BORDERFREE INC BRDR S
September 08, 2014 - 2:08am EST by
mrsox977
2014 2015
Price: 14.16 EPS $0.15 $0.21
Shares Out. (in M): 34 P/E 94.4x 67.4x
Market Cap (in $M): 474 P/FCF 0.0x 0.0x
Net Debt (in $M): -120 EBIT 1 5
TEV ($): 354 TEV/EBIT 354.0x 76.9x
Borrow Cost: NA

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  • Technology
  • Cloud
  • Logistics
  • Opaque Business Model
  • Overstated Revenue
  • Lock-Up Expiry
 

Description

BORDERFREE (ticker: BRDR) $14.16

Borderfree is a low tech consulting and logistics business masquerading as an e-commerce cloud solutions provider with shares that trade on a multiple of sales that is grossly inflated and misunderstood.  Its sales recording method is unique against the hundreds of companies we study and follow.  Regardless, over time, BRDR shares should rerate to reflect the underlying reality of the business’ poor economics.  This write-up will highlight six key reasons as to why we think BRDR is a compelling short (including a timely IPO lock-up expiration).  But first, lets go over some background on the Company.

 

What does Borderfree do?

In the Company’s own words, “Borderfree, Inc. provides cross-border ecommerce solutions. The company operates a technology and services platform that enables retailers in the United States to transact with consumers in approximately 100 countries and territories worldwide. Its customers include retailers, department stores, apparel brands, and lifestyle brands that sell a range of physical goods online, including apparel, handbags, jewelry, sporting goods, home décor, and toys.”

In layman’s terms, Borderfree provides a web platform/interface that allows its customers (large US retailers like Williams Sonoma and Macy’s) to offer their products in different countries to end consumers.  Borderfree handles the currency translation, duties, shipping and fulfillment responsibility on behalf of the retailer.  At the same time, they are also on the hook for fraud, chargebacks and payment processing mishaps, if any.  Keep in mind that BRDR holds no inventory.  Once a product is ordered, it is shipped to a domestic hub that is run by a third party logistic provider that has contracted with Borderfree.  It is then sent to an overseas hub before being shipped to the ‘last mile’ by (usually) DHL.  In some cases, if there are high moving SKUs, Borderfree will preemptively place certain inventory in country at third party overseas hubs.  BRDR calls the total value of goods passing through their platform as GMV or Gross Merchandise Volume.  In 2013, GMV amounted to $447.8m

See for yourself.

Go to Macy’s.com and click on the little flag at the top right hand corner of the page.  Select ‘United Kingdom’ as your shipping destination.  You are now in the world of Borderfree.  What you will notice, if you place something into your shopping cart and try to buy it, is the exorbitant cost of shipping and duty.

 

Example: Borderfree shopping experience on Macys.com

Our analyst goes to Macys.com from our London UK office and sees this popup:

 

 He then selects this handsome Izod golf polo.  A steal at only 14.62 GBP!

 

 

 He adds the polo to his cart and proceeds to pay.  Much to his dismay, the item’s shipping charge costs more than the item! (note the Borderfree fulfillment service disclaimer at the bottom)

 

 

Ready to short Borderfree yet?  Hold up.  First, some more background on the business.

 

How did Borderfree start?

Borderfree’s roots can be traced back to established serial entrepreneur Yuval Tal’s early company E4X.  According to the “Geektime” blog:

“[E4X was] a business that developed a solution that allowed for electronic trading around the world to view prices in local currency of the user and get the transaction in exchange for dollars, without dealing with the hassle of converting different currencies.  Along with the development of e-commerce, the developers understood that the various trading sites have difficulty with other aspects of the new digital business reality with regards to handling international customers so they decided to expand the company’s product portfolio to offer handling international shipments, accurate price calculations; and to include additional costs such as customs clearance of credit, risk management and even the allocation of personnel customer service.

As part of this development, the company changed its name in 2007 from E4X to FiftyOne, bringing in a new outside CEO named Michael deSimone, a former senior executive at Citibank, to further develop the activity.”

In March of 2012, FiftyOne bought Canadian competitor Borderfree, and changed the name of the Company to Borderfree in April of 2013.  Since its inception and before coming public in 2014, Borderfree has raised $41.5 million from Israeli venture capital funds:  Delta Ventures, Pitango, Vintage and Loyola Credit; and from American foundations Adam Street Partners, Online Ventures and Ventures Strategy Group. 

 

Initial Public Offering

On March 21, 2014, Borderfree sold 5,750,000 shares of common stock, which included 750,000 shares sold pursuant to the underwriters' option to purchase additional shares, in its initial public offering, at an offering price of $16.00 per share, valuing the Company at $500m.  Note that in 2012, bankers were tossing around the idea of a $700-$800m valuation. 

Post IPO, Borderfree received approximately $85.6 million, net of underwriting discounts and commissions.  Credit Suisse and RBC Capital Markets were the lead underwriters.  The company ended its first trading day up 25% (after having reached a peak of 33%).  It closed the day at $20 and has never seen that price again, hitting an intraday low of $10.82 on May 9th 2014, two days after their first earnings report as a public company. 

Currently, there are 31.5m shares out, with the top five shareholders holding 55% of the stock (see below).

 

***The lockup expiration is on 9.17.2014 making this a somewhat timely idea.***

 

Top 5 Shareholders:

Pitango 8.6m shares (26.5%)

Adams St 5.5m shares (17.5%)

Delta Ventures 3.1m shares (10%)

VSP Capital 1.5m shares (4.7%)

Mass Fin Services Co 1.1m shares (3.66%)

 

Six Reasons Borderfree is a compelling short:


1.  Borderfree is a “Bridge to Nowhere”

The more success that a merchant may having using BRDR, the higher the likelihood that BRDR will, in the long run, fail.  What does this mean?  It means that if Macy’s, Williams Sonoma, Marc Jacobs, etc.  were ever able to generate any meaningful international sales, they would simply recut their contracts with Borderfree the first time they came up for renewal or they would just bring the business in-house.  Why would a multimillion dollar brand with global aspirations give away a meaningful percentage of their sales to what is, at the end of the day, a “skin” on a web site with a currency converter attached to it?  BRDR is a terrific testing ground/end-to-end solution for a company to begin selling their wares into dozens of countries fast.  But that is where it ends.  Any brand that can achieve size or scale in a foreign land is likely to take up operations there so as not to give up any of their economics and/or cut a new deal with Borderfree.  

Borderfree also competes against well established behemoths like Amazon and eBay Enterprise where merchants have the benefit of the latest technology, local sales, distribution centers, currency and fulfilment capabilities simply by hitching a ride on the Amazon/eBay platform.  Amazon has also demonstrated that it has no need to ever really turn a profit.  BRDR would refute this statement by saying that once a brand is on Amazon, it loses some of its identity, ie any real brand would prefer to have its own web site.  While this may be true in some cases, say for Brooks Brothers (a BRDR customer), it is hardly true for the thousands of products sold by say Macy’s, a company that is just an aggregator of other merchant’s products.  Services such as PayPal already allow consumers to pay in their own currency as well.  Borderlinx, among other startups, offer a service whereby customers receive a US shipping address (Borderlinx’s warehouse) and thus the ability to buy US items as a US customer, deliver to your storage space in their warehouse, and then Borderlinx ships it to you.

Borderfree walks a delicate line where customers need to grow in order to BRDR to enjoy higher sales and profits, but not grow too much or too fast where they will cut a new deal with BRDR or leave the platform.  Contracts don’t last forever.  Our discussions with large third party e-commerce facilitators indicate that no deal is ever more than 3-5 years and that once a customer (at least domestically) reaches $250m in sales, they usually leave and handle their e-commerce platform on their own.  BRDR talks often about its competitive advantage and tries to paint itself as being in a great niche where they ‘preserve brand value’ but their competitive position is actually very weak.

