Tech history is short.
I began the Uber post-mortem early last year, before it was fashionable
There is a new chapter in Uber’s story and this is my annotation. Let’s start here…
Travis Kalanick, is the former CEO of Uber. He has a weak moral compass. It is his character and it’s human. Many CEO’s that have that same subset, compensate for it by carefully choosing all the pieces of their management team “I know I drift to this, don’t let me’.
Travis traveled the other road, choosing members of the management team that would enable him, and, because they were flawed themselves, those people hired peers and subordinates that would enable them, and so on and so on.
That’s why this happened:
SEXUAL HARASSMENT SCANDAL,
Uber paid off hackers to hide a 57 million user data breach
Uber is tracking your location even when rides are finished
Uber’s app can secretly spy on your iPhone
Uber use spyware to track its rival, Lyft
Uber used a tool to deny rides to regulators and let them book only ghost-cars
Into this den of inequity, a new investor comes…
Softbank is a Japanese hybrid of Hedge Fund, Private Equity, Tech Business Holding Company. They operate +/- 800 businesses. Major operating segments (by sales) include Mobile Telecom, Sprint, Fixed Line Telecom and Internet.
Softbank is publicly traded and that requires visibility into earnings and everything on the periphery. The clever path around transparency is to make ‘transparent’ undecipherable by using complexity.
We will have to jump around in time, earnings are a moving stream and are stacked on where are buoy was before. Also, when you are doing earnings forensics you are in a Star Trek’ian teleporter lookbacks are important because earnings are always stacked in earlier earnings
Quick forensics can give some sense of its financial well being and corporate moral character. I’ll begin with earnings report of 2nd quarter 2013 vs 2015: (US$1.00 = 120.00 JPY)
Book Value $24B $32B
Questionable Assets (1) $16B $82B
Tangible Book Value (2) $8B $(50)B
BABA/Yahoo Gain (3) $0B $76B
Interest Bearing Debt $38B $96B
Questionable Assets defined as Goodwill + Intangibles + Equity Method Investees
Tangible Book Value defined as Book Value less Questionable Assets
Represents the increase in Unrealized Market Value associated with Alibaba and Yahoo! JPN stock. Alibaba Market Value of $65 Billion with a cost basis of $87 Million. Yahoo JPN Market Value of $11 Billion with a cost basis of $11 Million
June 30th 2015 Balance Sheet
The pace of borrowing & “investment” has been increasing dramatically. Interest Bearing Debt was US$ 96 Billion as of FYE March 31st, 2015, up from US $31 Billion two years earlier.
Even with all of the capitalized Questionable Assets, the debt to equity ratio nearly doubled from 2.3 to 4.1
Operating Margins decreased significantly, 25% in FY ending March 31st, 2013, down to 11% for the FYE March 31st, 2015
Interest Expense skyrocketed during the same period. Increasing from $540 million annually (8% of Operating Income) to more than $3 Billion per year (37.5% of OI) FYE March 31st, 2015
Illiquid, “Questionable Assets” as were US$ 82 Billion (47% of Total Assets). Conservative accounting methods would require that most of these assets be carried at a much lower level and/or expensed, as they have little/no benefit to future earnings. But, it gooses profits in the short run.
Let’s look at some of the Softbank acquisitions, investments, key events and its investment fund. Unexamined are thousands of suspects that require interrogation.
Reverse engineering highlights of fiscal third quarter of 2016
Segment income actually declined by US$ 400 million from the prior quarter. (pg 44 & pg. 52 of the respective reports.)
The ARM acquisition, at least in the December quarter, is contributing about 10% of Segment Income. When we apply financing costs to the US$ 32.7 Billion acquisition price, the business is barely covering the cost to finance the acquisition. Even a small rise in interest rates would make the ARM acquisition a loser with negative cash flow
Net Income in the 12/31/16 quarter was comprised substantially of the US$ 1.2 Billion of “fake” Alibaba equity-method income
Net Income for the 9/30/16 quarter was comprised primarily of the US$800 Million of “fake” Alibaba equity-method income and the US $4.6 Billion gain on the sale of Supercel and Alibaba stock
Oddly, nowhere in either the 3/31/16 Annual report or any of the quarterly reports, does Softbank disclose the Balance Sheet carrying value of the Alibaba shares they hold. The only thing we know with certainty is that the Alibaba share value is a major component of the JPY 1.55 Trillion (US$14.4 Billion) “Investments – Equity Method” line item on the balance sheet
Other Financial Assets increased by US$5.3 Billion during the quarter. The entire explanation for the increase is shown on page 20 of the Report “The Company made additional investments into existing investees and newly acquired investment securities.”
