Wandisco Update and Budget Postscript

I received an email yesterday on the subject of Wandisco (WAND). It was from someone using a fictitious name and an invalid email address so you can judge for yourself how accurate this is likely to be. This is what it said: “The inside scoop at WanDisco is that the European Sales Director has done a total number on them. Multiple huge sales reported, complete with purchase orders (which they now suspect may have been faked). Such little financial governance from the board that while they were lauding this guy as an amazing success, no one seemed to notice that the money hadn’t actually arrived. How out of control must a company be to not notice millions of bucks missing from the accounts?”

Is that credible? I don’t think so. See my previous comments in this blog post: https://roliscon.blog/2023/03/14/4704/

Were these “purchase orders” or simply “letters of intent”? In such a small company it is certainly incredible that the CEO and CFO were not familiar with the details of these orders and were not monitoring the likely cash flows. My previous comments are still relevant.

As regards the budget, Labour are apparently unhappy with the dropping of the lifetime pension allowance and will reverse it given the chance. This was always an iniquitous piece of tax legislation, effectively taxing money at high rates that was previously saved by prudent employees. The £1 million lifetime allowance was not enough to provide a comfortable lifestyle in retirement for previous high-earners. What guaranteed interest rate could they achieve? An annuity of £1 million would only likely mean an income of £60,000 p.a. for life which with inflation rapidly eroding the value is not a great proposition.

For a senior medical consultant working for the NHS the low lifetime allowance was certainly a great incentive to retire early to avoid breaching the £1 million lifetime allowance.

But another complaint is that the scrapping of the lifetime allowance and increase in the annual allowance to £60,000 will enable people to avoid Inheritance Tax. And why not? Inheritance tax is a dubious tax to start with as it taxes money previously taxed as income – effectively double taxation. It’s a tax based more on the principle of screwing as much as tolerable from personal savings rather than an equitable scheme to relieve people of what they can afford to contribute.

The whole personal taxation system needs reforming to make it more rational and simpler. There are so many loopholes and complications that making simple changes can lead to unintended consequences as seen with the latest changes.

The lifetime allowance was introduced to prevent the abuse of high tax relief on pension contributions. Scrapping the limit seems to be an ill-thought through reaction to problems in the NHS. The Labour Party could be right in that respect.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Silicon Valley Bank Rescue and Wandisco Discussion

Silicon Valley Bank (SVB) has been rescued both in the USA and UK. In the UK HSBC has taken over the business for £1 and put in some more cash. But bank share prices are still being negatively impacted as doubts about their stability remain.

The problem at SVB was in essence a failure to manage interest rate risks on bonds they held as security which they could not sell to meet depositor redemption requests without recognising big losses. It demonstrates the knife edge that most bank balance sheets sit on, which is why I don’t invest in banks. Lending long and borrowing short as all banks do is a recipe for disaster unless very carefully managed.

Last night there was a panel discussion of the problems at Wandisco (WAND) at the Mello event. I gave my view of the likely problem at the company which is likely to have wiped out investors in a company that was worth £905 million before the shares were suspended.

This company has been reporting numerous very large “orders” in recent months but if you read the last annual report it says this: “Commit-to-Consume contract structure to be widely utilised across all future clients, where a customer is contracted to move a minimum amount of data over a given time” and reports several new deals using that structure. What exactly were the implied commitments in terms of cash by these “orders” is the key question which is not apparent. The company revenue forecasts were probably based on more than the minimums committed and probably inherently too optimistic. We will no doubt learn more in due course.

Who was to blame for this fiasco? The sales person or persons involved as the company suggests or the CEO and CFO for not being more sceptical about the likely future cash flows? The latter I suggest. The announcements made by the company were in my view misleading and hence effectively a fraud on investors.

Can the company recover? As I said in the meeting, the company does appear to have some good technology but avoiding administration is not going to be easy. The company may need more funding urgently to meet its customer commitments but who would invest in the business as confidence in the management will have been lost and investigating the problem will take time? It may take weeks if not months to resolve and the longer the company shares are suspended the more difficult it becomes.