 

2.  Borderfree has no real technology

Borderfree has no real technology.  Less than $42m in venture capital has been invested in the company since inception.  By way of comparison, everybody’s favorite SaaS company to hate, Workday (ticker: WDAY) spent $62m in product development in 2012 alone, when its sales were comparable to BRDR ($134m for WDAY vs $116m ttm for BRDR).

The Company has touted the following, none of which we can find any evidence of (paraphrased from conference calls, presentations).  Note that our rebuttal is in bold:

-          “Borderfree’s platform gives its merchants the ability to shape prices in real time.”  A random walk through several of BRDR’s customer sites shows no evidence of this whatsoever.  In fact, pricing looked uniform across all of the jurisdictions that we tested the site and was based on nothing more than the exchange rate plus shipping and duty.  If a sweater was $40.00 in the U.S. it was $40 multiplied by whatever country factor of price/shipping/duty was unique to that country.  Not one merchant seemed to be contouring anything based on local tastes or preferences.

-          “Shoppers abandon 50% of all domestic transactions online, and almost 75% of all international transactions online.  As we drive down the cost of shipping international transactions, we will see an uptake in the order rate and be able to drive volumes through our platform.”  This is a chicken/egg argument.  We tend to think that higher sales drive lower shipping prices, and not the other way around.  See Amazon.com for proof of this.

-          “Our platform gives valuable data insights to merchants with respect to what items are selling where.”  Fair.  But this data is no more valuable than the data that those merchants would gather if they ran the platform on their own.  If on the other hand BRDR is showing Macys what people at Williams Sonoma are buying, this could be very valuable.  However, we doubt that this is going on, as customers would be reluctant to have their data shared in this way.

-          BRDR does not break out the gross merchandise value (GMV) of products across platforms ie desktop versus mobile, tablet etc.  Mobile commerce (or mcommerce) sales are growing much faster than traditional ecommerce sales and are becoming an increasingly larger slice of the web commerce pie (see the chart below).  BRDR will clearly have to bring on (or acquire) additional resources to accommodate this trend.  The fact that this is not discussed or broken out today, leads us to believe that it is an inconsequential portion of sales. 

  

3.  BRDR’s revenue model is opaque and the business suffers from heavy customer and geographic concentration

Ten BRDR customers represent over 60% of sales.  In addition, almost a third of sales are from Canada.  This is non-trivial.  Canada is the easiest natural extension for growing US brands.  An expansion into Canada both logistically and commercially would not be hard to facilitate and is further proof that most merchants on the platform are simply testing the waters. 

Furthermore, with revenue concentration this high, the typical customer contract should be easy to articulate to investors.

Instead, we find the financial statements are opaque with respect to how their revenue is calculated and booked.  Consequently, we tried several times to reach the CFO in the NYC headquarters for clarity on the financials.

Conceptually, both from the Company’s public statements (conference calls, presentations, etc.) we think we understand how a customer contract works.  However, when your business is worth close to half a billion dollars, it is very rare to see so little disclosed with respect to the revenue model.  Perhaps this is because each contract is different and they have to keep terms private so as not to inform the next potential customer what kind of deals the previous customers received.

Borderfree books revenue in two segments:  1. fulfillment services and 2. ecommerce services. 

Fulfillment services are completely pass-through and Borderfree earns no margin at all.  These are the shipping and duty fees that BRDR charges to a customer that are then remitted to shipping carriers and government agencies.

Ecommerce service revenues are slightly harder to understand.  BRDR earns ecommerce revenues in two ways:  1.  From the online merchant and 2. From the end customer.

For the purposes of this point, we are only concerned with Ecommerce services, because this is the only segment that will produce a profit.

Straight from the public filings:

We derive ecommerce revenue from fees paid to us by our customers based on a percentage of their total gross international sales revenue processed through our technology and services platform. In 2013, this revenue driven by customers represented 42% of global ecommerce services revenue. Our customer contracts typically have multi-year initial terms ranging from one to four years, followed by one-year renewal periods. Revenue derived from our customers is recognized upon the delivery of the agreed upon service to the customer.

We generate additional ecommerce revenue from foreign exchange services and fees related to parcel protection and other transaction based fees from consumers who transact on our customers’ websites and mobile applications. In 2013, this revenue driven by consumers represented 58% of our global ecommerce services revenue.

So what have we learned? 

Actual ecommerce revenue is 12% of GMV.  Out of this 12%, 42% comes from the merchant.  This is the 5 of sales that BRDR is taking on each transaction.  For the model to be sustainable, and sales to go higher over time, either volumes have to improve, or merchants have to pay BRDR more.  We already covered why we do not see the latter happening.

58% of the 12% comes from the consumer.  This opaque amount is buried in handling fees and FX fees.  Think of the currency management and exposure issues that could cause a strange "surprise” from time to time.  That aside, again we find that BRDR’s sales are linked to items that either must go up on their own (unlikely as the Company has stated that they want to drive sales by reducing fees) or must improve via volumes.  BRDR has no control over the volumes that end up moving through their site and rely on the local brand awareness, advertising and interest of their merchants.

It simply isn't enough in our estimation to say that you earn your revenue from forex and 'other' fees.  The mechanics of this should be clear and right in the financials for investors to see and understand.

 

4.  The $103.32 Pepper Mill for the Pakistani consumer

Ask yourself the following…

Why would somebody in Canada need to order a Ralph Lauren shirt from Macys.com?

Why would somebody in Japan need to order a pair of Adidas from Shoes.com?

Why would somebody in Pakistan need a Pepper Mill from Williams Sonoma..and for $103.32 !?!

The case analysis we show below is key to understanding the ridiculous premise of Borderfree, as it relates to most of the business.  While even us skeptics can see why an impossible to find Under Armour training shirt may be ordered by a Peruvian soccer star (that is until Under Armour sets up shop in South America and/or does this themselves), most of the products offered through the Borderfree platform are not only unnecessary at their retail price given the slow speed of delivery and hassle alone, but even more absurd when you factor in the fully burdened cost.  Take a look at the data below, which we pulled by going to Williams Sonoma and adding dozens of items to our currency matrix.  This snapshot highlighs both an All Clad Cookware Set and a Trudeau Pepper Mill, which we added to our cart as we pretended to be in the following countries (note not all items are even available everywhere - a sad state of affairs for those interested in the Le Creuset Cookware set or Vitamix Blender):

 

 

 

Would BRDR contend that as more Pepper Mills are ordered in Pakistan, shipping costs will plummet, causing prices to fall, causing pepper mill sales to rise?  We think not.  This exercise proves that BRDR is a snazzy bell and whistle for customers such as Williams and Sonoma, who can now say that they ship to dozens of countries around the world.  Whether any traction happens with respect to sales growth does not really matter.  The bar graphs above are staggering.  They display the all-in premium one must pay (over the USD price) in a few select countries, to obtain these products.

 

5.  BRDR’s sales are vastly overstated and extremely misleading.  Shares should trade at a multiple of true revenues, not pass through revenues

Let’s recap BRDR’s revenue segments once more for it is worth repeating.

Borderfree books revenue in two segments:  1. fulfillment services and 2. ecommerce services.

Fulfillment services are completely pass-through and Borderfree earns no margin at all.  These are the shipping and duty fees that BRDR charges to a customer that are then remitted to shipping carriers and government agencies.  The Company's own public filing basically articulate that this revenue has no commensurate profit, nor will it ever.  That having been said, it remains a staggering 47% of BRDR’s revenues.   While our research indicates that it is completely within the accounting guidelines for BRDR to recognize revenue as such, the end result paints a picture of a much larger enterprise where Wall Street’s hefty multiple on sales makes an enormous difference to the share price.