That’s it?….So a US$5.3 Billion long-term “Investment” over three months doesn’t even warrant a footnote describing what it is? After going into a painful, irrelevant three page discussion (Pg. 9) on Churn Rate, Subscriptions, Bundling, ARPU and phones sold, there wasn’t any space left to tell us what boondoggles they’ve “Invested” $5.3 Billion in? Could this be where they booked the already owned Alibaba Shares pledged as collateral and “transferred” to “West Raptor Holdings”?
Softbank paid US$32.7 Billion for US$1.5 Billion of “hard assets”, booking the remainder of the purchase price as Goodwill
Extrapolation of the 12/31/16 Segment Income of US$266 Million (US$1.1 Billion/yr.) and applying a financing cost (US$980 Million – 3% of $32.7 Billion) we can estimate, the business earns US$ 120 Million/yr. P/E ratio of 272
The first step the Softbank finance department took was to “improve” the accounting method, accelerating royalty income
“Following the Company’s acquisition of ARM, ARM has changed its accounting policy for recognition of royalty revenues. Since the change, ARM accrues the royalty revenue in the same quarter the chips are shipped by ARM’s licensees, based on estimates.”
There’s nothing improper about this, just an example of a change in the financials intended to “improve” results when the economic situation of the underlying business remains the same.
And this happened…
The Alibaba “Sale”
In June of 2016, Softbank announced it would sell a chunk of its Alibaba Stock to pay down debt and finance the newly announced ARM Acquisition. Reports had the value of the sale around US8B.
But, the Alibaba shares were never sold. Here are some of the highlights of the transaction
The BABA shares are transferred to a Softbank Subsidiary and pledged as collateral for newly issued “Trust Securities” held by their newly formed Mandatory Exchangeable Trust
Investors pay US$6.6 Billion for the newly issued “Trust Securities”
Softbank receives US$5.4 Billion in exchange for an obligation under the “Forward Contract” to deliver BABA shares on the first trading date after June 1, 2019 (Three years later)
The announcement says “A cap and a floor are set for the number of shares settled and the variable prepaid forward contract is classified as a hybrid financial instrument with embedded derivatives of collar transaction.”
This is financial reporting gibberish. It is insufficient to assess the transaction.
What are the parameters of the “collar” so we can assess the risk of the parties involved
The number of shares involved? Will Softbank be required to deliver the share equivalent of US$6.6 Billion as of June 1, 2019? What happens if the share price is $30.00 or $200.00?
Cash is “debited” for $5.4 Billion from the deal. Where is the offsetting $5.4 Billion credit?
In all probability the risk of share price fluctuation hasn’t been fully transferred, the offsetting credit is hiding in the oddly titled “Gain from Discontinued Operations”.
If I could generate a $5.4 billion gain from a “Discontinuation” transaction, I’d be “discontinuing” everything I could get my hands on.
Softbank was running out of beer money.
And then this happened…
Softbank “purchased” Fortress US$3.3 Billion.
Fortress was a publicly traded hedge fund
As of that current 10-K (9/31/16) the company has assets under management of roughly US$70B
Money under management comes from roughly 1,650 clients ($36.7 Billion or an average of $22.2 million invested) at Fortress and 100 clients at its sister fund Logan Circle ($33.4 Billion or an average $334 million).
Fortress Assets are invested in roughly seventy Private Equity/Hedge Funds. The Logan Circle Investment composition, even though they represent about half of all Assets Under Management, are not disclosed and are reported in one lump sum in the Fortress filings
Revenue (fees) have remained relatively constant even though Assets Under Management have skyrocketed.
Question: Why did Softbank do this deal?
Answer: Because Softbank needs cash.
The Fortress “purchase” gains access to a pool of investment capital that can easily be (mis)directed into Softbank influenced or sponsored joint ventures, funds, or projects that will be kept under the radar.
But, if we examine the filing, the deal isn’t really a “purchase” at all. The structure of the deal:
Merger of Fortress with a Delaware “Merger” Corp (Foundation Acquisitions LLC)
Simultaneously merged into a surviving Cayman Islands Limited Partnership (SB Foundation Holdings, LP).