There was a general discussion at the Mello event on how to avoid frauds which lose investors their money. Can you spot likely frauds was one question discussed. I think you can in many cases. There were warning signs at Wandisco such as never reporting a profit since they listed which is why I never invested in it. But sometimes it’s very difficult as at Patisserie Valerie where the audited accounts were fictitious.

One of the speakers mentioned a good book on the subject entitled “Lying for Money” by Dan Davies. I have ordered a copy. I would also recommend “The Signs Were There” by Tim Steer and I cover some of the things to look at when researching companies in my own book entitled “Business Perspective Investing”.

What should be done to avoid investors losing money from frauds?

Tighter regulation of announcements was one suggestion and tougher penalties for convictions was another. In general the UK legal regime is much too weak and the FCA has historically been very lax although they have been improving.

David Stredder suggested that companies that list should contribute to an “insurance” fund in case the company suffers fraud that would compensate investors (it’s rarely possible to recover funds from the fraudsters). This is an interesting idea but it would need to be a large fund to cover the likely cases.

Note that relying on non-executive directors or Nomads to pick up and stop problems does not work. Investors need to do their own due diligence.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Silicon Valley Bank Collapse, Wandisco Discussion and Fundsmith Equity Fund Annual Meeting

The collapse of Silicon Valley Bank (SVB) is a typical story of a bank run after depositors lost confidence and rushed to the exit door. This bank may not be well known to UK investors but they were very active on funding and providing banking services to early-stage US technology companies on the West Coast. This could have a severe impact on the tech sector.

The UK entity has also ceased trading and a letter signed by more than 140 companies was sent to the Chancellor begging him to step in with emergency funding. Without access to their funds, companies won’t be able to meet payroll or other commitments so might have to also enter administration.

There may be some justification for intervention in this case and hopefully keeping depositors protected will not cost an enormous amount.

The Nasdaq fell sharply on Friday and expect the same on Monday.

Also on Monday, Mello are hosting a panel discussion on Wandisco (I am on the panel) from 5.00 onwards – see  https://melloevents.com/mm13march2023/

I made some comments on the apparent fraud at Wandisco in a previous blog post and it is clear that many private investors were suckered into investing in the company (not me in this case). You should get some good tips on how to avoid such disasters.

I have just watched a recording of the Fundsmith Equity Fund annual shareholder meeting – see https://www.fundsmith.co.uk/tv/ . Terry Smith gave his usual slick performance and brushed off the negative 13.8% fund performance last year with the comment that “it was predictable” after such a long run of positive returns.

The detractors in the fund’s holdings were mainly tech stocks such as Meta, Paypal, Microsoft and Amazon. He reiterated the investment strategy of “only investing in good companies, don’t overpay and then do nothing”.

It is worth watching the video. I will continue to hold the fund as the formula followed is still likely to be effective.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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DotDigital Webinar, Wandisco Announcement and Immigration Laws

I watched the DotDigital (DOTD) interim results presentation on the Investor Meets Company platform this morning. I have held the shares for a number of years and have been happy with the company’s progress in general.

For the half year revenue was up 9%, with 95% being recurring. Adjusted EBITDA was slightly down but cash balance was up 24%. What are they going to do with the cash? They are looking at M&A activity.

There was a good competitive review. It is clear that the market for similar products is now quite mature so poaching from other suppliers is the name of the game and more consolidation among suppliers is likely. Their US market position is still unclear although they report “early evidence of success in the USA” after management changes and rebuilding the sales team.

It seems likely that steady growth should be achievable from more geographic expansion, more partnerships and the addition of more product features regardless of US success.