Ecommerce service revenues are slightly harder to understand.  BRDR earns ecommerce revenues in two ways:  1.  From the online merchant and 2. From the end customer.The company claims that its pricing model works out to roughly 50/50 ie 50% of their ecommerce revenue is from the merchant, and 50% is from the end customer.

Breaking sales out by Revenue Segment
 
Once again, BRDR calls the total value of goods passing through their platform as GMV or Gross Merchandise Volume.  Here is a snapshot of GMV, Total Sales, and the Sales by Revenue Segment:

 

BRDR Sales by year (in millions):

Year:

2011

2012

2013

TTM 2014

Fulfillment Revenue

16.8

46.3

57.2

57.1

Ecommerce Revenue

16.6

35.0

53.3

59.6

Total Revenue

33.4

81.3

110.5

116.6

Gross Merchandise Volume (GMV)

137.2

301.7

447.8

501.9

 

Current BRDR share price: $14.16

Shares out:  33.5 (fully diluted)

Market Cap: $474m

 

Price to sales multiples:

Year:

2011

2012

2013

TTM 2014

Using Total sales:

14.1x

5.8x

4.3x

4.0x

Using Ecommerce Revenue Only

28.4x

13.5x

8.9x

8.0x

As you can see, BRDR trades at 8.0x its true sales number.


What multiple of sales should it trade for?

We recently had the chance to see two leading e-commerce/fulfillment companies present, Speed Commerce (ticker: SPCD) and PFS Web (ticker: PFSW)


Speed Commerce (sample customers: Lowe's, Huawei, Yankee Candle, Ulta)

FY-14 Sales: $107m

Adjusted EBITDA: $12.3m

Market Cap: $210m

Price to Sales: 1.9x


PFS Web (sample customers: Lego, Asics, Gevalia, Starbucks)

FY-14e Sales: $129m-$135m

EBITDA: $12m - $14m

Market Cap: $145m

Price to Sales: 1.1x

 

YOOX S.p.A. (BIT:YOOX), the engine behind “Powered by Yoox” which operates the full-price online stores of fashion houses Marni, Emporio Armani, Dolce & Gabbana Moschino, Jil Sander, Bally Shoe and Ermenegildo Zegna, amongst dozens of others, enjoys the following valuation:

 

YOOX S.p.A.

Sales (ttm): 486m

EBITDA: 31.4m

Market Cap (EUR): 1.1b

Price to Sales: 2.26x

 

Only Demandware (ticker: DWRE) trades at a crazier multiple than Borderfee (14.8x sales) as its solution is truly cloud based.  Unlike BRDR, DWRE allows companies to use their cloud software to develop their own web sites.  Brooks Brothers is a BRDR client as well as a DWRE client.  Brooks Brothers would use DWRE to create and customize its digital commerce platform across multiple geographies and BRDR to facilitate sending a necktie to Turkey.  We are not trying to justify DWRE’s multiple, but the business spends more in a year on R&D than BRDR raised in its entire history and boasts 70% gross profit margins.

**Borderfree's market value approximates almost the entire gross market value of all merchandise passing through their platform.**  Even AMZN only trades at 1.75x sales.

We think that Borderfree should be given a multiple along the lines of a technology consulting outfit mixed with an e-commerce provider.  As such, 1.75-2.25x sales seems like a very reasonable range. 

However, we know how much the market loves tech.  So we will double that range to 3.5-4.5x just to be conservative.  However, what we won't do, is use a phony sales number that does not represent the true economic operations of the business.  We use ecommerce revenue only to arrive at true value:


CONSERVATIVE SCENARIO

Ecommerce revenue full year 2014: $75m

Multiple: 3.5-4.5x

Value: $262m - $337m

Fully diluted shares: 33.5

Value per share: $7.83 - $10.07

Upside: 29-45%


LESS CONSERVATIVE SCENARIO

Ecommerce revenue full year 2014: $75m

Multiple: 1.75-2.25x

Value: $131m - $168m

Fully diluted shares: 33.5

Value per share: $3.91 - $5.03

Upside: 64-72%

 

6.  The lock-up on BRDR shares held by insiders is set to expire on 9.17.14

BRDR’s shares are still held mostly by insiders.

Only 11.62m of the 31.5m shares are in the public float.

Average volume is around 100k shares per day or around $1.5m a day, which is low for a $471.5m market cap.  Insider selling pressure and the laws of supply and demand could help shares settle to a more reasonable level.

 

Conclusion

Borderfree shares trade at unsustainably high levels for a profit and technology-light middleman whose successes and fortunes are dependent on those of the customers that it serves.  A consulting company with a third party logistics back end does not deserve the multiple of a true SAAS engine.

BRDR trades for 37.7x the mid range of the Company’s stated full year 2014 adjusted EBITDA estimate and 88.5x the high end of their Non-GAAP earnings per diluted share estimate.

 

Risks

Cash:  The biggest risk to the BRDR short thesis is the Company’s $120m in cash.  This could be used to acquire a better business that would then be awarded a BRDR multiple.

Customer Traction:  The market could trade this name based solely on customer count.  If BRDR continues to sign up brand name customers, shares could go higher despite the lack of commensurate profits.


Notes

Full Year 2014 Projections (source: Borderfree)

  • Ecommerce services revenue of $72.9 million to $73.8 million
  • Revenue of $139.0 million to $141.0 million
  • Adjusted EBITDA of $8.9 million to $9.7 million
  • Non-GAAP net income of $4.6 million to $5.4 million or $0.15 to $0.18 per basic share and $0.14 to $0.16 per diluted share. Weighted average basic shares outstanding of 30.6 million and diluted shares outstanding of 33.3 million, on a pro forma basis, as if all preferred shares converted to common shares outstanding as of January 1, 2013
  • Non-cash stock-based compensation expense of approximately $3.8 million

 

 

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

- Market correctly decides to award a price to sales multiple based on true (not pass through) sales
- Customer losses; concentration
- Investor understanding that there is no real technology behind this business
- Lockup expiration 9.17.14
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    Description

    BORDERFREE (ticker: BRDR) $14.16

    Borderfree is a low tech consulting and logistics business masquerading as an e-commerce cloud solutions provider with shares that trade on a multiple of sales that is grossly inflated and misunderstood.  Its sales recording method is unique against the hundreds of companies we study and follow.  Regardless, over time, BRDR shares should rerate to reflect the underlying reality of the business’ poor economics.  This write-up will highlight six key reasons as to why we think BRDR is a compelling short (including a timely IPO lock-up expiration).  But first, lets go over some background on the Company.

     

    What does Borderfree do?

    In the Company’s own words, “Borderfree, Inc. provides cross-border ecommerce solutions. The company operates a technology and services platform that enables retailers in the United States to transact with consumers in approximately 100 countries and territories worldwide. Its customers include retailers, department stores, apparel brands, and lifestyle brands that sell a range of physical goods online, including apparel, handbags, jewelry, sporting goods, home décor, and toys.”

    In layman’s terms, Borderfree provides a web platform/interface that allows its customers (large US retailers like Williams Sonoma and Macy’s) to offer their products in different countries to end consumers.  Borderfree handles the currency translation, duties, shipping and fulfillment responsibility on behalf of the retailer.  At the same time, they are also on the hook for fraud, chargebacks and payment processing mishaps, if any.  Keep in mind that BRDR holds no inventory.  Once a product is ordered, it is shipped to a domestic hub that is run by a third party logistic provider that has contracted with Borderfree.  It is then sent to an overseas hub before being shipped to the ‘last mile’ by (usually) DHL.  In some cases, if there are high moving SKUs, Borderfree will preemptively place certain inventory in country at third party overseas hubs.  BRDR calls the total value of goods passing through their platform as GMV or Gross Merchandise Volume.  In 2013, GMV amounted to $447.8m

    See for yourself.

    Go to Macy’s.com and click on the little flag at the top right hand corner of the page.  Select ‘United Kingdom’ as your shipping destination.  You are now in the world of Borderfree.  What you will notice, if you place something into your shopping cart and try to buy it, is the exorbitant cost of shipping and duty.