The deal accomplishes a number of things
As a Cayman Islands Limited Partnership. it relieves the surviving entity, SB Foundation Holdings LP, of tedious SEC reporting and regulation
SB Foundation Holdings LP provides an easily accessible piggy bank
And then this happened…
Softbank created the $100 Billion Vision Tech Investment fund
The Saudi Arabia Public Investment Fund (PIF), along with Softbank, are the primary initial investors
The PIF itself is expected to have $2 trillion under management once the state oil company Saudi Aramco becomes publicly listed
Vision Fund, the Saudi relationship and the acquisition of Fortress is the flow of capital to fund a short lifetime of PR and money losing businesses.
And then this happened…
56% revenue growth last quarter, likely just consolidation revenue masquerading as “organic” growth. The “New Retail” model that management has been referring to (buying up brick and mortar) would have a much lower gross margin, and consequently, a much lower Price/Revenue ratio. Management increased their earnings “guidance”. It’s easy to forecast growth when you can go out and “buy” it. Unfortunately, since Revenue is, and has always been, reported as one big “Blob” we have no idea what it’s comprised of. (i.e. “Organic” e-Commerce vs. “Purchased” Brick & Mortar Revenue)
“Questionable Assets”: (Investment Securities, Goodwill, Intangibles, Land Use Rights and Investments in “Investees”) is now US$56 Billion (51% of the balance sheet), up $9 Billion from $47 Billion in the prior quarter, compared to roughly US$0.00 (0.00%) prior to the IPO just four short years ago
Written off $2.8 Billion on Alibaba (pictures) But..when they consolidated the money-losing-dog-turd Cainaio “junk delivery by tuk-tuks & scooters ecosystem” business, they somehow reported a $3.45 Billion gain on the consolidation, this more than fully offsetting the Alibaba (pictures) write-down
No New Customers: Annual Active Consumers increased to 515 million, a 6% increase QoQ and a 16% increase YoY. When we compare this slower (more believable) growth to the revenue growth (56% YoY) but, how?
Share Based Compensation issued $786 Million of $SBC in the quarter. ($2.1 Billion YTD
Cost Increases: Overhead increased from 61% of Revenue last year to to 69% of Revenue this year (pg. 11 of the press release). In absolute terms this is a $3.7 Billion increase over the same quarter last year. Unanswered is the forecast for organic growth versus “acquired growth” and the resulting compression in margins.
And then this happened…
Softbank Plans Phone Unit IPO signaling its focus on investments in startups such as Uber
Invested in a mapping startup Mapbox
Invested in an Indian ride-sharing Ol
Invested in mobile payments company Grab
Investment in Brazilian ride-sharing startup 99
Invested in the chips that may power robotaxis through its 5% stake in Nvidia and its acquisition of Arm, which develops parking sensors, automotive cyber security, safety technology and other automotive components
And then this happened…
The Saudi Arabia fund bought a 5 percent stake in Uber for $3.5 billion
Softbank led group acquired 14% stake in Uber
Question: Why Uber
Uber is an easy story to sell shareholders. Its financials are murky and closely held secret, just the way Uber likes ’em.
Uber has an imprinted larcenous culture, it doesn’t change because Travis left and the PR budget was raised.
But, the investment is more than smoke and rear view mirrors. Uber was, for a brief time, a superpower and it structured a propaganda system that is still in place.
Uber reframed public discussion around an emotive, ideological/tribal narrative that limited scrutiny of its economics
It built a base of dedicated supporters, who would see Uber’s battle against longstanding laws and regulations as a moral battle where compromise was unacceptable
Uber romanticized the gig economy, claiming that they generat[ed] 20,000 new driver jobs every month that had no factual basis and were totally inconsistent with actual industry economics.
It valorized its “driver-partners” as “small business entrepreneurs” yet they coerced drivers to bear much greater costs than traditional taxi drivers faced, could fire their “driver-partners” at will, and aggressively lied to them about their true earnings potential.