Another technology company that made a devastating announcement this morning was Wandisco (WAND). They said “The Board now expects that anticipated FY22 revenue could be as low as USD 9 million and not USD 24 million as previously reported. In addition, the Company has no confidence in its announced FY22 bookings expectations”. They blame one senior sales employee for “significant, sophisticated and potentially fraudulent irregularities with regard to received purchase orders and related revenue and bookings”. The shares have been suspended

I have looked at this share a number of times as I have a historic interest in database replication, but never acquired the shares. I can understand the need for what they sell but the accounts always looked dubious to me. Revenue very volatile and profits non-existent. I prefer to invest in relatively boring companies like DOTD with large recurring revenue based on a different business model.

On the political front an enormous amount of media coverage is on the small boat crisis and the attempts by the Government to halt illegal immigrants. These are mostly economic migrants, not people fleeing war or other disasters.

It is suggested that the proposed Government legislation would be illegal, because it contravenes the European Convention on Human Rights and the Refugee Convention. The latter was established in 1951 to help people made homeless or stateless by the Second World War and was a very positive move at the time. But it was never intended to enhance the rights of economic migrants who wish to move to a wealthier country.

I suggest that a breach of a Convention is not necessarily illegal and that the UK can withdraw from Conventions whenever it considers it necessary to do so. The country is being swamped by migrants, both legal and illegal ones.  This is putting enormous pressure on housing and social services.

For example the London Borough of Lewisham have recently published a new “Local Plan” and it reports these statistics: The population has grown by 23% over the last 20 years and is still growing rapidly. Some 46% of the residents identify as BAME heritage which rises to 76% for the school population. This shows the impact of uncontrolled immigration over the last 50 years, but the Council is still “planning for an open Lewisham”. That’s undefined but suggests that they are open to even more migration.

The BBC, as is now commonplace, spouts the views of left-wing commentators including that of a well-known footballer for no good reason. His views on football may be sound but he does not understand the problem of illegal immigrants.

Will the Government be able to halt the flow of illegal immigrants? Only if they take a very tough stance in my view.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Covid-19 Economic Impact and Was It All Based on Faulty Analysis?

Readers don’t need to be reminded on the damage being caused to the UK economy as a result of the coronavirus epidemic. Most of the damage has been caused by the “lock-down” that has closed whole swathes of UK business and industry. There can’t be many readers’ stock market portfolios which have not suffered as a result. The lock-down was all done based on the advice of Prof. Ferguson of Imperial College and a computer model that he used.

This is what Steve Baker, M.P. tweeted today: “Today, I read the Imperial College Covid-19 Code: https://github.com/mrc-ide/covid-sim . I then read this for a second time with growing horror: https://thecritic.co.uk/a-series-of-tubes/ . Software critical to the safety and prosperity of tens of millions of people has been hacked out, badly. It is a scandal.”

This is what I wrote yesterday in my diary (which I have kept since the start of the epidemic to make interesting reading for my offspring in future years):

“There has been a lot of controversy of late over the role of Professor Neil Ferguson in the epidemic crisis.  He is professor of mathematical biology at Imperial College London and has been advising on the UK government’s response. His virus modelling led to the current lockdown being put in place. It seems his past forecasts of the impact of epidemics of other diseases have been wildly pessimistic. He has now resigned from the Government advisory body after ignoring the lock-down rules to meet a paramour.

But when people looked at the software code that he has been using to forecast epidemic spread, it seemed to be unreliable. It consisted of 15,000 lines of undocumented and unstructured code that allegedly gave different answers when run more than once. It very much appears to be a rather unprofessional approach to software development that one might expect from a scientist rather than an IT professional”.

I then covered my past career as a programmer and lamented the lack of professionalism in some parts of the world as regards software development, 40 years after I gave up programming. This is a good quotation from the Daily Mail on the latest fiasco: “David Richards, co-founder of British data technology company WANdisco said the model was a ‘buggy mess that looks more like a bowl of angel hair pasta than a finely tuned piece of programming’. He also said: ‘In our commercial reality we would fire anyone for developing code like this and any business that relied on it to produce software for sale would likely go bust’.”

So now you know why we are all stuck at home and in such a financial mess.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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