     

    Example: Borderfree shopping experience on Macys.com

    Our analyst goes to Macys.com from our London UK office and sees this popup:

     

     He then selects this handsome Izod golf polo.  A steal at only 14.62 GBP!

     

     

     He adds the polo to his cart and proceeds to pay.  Much to his dismay, the item’s shipping charge costs more than the item! (note the Borderfree fulfillment service disclaimer at the bottom)

     

     

    Ready to short Borderfree yet?  Hold up.  First, some more background on the business.

     

    How did Borderfree start?

    Borderfree’s roots can be traced back to established serial entrepreneur Yuval Tal’s early company E4X.  According to the “Geektime” blog:

    “[E4X was] a business that developed a solution that allowed for electronic trading around the world to view prices in local currency of the user and get the transaction in exchange for dollars, without dealing with the hassle of converting different currencies.  Along with the development of e-commerce, the developers understood that the various trading sites have difficulty with other aspects of the new digital business reality with regards to handling international customers so they decided to expand the company’s product portfolio to offer handling international shipments, accurate price calculations; and to include additional costs such as customs clearance of credit, risk management and even the allocation of personnel customer service.

    As part of this development, the company changed its name in 2007 from E4X to FiftyOne, bringing in a new outside CEO named Michael deSimone, a former senior executive at Citibank, to further develop the activity.”

    In March of 2012, FiftyOne bought Canadian competitor Borderfree, and changed the name of the Company to Borderfree in April of 2013.  Since its inception and before coming public in 2014, Borderfree has raised $41.5 million from Israeli venture capital funds:  Delta Ventures, Pitango, Vintage and Loyola Credit; and from American foundations Adam Street Partners, Online Ventures and Ventures Strategy Group. 

     

    Initial Public Offering

    On March 21, 2014, Borderfree sold 5,750,000 shares of common stock, which included 750,000 shares sold pursuant to the underwriters' option to purchase additional shares, in its initial public offering, at an offering price of $16.00 per share, valuing the Company at $500m.  Note that in 2012, bankers were tossing around the idea of a $700-$800m valuation. 

    Post IPO, Borderfree received approximately $85.6 million, net of underwriting discounts and commissions.  Credit Suisse and RBC Capital Markets were the lead underwriters.  The company ended its first trading day up 25% (after having reached a peak of 33%).  It closed the day at $20 and has never seen that price again, hitting an intraday low of $10.82 on May 9th 2014, two days after their first earnings report as a public company. 

    Currently, there are 31.5m shares out, with the top five shareholders holding 55% of the stock (see below).

     

    ***The lockup expiration is on 9.17.2014 making this a somewhat timely idea.***

     

    Top 5 Shareholders:

    Pitango 8.6m shares (26.5%)

    Adams St 5.5m shares (17.5%)

    Delta Ventures 3.1m shares (10%)

    VSP Capital 1.5m shares (4.7%)

    Mass Fin Services Co 1.1m shares (3.66%)

     

    Six Reasons Borderfree is a compelling short:


    1.  Borderfree is a “Bridge to Nowhere”

    The more success that a merchant may having using BRDR, the higher the likelihood that BRDR will, in the long run, fail.  What does this mean?  It means that if Macy’s, Williams Sonoma, Marc Jacobs, etc.  were ever able to generate any meaningful international sales, they would simply recut their contracts with Borderfree the first time they came up for renewal or they would just bring the business in-house.  Why would a multimillion dollar brand with global aspirations give away a meaningful percentage of their sales to what is, at the end of the day, a “skin” on a web site with a currency converter attached to it?  BRDR is a terrific testing ground/end-to-end solution for a company to begin selling their wares into dozens of countries fast.  But that is where it ends.  Any brand that can achieve size or scale in a foreign land is likely to take up operations there so as not to give up any of their economics and/or cut a new deal with Borderfree.  

    Borderfree also competes against well established behemoths like Amazon and eBay Enterprise where merchants have the benefit of the latest technology, local sales, distribution centers, currency and fulfilment capabilities simply by hitching a ride on the Amazon/eBay platform.  Amazon has also demonstrated that it has no need to ever really turn a profit.  BRDR would refute this statement by saying that once a brand is on Amazon, it loses some of its identity, ie any real brand would prefer to have its own web site.  While this may be true in some cases, say for Brooks Brothers (a BRDR customer), it is hardly true for the thousands of products sold by say Macy’s, a company that is just an aggregator of other merchant’s products.  Services such as PayPal already allow consumers to pay in their own currency as well.  Borderlinx, among other startups, offer a service whereby customers receive a US shipping address (Borderlinx’s warehouse) and thus the ability to buy US items as a US customer, deliver to your storage space in their warehouse, and then Borderlinx ships it to you.

    Borderfree walks a delicate line where customers need to grow in order to BRDR to enjoy higher sales and profits, but not grow too much or too fast where they will cut a new deal with BRDR or leave the platform.  Contracts don’t last forever.  Our discussions with large third party e-commerce facilitators indicate that no deal is ever more than 3-5 years and that once a customer (at least domestically) reaches $250m in sales, they usually leave and handle their e-commerce platform on their own.  BRDR talks often about its competitive advantage and tries to paint itself as being in a great niche where they ‘preserve brand value’ but their competitive position is actually very weak.

     

    2.  Borderfree has no real technology

    Borderfree has no real technology.  Less than $42m in venture capital has been invested in the company since inception.  By way of comparison, everybody’s favorite SaaS company to hate, Workday (ticker: WDAY) spent $62m in product development in 2012 alone, when its sales were comparable to BRDR ($134m for WDAY vs $116m ttm for BRDR).

    The Company has touted the following, none of which we can find any evidence of (paraphrased from conference calls, presentations).  Note that our rebuttal is in bold:

    -          “Borderfree’s platform gives its merchants the ability to shape prices in real time.”  A random walk through several of BRDR’s customer sites shows no evidence of this whatsoever.  In fact, pricing looked uniform across all of the jurisdictions that we tested the site and was based on nothing more than the exchange rate plus shipping and duty.  If a sweater was $40.00 in the U.S. it was $40 multiplied by whatever country factor of price/shipping/duty was unique to that country.  Not one merchant seemed to be contouring anything based on local tastes or preferences.

    -          “Shoppers abandon 50% of all domestic transactions online, and almost 75% of all international transactions online.  As we drive down the cost of shipping international transactions, we will see an uptake in the order rate and be able to drive volumes through our platform.”  This is a chicken/egg argument.  We tend to think that higher sales drive lower shipping prices, and not the other way around.  See Amazon.com for proof of this.

    -          “Our platform gives valuable data insights to merchants with respect to what items are selling where.”  Fair.  But this data is no more valuable than the data that those merchants would gather if they ran the platform on their own.  If on the other hand BRDR is showing Macys what people at Williams Sonoma are buying, this could be very valuable.  However, we doubt that this is going on, as customers would be reluctant to have their data shared in this way.

    -          BRDR does not break out the gross merchandise value (GMV) of products across platforms ie desktop versus mobile, tablet etc.  Mobile commerce (or mcommerce) sales are growing much faster than traditional ecommerce sales and are becoming an increasingly larger slice of the web commerce pie (see the chart below).  BRDR will clearly have to bring on (or acquire) additional resources to accommodate this trend.  The fact that this is not discussed or broken out today, leads us to believe that it is an inconsequential portion of sales. 

      

    3.  BRDR’s revenue model is opaque and the business suffers from heavy customer and geographic concentration

    Ten BRDR customers represent over 60% of sales.  In addition, almost a third of sales are from Canada.  This is non-trivial.  Canada is the easiest natural extension for growing US brands.  An expansion into Canada both logistically and commercially would not be hard to facilitate and is further proof that most merchants on the platform are simply testing the waters. 