Uber’s public claims quickly coalesced into a PR/propaganda narrative: Uber’s huge valuation was justified by its powerful business model that was based on cutting-edge technological innovation; it has created a totally new product category (“ridesharing”) an industry (the “on-demand” or “sharing economy”) that is totally different from traditional taxis; its meteoric demand growth was the result of consumers freely choosing their vastly superior product in open, competitive markets; resistance to Uber’s growth was due to the coalition of the evil Taxi Cartel and corrupt regulators who were willing to block major innovations and job creation in order to protect an inefficient status quo
There is no legitimate, verifiable economic evidence supporting any part of Uber’s PR/propaganda narrative. But the effectiveness of propaganda campaigns does not depend on analytical rigor. It depends on their ability to get seemingly objective outsiders to amplify the message and give it greater credibility.
Journalists focused on the wealth and status of Uber’s Silicon Valley investors. The presumption they must know what they are doing eliminated the need to find evidence that would explain how they had found tens of billions of economic value no one else had ever seen, or whether their interests coincided with any broader economic interests.
Since Uber’s narrative provided a fully self-contained explanation of its inevitable success, even journalists without strong tribal tech industry ties had little need to undertake any independent investigation. Given Uber’s overwhelming financial advantage, one could assume the battle had been decided before it started, and thus there was no need to dig into complicated competitive issues.
The huge industry-wide losses caused by the massive increase in less efficient capacity was never considered newsworthy, and was never blamed on Uber; since Amazon and Ebay had converted large initial losses to sustainable profits there was no reason to doubt that Uber would as well.
In the US/Europe, Uber ‘spying’ saw sunlight. In other parts of the world it won’t
Transformation of people operating systems
Outside of the Western Hemisphere where it’s installed and mature, “Politics” is giving way to ‘fiscalization’ for control.
In a fiscalized system, when there is political change. People get swapped but contracts stay intact and enforceable
In a politicized system, such as China rulers are fearful of public opinion, fortunes can turnover. A fiscalized system it relies more on self censorship and economic coercion,
Technology enables fiscalization of a system, example is centralizing tax collection, banking, credit availability
Broke: Whatever came before
Woke: Worshipping algorithms
Because we have made computers, in all their forms, our idols. Data becomes theologized. It is a worship that binds its practitioners into faith that any kind of computational social change is pre-determined and inevitable. Algorithms turns computers into gods and their outputs as scripture.
And therefore…Resistance is futile.
And this will bring a war Softbank was not expecting to fight and can’t win, Open Source Anti-Corporate Insurgency. It is an organizational method by which a large collection of small, visible and empowered activists groups can work together to take on corporate hierarchies.
It does not have a centralized operations or command and little to no advertising spending. It is a loose, meshed network of individuals and small groups working independently, but united by a single purpose, in this case: defeating Uber. And now, Softbank is the kingdom they want to take down.
One of the earliest major offenses was amplifying the sexual harassment claims.
The objective animates the group. Because of the diversity of the groups and individuals that join together the only goal that works is simple and extremely high level. More complex goal setting is impossible, since it will fracture/fork the insurgency. The insurgents do not want resolution
A demonstration of survivability. An attack that demonstrates that it’s possible to win against the enemy. It deflates any aura of invincibility that the enemy may currently enjoy. The demonstration serves as a rallying cry for the insurgency
Resist. Stay small. Don’t grow to a size that makes the original group easy for the enemy to target. Don’t establish a formal collection of groups, a hierarchy of control, or set forth a complex agenda, it will make it a target of its own insurgency.
“Uber’s drivers aren’t the faceless, nameless bots in your ‘freelance economy’. They are real people!”
Uber’s reliance on freelancers, algorithms with asymmetrical power, destruction of middle class jobs and city economic welfare made it easy for the anti-corp open sourced insurgency to attack the company’s brand.
The anti-corporate insurgency destroyed the brand of Uber, it found refuge in more repressive systems that welcomed its people controlling apparatus
The warfare waged against the brand pitted customers against the company and the drivers against the company. Attrition warfare waged against Uber’s income is slowed the company’s growth. Lawsuits and legal action have put constraints on new fundraising.
And, now this is all Softbank’s. The antistatists will pry at Softbank. They only wanted Uber. Now they also will get Softbank.
Big companies don’t die of starvation, it’s indigestion that kills them.
And that’s a whole new kind of hurt
Question: Should you short the stock
Answer: NO FKING WAY! You have to bet against the breadth )rising tide lifts all boats) momentum, access to shares to borrow, time, possibility of any newly initiated stock ownership positions and the Uber wondrous access to capital. Even if you are right, you could be holding onto your short for a long time and that will bring volatility that will suck you into covering unprofitably. Watch the con game, don’t be a participant