Commentary

We sent a letter today to C3.ai’s signing audit partner and the head of the U.S. audit & assurance practice at Deloitte & Touche LLP regarding serious accounting and disclosure issues we have identified in C3.ai’s SEC public financial statements. Our letter can be found here.

C3’s fiscal year ends on April 30, and we have asked Deloitte to review our letter in anticipation of its upcoming work conducting the company’s year-end audit. In the letter, we discuss:

• The highly conspicuous growth in unbilled receivables to levels we’ve never before seen in software companies
• Opaque, confusing and highly concerning disclosures and financials related to the company’s related party and very large customer, Baker Hughes
• Efforts to inflate gross profit margins by reclassifying costs of revenue as research and development expenses
• Classification of significant revenue as subscription revenue that in actuality is services- or consulting-oriented revenue
• Significant turnover in chief financial officers, and the appointment of successively less qualified CFOs over time

We hope that our letter will bring to light various highly misleading accounting methodologies that we believe the company utilizes in order to inflate revenue and certain profit metrics, and to conceal deterioration in its underlying business.

In the 18 months since our original report on Korn Ferry, available at kerr.co/kfy, we’ve gained further conviction that the company’s combination of strong revenue growth, attractive incremental margins, and higher subscription revenue mix will continue to drive estimates and multiples higher.

Korn Ferry is the dominant executive search firm and is successfully transforming into a digital-first global consulting organization with a leading technology platform. The company brings an increasingly diversified revenue mix that’s lowered cyclicality in the business, and a scale advantage that is not reflected in its current valuation when comparing KFY to its sub-scale private competitors or firms competing down-market. The company’s recent proxy suggests management wants us to comp the business to commercial real-estate companies like Jones Lang Lasalle Inc. and asset-light dominant franchises like Nielson Holdings plc, and we agree. Korn Ferry’s business model shares many similarities to the commercial real-estate market, including share gains in a fragmented market providing consolidation opportunities, with a growing demand for outsourcing of services benefiting large established incumbents with diversified business segments like KFY. We think shares re-rate from current 8.5x EV/EBITDA multiple to 12 -14x, driving upside for the stock to the $100 – 110 range.

Read our full update here.

In our original report on Principia Biopharma, we emphasized that BTK inhibitors have failed over and over in autoimmune diseases, which we attribute to a basic problem with their mechanism of action: their main effect is to impair the production of new B-cell lineages, leaving the previously established B-cell populations that cause autoimmunity largely unscathed. Alas, Sanofi – the French pharma firm that licensed Principia’s BTK inhibitor SAR442168 for use in multiple sclerosis – doesn’t seem to have gotten the memo. During Sanofi’s recent earnings call, its global head of R&D rattled off what he views as the drug’s key virtues, all the while perpetuating several myths and misconceptions. Here we respond point to point to Sanofi’s paean to SAR442168, explaining why we remain unimpressed.

Read our full update here.

We are short shares of Principia Biopharma. Last week, Sanofi, the large pharma company that has licensed Principia’s BTK inhibitor SAR442168 for use in multiple sclerosis, announced that the drug met the primary endpoint of its Phase 2 trial. In our original report…

Since our last article on Intelsat, newsflow has continued to trend positively and point to major positive catalysts over the course of 2018, yet Intelsat shares have tumbled from the mid $20s to the mid teens. In this article, we provide updates to our thesis and timeline; for background, please also see our original report and 2018 update…

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With shares 36% below last year’s highs, we believe an investment in Intelsat (NYSE: I) represents exceptional value ahead of important catalysts as the regulatory process enters its final stages. The bull thesis as laid out in our original, full-length report and subsequent…

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This post is part of a series of additional research that we conducted following our initial report on ViaSat. Please visit factsaboutviasat.com to access all of our research on ViaSat.

ViaSat’s aviation business is a source of market interest and bullishness.  Much like shareholder enthusiasm for ViaSat’s residential broadband business, we believe much of this optimism is misplaced.

Until ViaSat-3 Asia is in service (likely beyond 2022), ViaSat lacks global coverage. This is a non-starter for many international airlines.  If and when all three ViaSat-3 satellites are…

This post is part of a series of additional research that we conducted following our initial report on ViaSat. Please visit factsaboutviasat.com to access all of our research on ViaSat.

A key flaw in ViaSat’s technology path and business model is the lack of backward compatibility.  ViaSat’s newest satellite, upon which the company’s growth prospects hinge, cannot communicate with its current subscribers. Currently installed aviation equipment is also not compatible with ViaSat-2, which is why management recently cited a “pause” in installation…

We remain short shares of Straight Path Communications. As we argued earlier this month, Straight Path is dramatically overvalued relative to the most appropriate comparable transaction: Verizon’s potential future acquisition of XO Holdings’ millimeter-wave (mmWave) spectrum. Reaching this conclusion does not require any particular skepticism about the prospects of mmWave 5G. However, some investors – apparently taking marketing fluff at…