Chapter 11 - Bear Hug, February 19 – 25, 2002 - episode 3Listen to podcast
“We are at start time and there are nine participants on music hold,” says Naomi.
“Let’s wait one more minute,” says Larry.
“Sir, Mr. Lazard, are you there?”
“Yes. Let’s wait thirty more seconds.”
“Sir? Mr. Lazard?”
“The phone’s still ’mooted’,” says Donna acerbically, “she can’t hear you.”
Larry reaches to unmute the phone but, instead, hangs up the call. “Oh, shit,” he says and lunges for the phone. “What the fuck’s the number? Shit.”
“I’ve got it,” says Michele competently. She pulls the Polycom closer to her where Larry can’t reach it and redials. They hear a busy signal.
“Oh, fuck,” says Larry. “What else can go wrong? We’ve got to make this shitty announcement and now I disconnected the call. This is a fucking disaster.”
“Blame it on the technology,” says Aaron.
Michele gets reconnected with Naomi. “I show four minutes past start time and twelve participants on music hold.” She sounds nervous.
“Let’s go,” says Larry glumly.
“Welcome to the hackoff ... I mean ... hackoff-DOT-COM... Excuse me. Welcome to the hackoff.com quarterly and an-nu-al results conference call. Our hosts are Mr. Larry Layzard … uh, Chairman … uh, and CEO of … uh, the company, uh, and Ms. Langhorny, Chief Finance Officer.”
Larry’s not laughing.
Donna chuckles and looks back at her script.
“For the first part of the call, participants’ phones will be mooted. Later there will be a questions and answer session and the participant phones will be unmooted. If you want to ask a question at that time, press star-one on your phone and you will be put in queue. If you want to cancel a request for a question, press star-two. If, at any time during the call you need technical assistance, press star-zero on your phone.
“I will now turn the call over to Mr. Luh-zard.”
“Sorry for the uh … delay in getting started. Thank you for joining us and welcome to hackoff’s fourth quarter and full year conference call for 2001. Also welcome to those of you who are listening on the webcast. Remember that you can still email questions to firstname.lastname@example.org and we’ll answer them as time allows.
“You’ve already seen the press release so you know we have both bad news and good news. Before I get into that, though, as usual, I’ll ask our CFO Donna LANGhorne to go through the numbers for the quarter with you. After she gives you the numbers, I’ll give you some color from my point-of-view and then we’ll take questions from those who are on the phone and, time allowing, we’ll also answer emailed questions. Donna.”
Donna reads: “Thanks, Larry. Thanks again for joining our call today. Let me start off again by reading the forward-looking statements disclaimer, then I'll review the line-by-line items of the release.
“I want to remind you that, as with our past conference calls, all of our non-historical statements today constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. As with any public company, our ability to perform in accordance with these statements could be materially adversely affected by numerous risks and uncertainties including the factors described in our press releases and the risks disclosed in our SEC filings.”
Donna then goes on to recite the numbers in the press release with slightly more detail. She reveals that headcount has been reduced from 160 at the end of 2000 and 115 at the end of the third quarter of 2001 to 105 at the end the fourth quarter. She emphasizes that some of the expenses in the fourth quarter are as a result of paying severance to those who have been let go and so this part of expense will come down in future quarters.
She also says that the company has done a good job of managing its receivables; on the average, money is collected in forty-six days, down from forty-eight days in the previous quarter. Total receivables are also down but, she is careful to say, this is partly a result of lower cash sales than in the previous year.
Very carefully, Donna reads the explanation of what the company means when it talks about cash-basis profit and loss.
While Donna is reading her script, Larry gets up from the table and wanders around the office. He checks the after-hours trading price of hackoff and mouths a curse when he sees it below $1.40. He reads the growing pile of email questions and writes on them the order he wants them asked. He drinks some water, some coffee, then some water again. Then sits down as Donna nears the end of her presentation.
“Now I’ll turn you back over to Larry,” Donna concludes.
“Thank you, Donna,” says Larry. He speaks from notes: “Well, no one likes to uh … report the kind of loss we’re reporting this quarter. We know that our investors don’t like seeing these write-downs and write-offs. We don’t like seeing them ourselves…” His voice is fading as he speaks.
