Category Archives: Fast Search

Fast Search: The Blood-Letting Begins

See this Forbes story for the latest news on the situation at Fast Search (& Loose Accounting) & Transfer:

  • Layoff of 148 employees
  • Reduction in operating costs of approximately $12M/quarter
  • Up to a $55M one-time restructuring charge
  • Of which $25M will be cash (e.g., severance)
  • And remaining up to $30M will be non-cash

The non-cash write-offs are the most interesting ones. In the slide presentation from today’s conference call they say the $30M in non-cash charges will be for:

  • Internally developed software. This means some amount of previously capitalized R&D has now been decided to be worthless. (This is why conservative software companies don’t capitalize R&D.)
  • Acquired technologies and customers. I’ve never heard of carrying acquired customers on your balance sheet before, but saying you’re writing off acquired technologies means that some products or work-in-process R&D you had previously acquired and put on the balance sheet as assets have since been decided to be worthless.
  • Specific accounts receivable provisions. (What’s the PR rule? Always put the thing you want the least focus on 3rd in a list of 4?) I don’t know what “specific provisions” are, but I do know that writing off accounts receivable (AR) means that customers aren’t paying for deals that you previously reported as revenue, either because your agreements weren’t actually binding (and the deals should never have been reported as revenue in the first place) or because customers aren’t happy and are simply refusing to pay. One does wonder how much in additional AR write-offs is buried in this otherwise opaque $30M pool.
  • Property and equipment. I’m not sure what this is, to be frank. It’s hard to imagine walking into a building one day and deciding it’s become worthless. Perhaps it’s more about computers or about their planned real estate consolidation.

In addition, Fast provided 2007 guidance of ~$160M, which is slightly down from the reported 2006 revenues of $162.6M (see page 25).

Somewhat amazingly, for a company that on May 31 thought it was going to do “$53.5 to $57M” in the quarter ended 30 days later and did $34.1M instead, Fast gave guidance for revenue growth for “succeeding years” (i.e., beyond 2007) of “30%+”.

Here I was thinking it was bold to provide 2007 guidance under the current circumstances, and they’re giving guidance for 2008 and beyond.

See the FAQ for disclaimers. See these posts (Fast Warns, Who’s Accountable) for more on the story.

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.)

See the FAQ for disclaimers.

More on Fast's "Extensive" Profit Warning

See this Forbes story for more information on the situation at Fast Search & Transfer. The shortfall seems bigger than I previously posted:

  • The 2Q07 revenue guidance I cited was evidently the bottom of a consensus range of $50M to $60M (see below)
  • The company’s new guidance is $34M to $38M
  • The company’s 2Q06 revenues were $38.5M (though the SEB Enskilda analyst says that “historical revenue figures are now called into question,” seeming to suggest a possible restatement.)

Quotes from the Forbes story:

Fast Search & Transfer fell 0.3 to 10.45 [NOK] as analysts got to grips with the implications of the internet search firm’s extensive profit warning last Friday.

Last Friday shares in Fast slumped almost 30 pct after it warned that its second-quarter results were unlikely to meet market expectations, with sales coming in at 34-38 mln usd compared to what analysts say is a consensus forecast of 50-60 mln.

The group blamed ‘changes in business practice’ and the tightening of internal control procedures, along with lower sales, a rise in exceptional items and the need for an increased provision for bad debt.

Analysts had already expressed serious concerns about Fast’s accounting procedures, and particularly the aggressive methods of recognising revenues. However today they said Fast’s profit warning had been even more severe than had been expected.

[…]

The broker said that despite previous warnings over margins, strong top-line growth had ‘continued to support the investment case’. SEB said last week’s warning had ‘called the historical revenue figures into question’.

‘Its profit warning was more extensive than our concerns about its aggressive revenue recognition and receivables write-downs,’ the broker said, arguing that the firm’s cost base is ‘clearly geared to significantly higher revenues than the company expects’.

[…]

See my FAQ for disclaimers.