    Furthermore, with revenue concentration this high, the typical customer contract should be easy to articulate to investors.

    Instead, we find the financial statements are opaque with respect to how their revenue is calculated and booked.  Consequently, we tried several times to reach the CFO in the NYC headquarters for clarity on the financials.

    Conceptually, both from the Company’s public statements (conference calls, presentations, etc.) we think we understand how a customer contract works.  However, when your business is worth close to half a billion dollars, it is very rare to see so little disclosed with respect to the revenue model.  Perhaps this is because each contract is different and they have to keep terms private so as not to inform the next potential customer what kind of deals the previous customers received.

    Borderfree books revenue in two segments:  1. fulfillment services and 2. ecommerce services. 

    Fulfillment services are completely pass-through and Borderfree earns no margin at all.  These are the shipping and duty fees that BRDR charges to a customer that are then remitted to shipping carriers and government agencies.

    Ecommerce service revenues are slightly harder to understand.  BRDR earns ecommerce revenues in two ways:  1.  From the online merchant and 2. From the end customer.

    For the purposes of this point, we are only concerned with Ecommerce services, because this is the only segment that will produce a profit.

    Straight from the public filings:

    We derive ecommerce revenue from fees paid to us by our customers based on a percentage of their total gross international sales revenue processed through our technology and services platform. In 2013, this revenue driven by customers represented 42% of global ecommerce services revenue. Our customer contracts typically have multi-year initial terms ranging from one to four years, followed by one-year renewal periods. Revenue derived from our customers is recognized upon the delivery of the agreed upon service to the customer.

    We generate additional ecommerce revenue from foreign exchange services and fees related to parcel protection and other transaction based fees from consumers who transact on our customers’ websites and mobile applications. In 2013, this revenue driven by consumers represented 58% of our global ecommerce services revenue.

    So what have we learned? 

    Actual ecommerce revenue is 12% of GMV.  Out of this 12%, 42% comes from the merchant.  This is the 5 of sales that BRDR is taking on each transaction.  For the model to be sustainable, and sales to go higher over time, either volumes have to improve, or merchants have to pay BRDR more.  We already covered why we do not see the latter happening.

    58% of the 12% comes from the consumer.  This opaque amount is buried in handling fees and FX fees.  Think of the currency management and exposure issues that could cause a strange "surprise” from time to time.  That aside, again we find that BRDR’s sales are linked to items that either must go up on their own (unlikely as the Company has stated that they want to drive sales by reducing fees) or must improve via volumes.  BRDR has no control over the volumes that end up moving through their site and rely on the local brand awareness, advertising and interest of their merchants.

    It simply isn't enough in our estimation to say that you earn your revenue from forex and 'other' fees.  The mechanics of this should be clear and right in the financials for investors to see and understand.

     

    4.  The $103.32 Pepper Mill for the Pakistani consumer

    Ask yourself the following…

    Why would somebody in Canada need to order a Ralph Lauren shirt from Macys.com?

    Why would somebody in Japan need to order a pair of Adidas from Shoes.com?

    Why would somebody in Pakistan need a Pepper Mill from Williams Sonoma..and for $103.32 !?!

    The case analysis we show below is key to understanding the ridiculous premise of Borderfree, as it relates to most of the business.  While even us skeptics can see why an impossible to find Under Armour training shirt may be ordered by a Peruvian soccer star (that is until Under Armour sets up shop in South America and/or does this themselves), most of the products offered through the Borderfree platform are not only unnecessary at their retail price given the slow speed of delivery and hassle alone, but even more absurd when you factor in the fully burdened cost.  Take a look at the data below, which we pulled by going to Williams Sonoma and adding dozens of items to our currency matrix.  This snapshot highlighs both an All Clad Cookware Set and a Trudeau Pepper Mill, which we added to our cart as we pretended to be in the following countries (note not all items are even available everywhere - a sad state of affairs for those interested in the Le Creuset Cookware set or Vitamix Blender):

     

     

     

    Would BRDR contend that as more Pepper Mills are ordered in Pakistan, shipping costs will plummet, causing prices to fall, causing pepper mill sales to rise?  We think not.  This exercise proves that BRDR is a snazzy bell and whistle for customers such as Williams and Sonoma, who can now say that they ship to dozens of countries around the world.  Whether any traction happens with respect to sales growth does not really matter.  The bar graphs above are staggering.  They display the all-in premium one must pay (over the USD price) in a few select countries, to obtain these products.

     

    5.  BRDR’s sales are vastly overstated and extremely misleading.  Shares should trade at a multiple of true revenues, not pass through revenues

    Let’s recap BRDR’s revenue segments once more for it is worth repeating.

    Borderfree books revenue in two segments:  1. fulfillment services and 2. ecommerce services.

    Fulfillment services are completely pass-through and Borderfree earns no margin at all.  These are the shipping and duty fees that BRDR charges to a customer that are then remitted to shipping carriers and government agencies.  The Company's own public filing basically articulate that this revenue has no commensurate profit, nor will it ever.  That having been said, it remains a staggering 47% of BRDR’s revenues.   While our research indicates that it is completely within the accounting guidelines for BRDR to recognize revenue as such, the end result paints a picture of a much larger enterprise where Wall Street’s hefty multiple on sales makes an enormous difference to the share price.

    Ecommerce service revenues are slightly harder to understand.  BRDR earns ecommerce revenues in two ways:  1.  From the online merchant and 2. From the end customer.The company claims that its pricing model works out to roughly 50/50 ie 50% of their ecommerce revenue is from the merchant, and 50% is from the end customer.

    Breaking sales out by Revenue Segment
     
    Once again, BRDR calls the total value of goods passing through their platform as GMV or Gross Merchandise Volume.  Here is a snapshot of GMV, Total Sales, and the Sales by Revenue Segment:

     

    BRDR Sales by year (in millions):

    Year:

    2011

    2012

    2013

    TTM 2014

    Fulfillment Revenue

    16.8

    46.3

    57.2

    57.1

    Ecommerce Revenue

    16.6

    35.0

    53.3

    59.6

    Total Revenue

    33.4

    81.3

    110.5

    116.6

    Gross Merchandise Volume (GMV)

    137.2

    301.7

    447.8

    501.9

     

    Current BRDR share price: $14.16

    Shares out:  33.5 (fully diluted)

    Market Cap: $474m

     

    Price to sales multiples:

    Year:

    2011

    2012

    2013

    TTM 2014

    Using Total sales:

    14.1x

    5.8x

    4.3x

    4.0x

    Using Ecommerce Revenue Only

    28.4x

    13.5x

    8.9x

    8.0x

    As you can see, BRDR trades at 8.0x its true sales number.


    What multiple of sales should it trade for?

    We recently had the chance to see two leading e-commerce/fulfillment companies present, Speed Commerce (ticker: SPCD) and PFS Web (ticker: PFSW)


    Speed Commerce (sample customers: Lowe's, Huawei, Yankee Candle, Ulta)

    FY-14 Sales: $107m

    Adjusted EBITDA: $12.3m

    Market Cap: $210m

    Price to Sales: 1.9x


    PFS Web (sample customers: Lego, Asics, Gevalia, Starbucks)

    FY-14e Sales: $129m-$135m

    EBITDA: $12m - $14m

    Market Cap: $145m

    Price to Sales: 1.1x

     

    YOOX S.p.A. (BIT:YOOX), the engine behind “Powered by Yoox” which operates the full-price online stores of fashion houses Marni, Emporio Armani, Dolce & Gabbana Moschino, Jil Sander, Bally Shoe and Ermenegildo Zegna, amongst dozens of others, enjoys the following valuation:

     

    YOOX S.p.A.