He stops, swallows, continues half an octave lower and with more force: “It is important to remember that these reported losses, however, DO NOT represent a cash loss for the company, nor do they reflect on our operations. We all know what has happened to the stock market, particularly to the dotcom portion of the stock market, and, not surprisingly, that has happened to our portfolio as well.”
Aaron is conspicuously looking away. Donna makes a throat-cutting motion and then winds her forefinger to signal “move on”.
Larry pauses for a minute as he decodes all the signals, then pushes on, still in a low and slow voice: “Uh ... of course it is certainly possible that the market will move up as well as down and, if that were the case...”
Aaron leaps up and writes on the whiteboard: IT COULD CONTINUE DOWN TOO. Donna’s circling forefinger accelerates and tightens its circles.
“If that were the case,” Larry closes his eyes and continues: “If that were the case, some of these securities could gain in value.”
Aaron sits at the table with his head in his arms. Donna sits back and sighs slightly; she pulls her skirt down further towards her knees under the table. Michele starts to get up to check for more email, then sits down very quietly again.
“Of course,” says Larry, now staring at Aaron, “the stocks could continue down as well. There can be no assurance that we won’t have further write-offs and/or write-downs in future quarters.”
“Thank you,” mouths Aaron, looking up at the ceiling.
“In fact, because the world — and particularly the stock market — is a dangerous place,” Larry continues, more confidently, “we are running the company as if the equity portfolio, as important as it is, didn’t … doesn’t exist.”
Donna leans slightly forward and flashes “okay” with a smile and the thumb and forefinger of one hand, but quickly resumes the “speed it up” signal with the other.
“As Donna explained,” says Larry, “we are now reporting and managing to what we call cash-basis earnings, the numbers as they would look if we had no income in the form of equity and had never had any income in the form of equity. For the last quarter, our cash-basis earnings were up even though GAAP (Generally Accepted Accounting Principals) earnings were down. We feel this is important.
“As we continue to manage cash carefully, our cash-burn for the fourth quarter was less than that for the third and well below that of the fourth quarter a year ago. We are confident that, even if we never cash in any of our equity, we have sufficient cash…”
Aaron is frantically writing on the board: THAT’S NOT WHAT WE SAID IN THE RELEASE. THAT’S NOT THE GUIDANCE WE GAVE. STOP!
“We have sufficient cash,” Larry recovers, “even if we never do an equity offering or sell debt to take us to the point where the company is cash-flow positive. That’s what we believe.”
Aaron sits down but looks more unhappy than ever.
Donna slides a note to Aaron. HE COVERED IT, it says.
Larry is distracted by the note-passing, but continues: “Uh ... there is other good news this quarter besides our reduced cash-burn and reduced cash-basis losses. We have just introduced our Monitored hackaway Service. Let me explain: This isn’t only a dangerous time in the stock market; it’s also a dangerous time on the Net. Hackers are more aggressive and have better tools than ever before. Because of the SUCCESS of e-commerce — and it has been a success, no matter what the stock market thinks — because of the success of e‑commerce, there are more transactions on the Web than ever before; more dollars are flowing in e-commerce. Willy Sutton said he robbed banks because that’s where the money is. There is a modern type of bank robber who goes to e-commerce sites because that’s where the money is today.”
He looks around for encouragement. Donna smiles slightly. Aaron doesn’t respond.
Michele leaves to field more questions. When she comes back, she brings questions and a list for Donna of the people on the call. While Larry continues to talk, Donna crosses off those she doesn’t want to let ask questions and assigns priorities to the others. Michele leaves again and emails the blacklist and priority list to Naomi. The unauthorized will not have their request to ask questions recognized but will hopefully think they are just too far down on the question queue to be heard.
“Our current hackaway software-only product is the best available on the market today,” Larry continues. “Our customers — unlike the customers of our competitors — have never had a significant loss when they used our products as directed. But we’re not sitting back on our laurels. There is always the danger of a new kind of attack, perhaps of a kind even WE haven’t thought of. Hence, Monitored hackaway Service. With this service, we are virtually there, on the websites of our customers, looking for attacks. Even attacks of a kind that have never been seen before. And we can counter these attacks before they damage the valuable businesses our customers have built, BEFORE they threaten the retail customers of our customers.
“We feel that this monitored service will be essential for e-commerce websites in the future. We think it will generate recurring revenue for hackoff.