Fast Search & Transfer Warns Big Time

See this story where Norwegian enterprise search vendor, Fast Search & Transfer, makes a significant (~$15M revenue shortfall) 2Q07 earnings warning:

Fast Search & Transfer closed 4.25 nkr lower at 10.75 after the search platform specialist warned its second-quarter results were unlikely to meet market expectations, with sales coming in at between 34-38 mln usd compared to what analysts say is a consensus forecast in the region of 50 mln.

The group said ‘changes in business practice’ and the tightening of internal control procedures have had an adverse impact on second-quarter revenues.

‘We believe that these changes had an impact of 10 mln usd when compared to the first-quarter results,’ it said. ‘In addition, a shortfall in expected sales revenues has had a further adverse impact of about 5 mln usd in the quarter.’

On top of this, Fast said the second quarter has seen exceptional items worth a combined 5 mln usd, which means expenses in the quarter are also going to come in ‘higher than market expectations’.

Additionally, Fast said it expects to make an increased provision for bad debt ‘in excess of the 6 mln usd previously communicated’. Fast is scheduled to release it second quarter results on Aug 8.

For a long time, I’ve felt that Fast was the MicroStrategy of enterprise search; so concerned with showing high growth that it — how do I put this nicely — let the basics slide. Frankly, I didn’t draw that conclusion all by myself; some of it came from reading a few financial analyst reports about them, other information came from discussions with former employees who described the culture in terms that reminded me of MicroStrategy, and some came from my general sense that Fast was spread too thin, with too many initiatives for a company their size.

By my math, this means the “high growth” vendor in enterprise search is actually shrinking. Per the 2Q06 earnings release, revenues in 2Q06 were $38.5M. Their new 2Q07 guidance is $34 to $38M, so they are shrinking somewhere between 1% and 12%.

If you think financials don’t matter when it comes to market perception, think again. And I’m not talking about the Norwegian stock market, I’m talking about the customer market. As a customer, or industry analyst / consultant who advises them, tell me how you would feel about a supplier who is:

  • 70% of the leader’s size, profitable, and growing at 50%

Versus:

  • Less than half the leader’s size, unprofitable, and shrinking

It makes quite a difference, doesn’t it?

While most industry analysts would not admit it, they look a lot at reported vendor financial results in determining their opinion of a company, the effectiveness of its strategies, and ultimately things like its placement on a magic quadrant or equivalent diagram.

I’d note (and I’d guess the timing of all this is not a coincidence) that Fast announced the appointment a new president and COO this week, Joseph Krivickas.

Velkomen, Joe. I hope you brought a mop.

Disclaimers:

  • We compete with Fast, although indirectly
  • I am a CEO analyzing the market, not a financial analyst analyzing stocks, and I do not make buy/sell recommendations
  • See my FAQ for more

Autonomy Hires Fast's Convera Guys. Huh?

Things are sure crazy in enterprise search.

  • First, Verity forgets to invest in product innovation for several years, leaving themselves open to a general market-share assault and subsequent acquisition by Autonomy — a company less than one-half Verity’s size at the time they acquired them. That’s rare. (See here for more.)
  • Then Convera decides that the only thing that it knows how to do (sell search inside government) isn’t worth doing and, in response, amazingly sells off the part of their business that accounts for 93% of their revenues. That’s rarer. (See this post: Honey, I Shrunk the Company).
  • Then Fast announces its intention to acquire Convera’s $2.6M/quarter Retrievalware business for $23M. Paying 2.3x revenues for a business shrinking at nearly 30% is pretty rare, too. Normally, using my rules of thumb, a flat $2.6M/quarter business might be worth $10M (i.e., 1x revenues). A shrinking one might be worth half that.

If things work out as it appears:

  • Fast will end up with Convera’s technology
  • Autonomy will end up with Convera’s people

Since it’s hard to support the technology without the people (see my post on the Oracle/SAP lawsuit here), and since neither company is US-owned, that should make Convera’s largely defense and intelligence customers pretty sketchy on the whole affaire.

Combine this chaos with:

  • The Government’s desire to use XML as an open and standard format.
  • The Intelligence Community’s desire to use XML enrichment technologies to create richer and richer markup
  • XQuery’s ability to express powerful queries in a high-level fashion against that markup
  • MarkLogic’s ability to process complex XQueries against large contentbases with high-performance

And all roads seem to point in MarkLogic’s direction.