    Sales (ttm): 486m

    EBITDA: 31.4m

    Market Cap (EUR): 1.1b

    Price to Sales: 2.26x

     

    Only Demandware (ticker: DWRE) trades at a crazier multiple than Borderfee (14.8x sales) as its solution is truly cloud based.  Unlike BRDR, DWRE allows companies to use their cloud software to develop their own web sites.  Brooks Brothers is a BRDR client as well as a DWRE client.  Brooks Brothers would use DWRE to create and customize its digital commerce platform across multiple geographies and BRDR to facilitate sending a necktie to Turkey.  We are not trying to justify DWRE’s multiple, but the business spends more in a year on R&D than BRDR raised in its entire history and boasts 70% gross profit margins.

    **Borderfree's market value approximates almost the entire gross market value of all merchandise passing through their platform.**  Even AMZN only trades at 1.75x sales.

    We think that Borderfree should be given a multiple along the lines of a technology consulting outfit mixed with an e-commerce provider.  As such, 1.75-2.25x sales seems like a very reasonable range. 

    However, we know how much the market loves tech.  So we will double that range to 3.5-4.5x just to be conservative.  However, what we won't do, is use a phony sales number that does not represent the true economic operations of the business.  We use ecommerce revenue only to arrive at true value:


    CONSERVATIVE SCENARIO

    Ecommerce revenue full year 2014: $75m

    Multiple: 3.5-4.5x

    Value: $262m - $337m

    Fully diluted shares: 33.5

    Value per share: $7.83 - $10.07

    Upside: 29-45%


    LESS CONSERVATIVE SCENARIO

    Ecommerce revenue full year 2014: $75m

    Multiple: 1.75-2.25x

    Value: $131m - $168m

    Fully diluted shares: 33.5

    Value per share: $3.91 - $5.03

    Upside: 64-72%

     

    6.  The lock-up on BRDR shares held by insiders is set to expire on 9.17.14

    BRDR’s shares are still held mostly by insiders.

    Only 11.62m of the 31.5m shares are in the public float.

    Average volume is around 100k shares per day or around $1.5m a day, which is low for a $471.5m market cap.  Insider selling pressure and the laws of supply and demand could help shares settle to a more reasonable level.

     

    Conclusion

    Borderfree shares trade at unsustainably high levels for a profit and technology-light middleman whose successes and fortunes are dependent on those of the customers that it serves.  A consulting company with a third party logistics back end does not deserve the multiple of a true SAAS engine.

    BRDR trades for 37.7x the mid range of the Company’s stated full year 2014 adjusted EBITDA estimate and 88.5x the high end of their Non-GAAP earnings per diluted share estimate.

     

    Risks

    Cash:  The biggest risk to the BRDR short thesis is the Company’s $120m in cash.  This could be used to acquire a better business that would then be awarded a BRDR multiple.

    Customer Traction:  The market could trade this name based solely on customer count.  If BRDR continues to sign up brand name customers, shares could go higher despite the lack of commensurate profits.


    Notes

    Full Year 2014 Projections (source: Borderfree)

    • Ecommerce services revenue of $72.9 million to $73.8 million
    • Revenue of $139.0 million to $141.0 million
    • Adjusted EBITDA of $8.9 million to $9.7 million
    • Non-GAAP net income of $4.6 million to $5.4 million or $0.15 to $0.18 per basic share and $0.14 to $0.16 per diluted share. Weighted average basic shares outstanding of 30.6 million and diluted shares outstanding of 33.3 million, on a pro forma basis, as if all preferred shares converted to common shares outstanding as of January 1, 2013
    • Non-cash stock-based compensation expense of approximately $3.8 million

     

     

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    - Market correctly decides to award a price to sales multiple based on true (not pass through) sales
    - Customer losses; concentration
    - Investor understanding that there is no real technology behind this business
    - Lockup expiration 9.17.14

    Messages


    SubjectRE: Valuation
    Entry09/08/2014 03:21 PM
    Membermrsox977
    Cash is the Company's most valuable asset without question.  I use Price/Sales versus EV/Sales simply because tech companies never get as much credit for their cash (see: AAPL).  See the EV/Sales table below.  BRDR is still substantially more expensive than its peers using non-pass through revenues alone.  At 3x EV Sales it's a $10.45 stock, down 30%.  PFS has publicly stated that their FY14 revenue and adjusted EBITDA will grow nicely over FY13.  SPDC has publicly stated that they will do $15m in Free Cash Flow for FY15.  This is 2x Borderfree's adjusted EBITDA yet PFS trades for 30% of BRDR's market cap.
     
      Market Cap Debt Cash EV Sales EV/Sales
    SPCD 210 38 0 248 107 2.3
    PFSW 145 11 22 134 135 1.0
    YOOX 1100 37 33 1104 486 2.3
    BRDR 471.5 0 125 346.5 75 4.6

    SubjectRE: Bull case?
    Entry09/08/2014 03:40 PM
    Membermrsox977
    Thank you for your question.
     
    This was sold to IPO investors with all of the key buzzwords:
     
    - "global e-commerce"
    - "segment leader"
    - “spice routes”
    - "e-commerce adoption rate higher outside the US"
     
    The TAM may be infinite in principle, but not in reality.  For one, anybody trying to transact in China has Baidu, AliBaba and Tencent to deal with.  In addition:
     
    - none of BRDR's contracts offer exclusivity
    - there is significant competition
    - it took the company almost 5 years to double its number of active merchants.  this is a reasonable rate of growth for a business, but not off the charts given where this company is valued.

    Subjectadditional thought
    Entry09/08/2014 03:48 PM
    Membermrsox977
    Since BRDR is on the hook for all chargebacks, payment pricessing failures, fraudulent transactions, and refunds for returns, what is to say that the sample size of their individual merchant revenues is even large enough at $5m avg revenue per merchant ($2.5m per merchant if we count 'real' revenue) to make a reasonable estimate of where their true gross margin shakes out.  Put another way, a worldwide clientele of Macy's enthusiasts is currently putting $5m in product through Borderfree.  BRDR is charging Macy's 5% of sales as a fee, and is somehow skimming the rest of the revenue from hidden fees and forex that the enthusiasts do not see or seem to mind.  $2.5m in product is hardly large enough to be representative of any international ecommerce business with respect to fraud, chargebacks and the like, especially across dozens of jurisdictions.  While the 5% fee to Macy's is easy to model, I don't see how you model the rest of the revenue in a comfortable, repeatable and accurate enough manner at this point to justify 8x sales.

    SubjectRE: RE: RE: Valuation
    Entry09/09/2014 11:39 AM
    Membermrsox977
    1) the EV/Sales metrics in the thread do not ignore the cash
     
    2) Point taken.  I don't like to short real growth companies with sustainable business models and actual technology.  You will not find me shorting Tesla or Workday either.  I am happy covering BRDR at 30x 2015e earnings of 21c.

    SubjectRE: RE: RE: RE: RE: Valuation
    Entry09/10/2014 11:30 PM
    Membermrsox977
    Shares are easy and cheap to borrow.  The second half of your question seems to be geared at another post, if I am not mistaken.

    SubjectRE: Some questions
    Entry09/11/2014 12:47 AM
    Membermrsox977
    Thank you for the compliment.  I did not expect this idea to get a good rating.  I think that people need to focus less on the growth and more on the sustainablity of the model/the technology.  We think both of those items are deficient.  Say what you will about Tesla and its valuation, but there is no denying that their patents are probably valuable.  Borderfree is a fulfillment company and should trade as such.  If for some reason, GAAP did not allow them to list the pass through shipping charges as sales, and the business was going to do $75m in revenue this year, what do you think the market cap would be?

    (1)
    (2 + 3) Pitney Bowes (PB) is a large competitor.  
    https://www.pitneybowes.com/us/global-ecommerce.html
    In 2004, PB started working with eBay marketplace sellers, offering an international postage printing service. The relationship expanded and exists today, doing everything Borderfree does:  http://pages.ebay.com/shipping/globalshipping/buyer-tnc.html

    In 2005, PB acquired ClearPath from Canada Post Borderfree; ClearPath provided the technology Pitney uses to calculate landed costs for international shipments.