“That’s it for me. Thank you for listening. Naomi, you can now accept questions from those who are on the conference call. Those of you on the webcast can continue to email in your questions although we may not be able to get to all of them. Naomi.”
“We are now opening the phones for questions,” says Naomi on cue. “If you have a question, press star-one on your phone to be placed in queue. If you want to cancel your request to ask a question, press star-two. Your questions will be taken in the order received.” (This, of course, is a lie since she will actually activate questioners in the order supplied by Donna and never activate those on the blacklist.) “If you need technical support at any time, press star-zero.
“Our first question,” Naomi announces, “is from Vin Foster at Seller Brothers.”
“Hi, Vin,” say Larry and Donna simultaneously.
“Hi, guys,” says Vin. On other quarterly calls Vin and other analysts have prefaced their questions by saying “good quarter”; not this time. “Clearly you’re doing the right thing in taking these write-offs now and reflecting market reality. What assurance can we have that there won’t be further write-offs next quarter?”
“And he’s our friend?” Larry whispers to Donna. Then he answers: “Good question, Vin. We can’t give you any assurances on that. We can’t predict the market…”
Aaron and Donna smile their approval at Larry.
“However, the market can go up as well as down.”
Aaron’s head drops back into his hands. Donna looks away.
“It may turn out,” Larry continues, pointedly not looking at them, “that some of these securities have more value than what we’re carrying them for on our books.”
“I have a follow-up question,” says Vin.
“Go ahead,” says Larry.
“When are you going to start selling some of the stocks in your portfolio? Shouldn’t you be turning some of that equity into cash before its value disappears completely?”
“I can’t comment on when or if we plan to sell,” says Larry to Aaron’s visible relief. Then, to Aaron’s dismay and Donna’s studied indifference, Larry continues: “Remember, we don’t need the cash. We are managing to the cash we have without selling these equities to give them every chance to regain some of their value when the NASDAQ decides to recover.”
Aaron groans almost audibly.
“I have another follow-up question,” says Vin.
“Vin, you always ask good questions, but we need to give other people a chance,” says Donna in a smiling voice.
“Our next question,” says Naomi, “is from John Braxton at Barcourt & Brotherson.”
“Hello, John,” say Larry and Donna, not quite simultaneously.
“Hello,” says John. “My question is about sales going forward. Are you going to stop accepting equity in lieu of cash? If not, why not? That strategy doesn’t seem to be working.”
“No, John,” answers Larry, speaking slowly and with an angry space between each of his words, “we’re not going to ‘stop accepting equity in lieu of cash’. That is an integral part of the hackoff value proposition as you, yourself, wrote many times.”
Donna is frantically trying to wave Larry silent but he bulls on: “If it made sense to accept stock when the market was high — and, with hindsight, the market was too high — then it certainly makes sense — more sense — to accept stock when the market is low.”
“Not if you ever want to make your numbers,” says John, picking up Larry’s angry tone.
Donna puts her hand on Larry’s fist, which is clenched on the table. He flips her hand off, but unclenches.
“John,” Larry continues, in a more friendly tone but with a grimace, “we are also now reporting and managing to cash-basis earnings. We do feel that these will have greater predictability and give analysts and investors an easier way to evaluate and track the company.”
“Are you saying we should ignore the reported numbers?” asks John, still sounding surly. “We should ignore all the equity sales and all the equity WRITE‑OFFS and just look at cash-basis sales? Is that what you’re saying?”
“John, we could never tell you what to look at and what to ignore,” says Larry in a placating tone. “But we’re not saying that. We just think that the cash-basis gives an additional point of reference. And we are managing to that, as I said.”
“What increase in cash-basis sales and revenue are you looking for over the next few quarters?” John asks.
“I’m sorry, John, we haven’t given any guidance on that.”
“Our next question,” says Naomi, “is from John Signal at Simple Funds.”
“We know it’s really ‘Semper’,” says Donna. “Hi, John.”
“Hi, John,” says Larry.
“Look,” says John Signal, “you’re not giving us very much to go on. You don’t know whether or not you’ll have more write-offs. You aren’t giving guidance on sales earnings. Why should anyone buy or hold the stock? Where’s the upside?”
