TNE Short attack, page-31

This kind of trickery can continue as long as contracts continue being signed and it is effectively pushing revenue forward from subsequent years. Effectively borrowing from the future. The most tricky one though is signing fees as these are not replicated in any subsequent year, so they will push up revenue in that year. It is all good if you keep signing contracts though. The annuity revenue or SAAS fees will also not cause problems, as these are really sticky and most organisations will not like changing systems, so there is probably very little chance of them losing out, but if they do, or if you don't meet contractual commitments then this revenue would need to be backed out if it is recognised in advance of being earned. So there is an element of risk in engaging in these practices. I must say though that most auditors would not detect this behaviour as they are not used to SAAS based contracts, and struggle with the concepts. They are more used to retail, service based etc.

I have always looked at debtors numbers to detect this behaviour. If there is a large accounts receivable amount it means people aren't paying money. At the half TNE had $30m in receivables, and their revenue from contracts with customers is annualised at $274m so that would equate to 11% of their revenue, so that sounds okay. Their FY19 number though was $49m in receivables on an income of $284m so around 17% which shows either a number of contracts were signed just before reporting date or customers aren't paying fees as they don't believe they need to be paid yet. The percentage oif debtors to revenue should always be around 8.33% as SAAS fees should be evenly spread. The FY19 number seems weird, but whatever the abnormality seems to have corrected at the half.

I don't know what basis GMT are questioning the TNE accounts, but there could be a lot of reasons. It could have a basis, or it could be garbage. You can always find abnormalities in the accounts of publicly listed companies. If your fund manager usually deals in SAAS companies they will be able to detect any abnormalities, but if they normally deal with retail, manufacturing, mining etc they won't have the expertise, so look at the type of companies this fund manager normally analyses.

I think TNE is a solid company, but do think it is overvalued right now.