    Fast forward to 2012 - Canada Post sold the remaining assets of Borderfree to FiftyOne.  This is when FiftyOne changed their name to Borderfree.

    We found several examples of customer dissatisfaction using Borderfree and are not surprised.  In the case of Canada, BRDR is basically facilitating a shipment from the retailer via UPS to a warehouse in Detroit.  The item is then sent via Canada post through customs which can be delayed by several days.  Once it clears, it is still another few days to get the item depending on where in Canada you are.  The point is that no technology or web site is truly going to make shipping internationally a lot faster unless it has massive scale or unless items are warehoused in the destination country.

    Very perceptive re the purchase goosing the topline.  We did not think of it that way.  Instead we read through the S-1 carefully and simply noticed how BRDR has never made any money.  Here is a Borderfree merchant count:

    2011
    Q1: 43
    Q2: 46
    Q3: 50
    Q4: 56

    2012
    Q1: 64
    Q2: 65
    Q3: 70
    Q4: 75

    When BRDR lists these numbers, they do say that "Merchants acquired from Canada Post Borderfree that were voluntarily decommissioned by Borderfree are excluded from these figures"

    Here is what they say re the 2012 purchase:

    Note 2—Acquisition

    On March 1, 2012, the Company acquired certain assets of CPBF for $2.0 million in cash. The transaction has been accounted for as a purchase of a business. The acquisition of CPBF expanded the Company’s customer base and resulting sales volumes, and further optimized the Company’s fulfillment process by leveraging the infrastructure, service levels and cost structure of Canada Post’s logistics model. The acquired assets, after adjustments to reflect fair market values assigned to assets purchased from CPBF, have been included in the Company’s consolidated financial statements from the date of acquisition. Since the date of acquisition, CPBF had revenue of approximately $5.9 million for the year ended December 31, 2012. Pro forma information has not been provided, as the impact to prior periods is immaterial.

    The following table summarizes the fair values of the assets acquired as of the date of the acquisition and the amounts assigned to goodwill and intangible asset classifications (in thousands):
     

    Property and equipment

       $ 65   

    Goodwill

         265   

    Amortizable intangible assets

         1,670   
        

     

     

     

    Total assets acquired

       $ 2,000   
        

     

     

     

    The amounts assigned to goodwill and major intangible asset classifications, all of which are tax deductible, for the CPBF acquisition are as follows (in thousands):

     

                     
        

     

         Amortization
    Period (Years)
     

    Goodwill

       $ 265         N/A   

    Customer relationships

         1,180         8.0   

    Technology

         490         1.0   
        

     

     

              
         $ 1,935            
        

     

     


    Goodwill recorded in connection with the acquisition was primarily attributable to the acquired workforce and the synergies expected to arise when the business is combined with the Company’s operations.
     
    As you can see from this table,GMV rises with the acquisition, but losses escalate until they get to the Dec 2013 quarter (the business is obviously seasonal due to the holidays).
     
                                                                     
        Quarter Ended  
        March 31,
    2012
        June 30,
    2012
        September 30,
    2012
        December 31,
    2012
        March 31,
    2013
        June 30,
    2013
        September 30,
    2013
        December 31,
    2013
     
       

    (In thousands)

     

    Revenue

      $ 14,917      $ 18,485      $ 19,006      $ 28,976      $ 25,772      $ 25,583      $ 23,216      $ 35,886   

    Operating expenses:

                                                                   

    Cost of revenue

        9,922        11,991        13,185        20,534        17,239        17,300        16,097        24,434   

    Technology and operations

        1,320        1,858        1,984        2,439        2,182        2,306        2,530        2,348   

    Research and development

        864        1,256        837        1,588        1,247        1,627        1,818        1,964   

    Sales and marketing

        880        1,266        1,867        1,716        2,598        2,759        2,364        2,307   

    General and administrative

        1,458        1,623        1,889        1,784        2,268        2,546        2,401        2,352   
       

     

     

       

     

     

       

     

     

       

     

     

       

     

     

       

     

     

       

     

     

       

     

     

     

    Total operating expenses

        14,444        17,994        19,762        28,061        25,534        26,538        25,210        33,405   
       

     

     

       

     

     

       

     

     

       

     

     

       

     

     

       

     

     

       

     

     

       

     

     

     

    Income (loss) from operations

        473        491        (756     915        238        (955     (1,994     2,481   

    Interest and other income, net

        250        376        323        256        378        438        337        253   

    Loss on change in fair value of warrants

        (1,198     (210     (210     (210     (215     (250     (320     (711
       

     

     

       

     

     

       

     

     

       

     

     

       

     

     

       

     

     

       

     

     

       

     

     

     

    Income (loss) before income taxes

        (475     657        (643     961        401        (767     (1,977     2,023   

    Provision for income taxes

        24        43        123        118        40        47        32        215   
       

     

     

       

     

     

       

     

     

       

     

     

       

     

     

       

     

     

       

     

     

       

     

     

     

    Net income (loss)

      $ (499   $ 614      $ (766   $ 843      $ 361      $ (814   $ (2,009   $ 1,808   
       

     

     

       

     

     

       

     

     

       

     

     

       

     

     

       

     

     

       

     

     

       

     

     

     

    Gross merchandise volume

      $ 50,886      $ 68,209      $ 70,177      $ 112,424      $ 92,375      $ 102,956      $ 96,696      $ 155,809  


    Keep in mind that this is a Company where the top three customers generated approximately 30% of global ecommerce revenue for the years ended December 31, 2011 and 2012, and approximately 25% for the year ended December 31, 2013.  Most customers can terminate their agreements with BRDR upon 30 to 90 days prior written notice.

    Additional Risks to BRDR not mentioned in the write-up:
    - the cost of potential security and/or privacy breaches
    - the cost of potential new taxes and tarrifs in the jurisdictions that they do business
    - TOP CUSTOMERS doing poorly... this is like being short a basket of suffering retailers:
        - Williams Sonoma gives soft outlook Aug 28th
        - Macys gives weak forecast Aug 13th
        - Aeopostale awful guidance Aug 21st

    (4) We are trying to get more on customer losses.
    So far we know of two:
    Kid Robot: http://www.kidrobot.com/
    Everton: http://evertondirect.evertonfc.com/stores/everton/default.aspx?
     
    (5) Good question.  The market will start to value this properly when the inevitable happens ie customers re-cut their deals with BRDR, leave, or have decelerating sales.  True tech investors know that there is no real tech here.


    SubjectRE: RE: Some questions
    Entry09/11/2014 01:03 AM
    Membermrsox977
    Apologies, for some reason (1) did not make it in.  We have not been able to get to the true decision makers at the merchants in order to ask this question properly.  Circumstantially, we have learned that yes, merchants enjoy the time to market and the services, but this is because BRDR is doing things that they have no interest in doing considering how small a part of the business it is.  Multi currency pricing is no secret sauce.  Any global bank can do it for your site with an API (see HSBC for example: https://globalconnections.hsbc.com/us/en/articles/path-profits-international-ecommerce-go-local).  It's the logistics part that nobody wants to do.  A lot can go wrong there to damage the brand (shipping speed, wrong item, customer service challengers) and retailers are happy to lay it all on Borderfree. 
     