Donna signals to Larry that he should let her answer the question but he ignores her.
“Fair question, John,” he says in a reasonable and thoughtful voice, “there are at least two areas where one can look for upside. One: as I said, the stocks in the portfolio COULD go up, I mean stocks do do that…—”
“So you’re running a mutual fund?” John interrupts. “I thought you were a software company.”
“We’ll leave running mutual funds to you, John,” Donna interjects, as she sees Larry’s jaw and fist tighten. She is using her smiling voice. “You do that much better than we could. You’re right, we are a software company and the ‘number two’ that Larry was about to tell you about is our Monitored hackaway Service.” She briefly touches the inside of Larry’s thigh under the table.
“Yes,” says Larry unclenched, “another potential upside for investors is our new service as Donna said. We think it is responsive to the needs of our customers in these ever more dangerous times for e-commerce. And it helps us in our objective to manage to cash since this is a cash-basis service for many of our customers.”
“Thank you,” says John.
“Our next question,” says Naomi relentlessly, “is from Marshal Manafiore of Manafiore Partners.”
“Hi, Marshall, glad you could join us,” says Donna. She called him and emailed him several times to get him to participate.
“Hi, Donna, glad to be here,” says Marshal. “My question is why did it take so long to get the monitored whateveritis service launched? You first announced it almost a year ago. You said the market needed it then and that you would have it two or three quarters ago. Has anyone bought it? Have you missed your market window?”
“Good questions, Marshal,” says Larry in his thoughtful voice. “I’ll start with the last one first. We haven’t missed our market window for the simple reason that no one else has come out with a product — a service, actually — like this. The customers’ need is not yet being met. We were later with the product than we would have liked to be,” he continues. “As John Braxton pointed out, we’re a software company and somehow software never seems to get done on time. But we’re still the only ones with this product. What was the other part to your question?”
“Has anyone bought it yet?” Marshal repeats.
“We have no announceable sales at this point in time,” says Larry. “Remember that customer confidentiality means we can’t announce sales without our customers’ permission.”
“You’re not violating anyone’s confidentiality if you just say whether you sold any of this service yet. I didn’t ask you WHO you sold it to. I just want to know—”
“Marshal, I’m sorry,” Larry interrupts. “We don’t break out sales by individual product line and this is not information we have disclosed. It might be deemed to be material and, at this point, it is non-public. I’m afraid I just can’t answer your question other than to say that we believe this product meets a very important need of our customers and will be good for both hackoff and hackoff’s customers going forward.”
He pauses then says: “There have not yet been any sales of Monitored hackaway Service.
PORNO, Donna writes on the whiteboard and TESTTOST!
“Marshal, I CAN tell you,” Larry resumes, “that our Monitored hackaway Service is of particular interest to the adult segment of e-commerce. These customers have traditionally been cash rather than equity-based for hackoff. And, because the adult segment does have a valued product and a high number of credit card transactions, they are particularly vulnerable to the kind of attack our new service is designed to protect them against.”
“Mr. Lazard,” says Marshal very coldly, “much of the money my firm manages comes from some very fine Christian groups. You’re telling me that no one is buying this new product but that, if anyone ever does, it will be godless pornographers who corrupt the youth of our country and destroy its values? I have no further questions, and you can certainly not expect any future investment from my firm.”
“Nice move, Donna,” says Larry in an aside away from the Polycom. “We have a question from one of the participants in the webcast,” he says to the Polycom, and cues Michele.
“Mr. Lazard,” Michele reads, “do you have any competitors? If so, do they have any product like your Monitored hackaway Service? If not, why not?”
“Good question,” says Larry. “There is a company called antihack that likes to consider itself a competitor to hackoff. They sell a product to e‑commerce sites that they claim provides protection from hackers, so I guess that makes them at least a wannabe competitor, even if many people think their product is vastly inferior to ours. Antihack does not have a product like our Monitored hackaway Service; at least they haven’t announced one. And it’s very hard for me to believe that they have the technical capability to develop something like this even though they do like to copy hackoff products. It took us a lot longer than we would have liked to get this product out; I don’t think they could do it ever — not without violating our patents. Let’s take another one of the webcast questions.”
“Mr. Lazard,” Michele reads, “are you going to quit?”
