The Fast Search Train Wreck: Who's Accountable?

Fast Search & Transfer reported its 2Q07 financial results yesterday. Here is the summary:

  • Revenues of $34.1M, down 31% from 1Q07, and down 11% from 2Q06
  • Operating loss of $37.8M, reflecting an operating margin of -111%
  • Cash burn of $25.6M in 1Q07 and $74.8M over the past year
  • Explosion in days sales outstanding (DSO) to 265 days.

On the plus side, Fast took their lumps. On the downside, while they admit to serious problems there seems to be no accountability for those who let them happen.

Quotes from the investor presentation, along with my commentary:

  • “We are disappointed about our Q2 results.” I sure as hell hope so, given that they’d provided guidance of $53.5 to $57M with one month left in the quarter, and they had positioned the company as the high-growth market share gainer in enterprise search.
  • “Change of sales procedures has cut short-term revenues significantly: tightening of financial control, including non-use of [memoranda of understanding] and removing longer payment terms.” My translation: Fast will stop taking revenue when they don’t have signed software license agreements and they’ll stop accepting payment terms that look more like a discount mattress store (buy now and make no payments till next year) than an enterprise software company. My question: if these practices are not acceptable, then who is accountable for having allowed them in the past?
  • “Thorough review of accounts receivable has led to $13.5M in new provision for bad debt.” My translation: $13.5M worth of deals that Fast had booked and reported as revenue in the past actually, uh, wasn’t because the customers won’t pay — probably because either they’re not happy with the software or because the agreements used (e.g., MOUs) weren’t actually binding. And that’s not $13.5M in total “fake” revenue, that’s $13.5M more than they’d previously estimated. This begs the same accountability question, and also suggests that a restatement of past results might be in order.
  • “No excuses: issues are internal operational and fixable.” For the most part, I’d guess that’s true but (accountability aside) this impacts how I think about the enterprise search category. Simply put: Fast and Endeca were the bright spots in an otherwise fairly bleak category. Now, there’s only Endeca and the bottom-eating Google Appliance.
  • “We are in a unique position in a very attractive market.” Well, I’ll give you the unique position part. See the prior point for my thoughts on the market.

Here’s some free advice for Fast:

  • Restore some credibility by holding someone accountable for this situation. When in doubt, the CEO is a good place to start.
  • Stop reporting under different financial rules (IFRS) than the mainstream software industry: report under GAAP like just about everyone else.
  • Dual list on the NASDAQ, subjecting the company to SEC rules and regulations

In short, take a lesson from the Barry Bonds situation: if you want people to care about — let alone celebrate — your results, then you should play by the same rules as everyone else .

(Recall that I was an executive officer of a France-based, dual-listed enterprise software company for 9 years so I have personal experience in dealing with these international issues.)

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