought was that man is clueless. He just stuck a stake through the heart of the stock price. He is just absolutely clueless.

      A previous person who posted got it right. Forget owning the stock, find out how to become an executive at RHT. Big options. Big bonus. Screw the shareholders. I got mine. That's RHT. That's why this stock has no future.

      If nice bonuses are going to be paid on profits, then the stock options need to be reduced to 5% of shares outstanding. Any action less than that is a slap in the face to the shareholders of RHT.

      Wake up Richard. Quit screwing your shareholders. Take the company private, or sell it.

    • I'll give it a listen. Can not help but notice that you did not address my biggest beef - the sheer number of outstanding options there are for this stock. Did RHT mgt address this issue in the presentation? Like it or not, those options serve as a huge drag on the stock.

      It's also going to be interesting to see if the presenters whined about the valuation of the stock. I am just so damn tired of listening to these people whine and moan about their stock price. If they don't like it, then they need to get off their butts and do something about it. Lever up and buy in stock. Or, better yet, just take the damn thing private.

      This company has no business being a public company. They treat their shareholders like trash by issuing options like it was free candy. If they want to dilute the heck out of their owners interests, make it come from their own pockets. Take it private.

      • 2 Replies to cpa38
      • I am curious: are you arguing that the options outstanding are causing some specific dollar amount or percentage reduction in the value of RHT? Or are you saying it will cause a drop in the future, once enough investors agree with you how horrible it is?

        What I am getting at is this: Everybody, including management itself (based on comments in the last conference call) agrees that the number of options outstanding is a negative. This is not a new, previously undisclosed problem. What isn't clear to me is that a) it is a big problem, since giving out no options is not a feasible alternative these days to recruiting and retaining good people, and b) that it hasn't already been discounted in the price of the stock.

        Yes, it would be nice if RHT had fewer options. Yes, it would be nice if it had less debt. Yes, it would be nice if it the outplacement division were growing as fast as the consulting operation. But if it had fewer options, less debt, and faster growth, the stock might be $25 or $30. You seem to think that the mere existence of an above average number of options, despite the mandatory stock purchases required of all employees, makes management so immoral and anti-shareholder that no price of the stock is too low for it to be a good buy. Is this just purely a moral issue for you? Or, if you really are a CPA, perhaps you can quantify for us why a P/E of 7 and an enterprise value/EBITDA of 4 doesn't already more than discount any negatives. Thank you.

      • I did listen to the presentation. I guess overall it sounded good, but I decided to sell at a little profit this morning. Have changed my mind since my first post as a few things are now making me uncomfortable.

        First Call is estimating decreasing revenue YOY and sequentially for the next 2 quarters although I believe RHT said revenue would be great this year. Nice that margins aren't decreasing as much as revenue in the US, but...

        After looking more into options I think a few folks here have made a good point about 20% of the O/S for options is a bit high. They also said in the 10-Q or 10-K they had to borrow $28M to pay bonuses, and want to increase authorized shares from 45M to 100M for possible acquisitions and more stock options.

        Based on EPS and LT growth the stock is undervalued, but think I'll put my money elsewhere. Think I'm starting to agree the company should go private, sounds like a great place to work.

        Thanks for the input - good board discussion here from both sides.

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