“I am not!” says Larry with a smirk. “I don’t quit. Moreover, this is an exciting time for hackoff — a time of challenge and a time of opportunity. I’m looking forward to being profitable again and cash-flow positive and to the success of our new service.”
Donna sticks her finger down her throat, but smiles.
“Let’s take one more webcast question and then get back to the phones,” says Larry, apparently pleased with himself.
“Mr. Lazard, does this announced loss for the quarter mean that hackoff.com is running out of money?”
“I think Donna and I have already answered that,” says Larry, “but let me hand off to Donna to address it again.”
“Thank you, Larry,” says Donna, “and thanks for the question. I understand that our reported loss for the quarter is disturbing to our stockholders. However, it is important to realize that this is an accounting loss; it doesn’t affect our actual cash position. As Larry and I have said, we are managing the company to be cash-flow positive as soon as is reasonably prudent. And we believe that our current resources are adequate to fund our cash-flow needs until we are cash-flow positive without the necessity of selling equity or going into debt.”
Larry claps silently at Donna. “Naomi, let’s have the next question from the phones.”
“Our next question is from Sam Marquant of Distressed Value Newsletter,” says Naomi.
HE WAS SUPPOSED TO BE BLOCKED, Donna writes on the blackboard. FUCK UP! WATCH OUT!
If Aaron were a dog, his hair would be standing straight up and he would be straining at his leash.
“There are two parts to my question,” Sam begins. “One: are you buying back any more shares, and if not why not? Don’t you believe in the company?”
“Sam…” Larry starts to answer.
“That’s just the first part of my question. Two: at what price would you sell the company? I mean you guys have to do something to realize value for shareholders.”
“We feel the current stock price significantly undervalues the company,” says Larry. “We would be hurting the interest of the shareholders if we sold the company for anything like this price.”
“Then,” continues Sam, “why aren’t you using some of your cash to buy back stock? Your board has authorized it. You can’t have it both ways. If the stock is undervalued, you ought to buy it. If the company is not undervalued, then you ought to sell it — or don’t you have any offers?”
“This would not be the right place to talk about offers that have not previously been disclosed,” says Larry.
“Then you’re saying there are some offers?”
“I didn’t say that,” says Larry. “If there are any offers — and I’m not saying there are — then clearly we don’t think they’ve reached the stage when we should make them public. For example, because we’re not negotiating. And, if we haven’t made offers public, we certainly wouldn’t announce them on this call. That would be a violation of Reg FD. I have nothing further to say about offers that may or may not have been made for the company.”
“If the current stock price undervalues the company...” Sam begins again.
“I think it’s time to give someone else a chance to ask a question,” says Donna. “Naomi, what do we have?”
“We have a question from Vin Foster at Seller Brothers. Mr. Foster, go ahead with your question.”
“If the current stock price undervalues the company,” says Vin, “then at what price is the company fairly valued? What would you sell the company for?”
“Vin, you know I would never answer a question like that,” says Larry. “If we were to sell the company, it is our fiduciary responsibility to get the best price we can for shareholders. We don’t do this by publicly stating our negotiating position.”
“Do you think a fifty-percent premium to the current price would be sufficient?” Vin asks.
“Frankly, no. The current price is way too low.”
Aaron is gesturing frantically, but Larry continues: “I am not going to answer any further questions on a possible sale of the company.”
“Then can you say why you are not buying back the stock?”
“I think I already answered that question.”
“No you didn’t,” argues Vin. “Sam asked you, but you never answered.”
“As you know,” says Larry. “We have an open authorization from our board to buy back up to 1.2 million shares of our stock. We have not disclosed and will not disclose at what prices we would do that. Clearly such disclosure would not help us achieve the best market price for our shareholders—”
“So you expect the price to go down further and are waiting for a LOWER price to buy your stock?”
“I didn’t say that. I think we’ve now run out of time. Thank you all very much for participating in the call. Remember the webcast will be available for listening to online in about an hour and will remain available for the next thirty days.” He stretches and hangs up the Polycom.
“Jesus, that was awful,” Larry says to Donna and Aaron.
They say nothing.
“Is it okay if I leave now?” asks Michele. “I have a date...”
“Go ahead,” says Larry. “Have fun.”
“I can stay if you need me,” she says.
“Thanks,” says Larry. “Go!”