    Watch the CEO on this Bloomberg video talk about lowering shipping costs by 25%.  We simply don't believe that this is true (for what it is worth his hesitation and eye blinking while answering the question are dead giveaways!).  Also as an FYI South Korean retail sales are also below forecast despite the CEO's "wildfire" assertion.  I guess ecommerce sales there are doing better.
     
    http://www.bloomberg.com/video/helping-retailers-expand-globally-borderfree-zXn5XIVKTmiTQ76Fic8WLQ.html

    Subjectimpact of stronger US$?
    Entry09/11/2014 07:34 AM
    MemberMason
    in the bloomberg video you cited, the CEO alluded to the fact that the korean won's strength was one of the reasons for the strength coming out of korea.  I found that statement interesting since the US$ has been strengthening against most other currencies.  CAD is weaker by 3% since june 30th and the EUR is weaker by 6%.  has the company talked about how sensative their business is to FX fluctuations?  

    SubjectRE: impact of stronger US$?
    Entry09/11/2014 08:52 AM
    Membermrsox977
    Currency fluctuations have two effects on the business.  According to the Company, a weakening US dollar makes the price of merchandise more attractive to foreign buyers and serves to lift gross merchandise sales.  Conversely, since they are accepting payment in foreign currencies, a strenghtening US dollar ultimately reduces the value of the foreign currencies they receive when translated back into dollars.  Given that the entire business is built around accepting foreign currencies, the lack of disclosure in the financial statements is absolutely staggering in terms of illustrating what various moves in various currency pairs would do to the Company's risk profile and ultimately, earnings.  It would be the same as Exxon not disclosing what the oil price movements do to the balance sheet assumptions.  Remember that 50% of real revenue (e-commerce, not shipping pass through) is based on skimming spread from the customer on forex (and handling fees).  Shouldn't investors know how those fees are calculated and what effect say a dramatic USD/CAD or USD/GBP move could have on earnings?  We think so.

    SubjectHigher multiples than Alibaba...
    Entry09/18/2014 12:42 PM
    Membermrsox977
    Starting to see some volume/liquidity in BRDR now that the IPO lockup has passed, for those VIC members that avoided the idea due to its thin and haphazard volumes.

    SubjectComp investor deck highlights BRDR deficiency
    Entry09/22/2014 11:09 AM
    Membermrsox977
    Yoox recenltly released a large roadshow presentation.  It is noteworthy for its detail on:
     
    - margins by segment
    - extensive capex to execute on the business plan
    - success in mobile ordering penetration
     
    http://cdn2.yoox.biz/yooxgroup/pdf/yooxgroup_ny_roadshow_presentation_september_2014_vfinal_0.pdf
     
    Key performance indicators, geography and currency are all discussed.
     
    BRDR offers nothing of the sort on most of these metrics and instead relies on buzzwords to keep its 8x sales multiple.  Yoox will spend 34m EUR on capex this year alone, which is more than 2 years of BRDR's estimated forward EBITDA projections.

    SubjectUSD strength must be killing BRDR
    Entry10/03/2014 10:20 AM
    Membermrsox977
    USD vs EUR and CAD has to be hurting Borderfree as the already expensive when shipped products they sell in to Europe and Canada get more expensive for end consumers every single day.  If the financials even discussed how long BRDR held the forex they received or had any other details on hedging we might even be able to take a guess on what the blow to earnings can be. Instead this remains the only internationally focused business we follow that has no such disclosures. 

    SubjecteCommerce woes for UPS
    Entry10/06/2014 11:46 AM
    Membermrsox977
    BRDR states their increased volumes will cause shiping prices to fall, thus sparking more sales.  Funny how UPS disagrees.
     
    From the WSJ:
    UPS's average revenue on each Internet-related package it handles is dropping.  Even though net income last year was the highest ever at UPS, profit margins on deliveries in the U.S. have been flat for three years. Next year, UPS will start charging by the size of ground shipments rather than weight alone, effectively raising prices.

    SubjectUPS buys international e-commerce enabler i-parcel
    Entry10/09/2014 12:19 PM
    Membermrsox977
    US-based courier firm United Parcel Service has acquired international e-commerce logistics solution provider i-parcel, as part of its strategy to bolster its logistics and technology capabilities in order to meet the demands of international customer base.
     

    The financial details of the acquisition have not been disclosed.

    i-parcel CEO Will Gensburg said: "i-parcel has been an international bridge linking U.S. and U.K. merchants to global e-commerce consumers throughout the world and our team is excited to join with UPS to further globalize e-commerce."

    i-parcel Global e-Commerce merchants link more than 100 million international shoppers with an integrated platform, which offers a localized feel to the respective merchant's portal.

    The i-parcel platform supports merchant's websites with a local language welcome mat, fraud protection and several value enhancing features.

    These features help shoppers in more than 100 countries to shop online in the US and UK whilst giving them a feeling as if they were shopping in their own country.

    i-parcel also offers low-cost deferred international transportation, thereby facilitating higher rate of shopper conversion for merchants even on lower-value goods.

    UPS executive vice president and chief commercial officer Alan Gershenhorn said: "UPS continues to look ahead to the expanding worldwide demands in the ever-growing global e-commerce market.

    "UPS continues to invest in capabilities that enable its e-commerce merchants to meet the growing global demand."

    Based in Atlanta, Georgia, UPS is a global package delivery company offering specialised transportation and logistics services in more than 200 countries and territories worldwide.


    Subjectbig earnings miss is coming...
    Entry10/10/2014 10:21 AM
    Membermrsox977
    Huge USD strengthening in the last 3 months. GBP/USD, USD/EUR and USD/AUD.  This causes USD denominated products to be even more expensive in GBP, EUR and AUD and leads to lower sales and fees for BRDR.

    From the last 10-Q:

    "to the extent the U.S. dollar strengthens against foreign currencies, as experienced in 2013 with the Australian dollar and the Japanese yen, cross-border trade related to purchases of dollar-denominated goods from our U.S.-based retailers running on our platform by non-U.S. purchasers will likely decrease, which would adversely affect our business, operating results and financial condition. As exchange rates in foreign currencies vary, our net revenue and other operating results may differ materially from expectations. In particular, if the U.S. dollar strengthens against major European currencies (for example, the euro and pound sterling) due to the ongoing sovereign debt crisis in Europe, worsening economic conditions or for any other reasons, our revenue and operating results would be adversely impacted."

    SubjectOutlook lowered
    Entry11/03/2014 04:20 PM
    Membermrsox977

    Market slowly realizing that this isn't worthy of being a public company. 


    SubjectRe: Re: big earnings miss is coming...
    Entry11/03/2014 08:03 PM
    Membermm202

    Great idea mrsox.

    Fwiw, last week I had dinner with an insider who is a top 5 holder in the stock.  I had shared with him some of your ideas and asked why they weren't selling.  He said that if you net out cash the stock is trading for 1 times revenue.  Comps in the space are trading at 2 to 3 times revenue.  While he agreed with your pessimism about the quarter due to the strong dollar, he also said over the long term it is anyones guess if this continues to be a problem and the company is taking steps to mitigate the issue.  He also said that none of their customers would really ever consider bringing the service that BRDR provides in-house as the revenue they make from selling through BRDR is relatively inconsequantial.  In fact, he couldn't think of a single instance where a customer had left BRDR for that reason.

     


    SubjectRe: Re: Re: big earnings miss is coming...
    Entry11/03/2014 09:27 PM
    Membermrsox977

    Thank you for the feedback. The insider is overly optimistic. The stick trades for more than one times revenue net of cash. This is because the shipping pass through is not real revenue. The model doesn't work, not has it ever. His reasoning ironically reinforces the short case.  Inconsequential is what this offering is, to all parties. Management was scrambling for answers on the call today and admitted to losing clients. They are going to sit back now and hope that the dollar weakens so that a John Varvatos coat is more affordable in Euros this Christmas.  Our research proves that their web overlay does nothing that it says it does. We will likely trade around the big move here, and yes the cash is real and there are better shorts at this stage with worse balance sheets, but by no means do we have any confidence in this business model. This company is worth only slightly more perhaps for the customer relationships than the minimal R&D they spent to build it plus the cash. The insider should have sold after the IPO, as I don't think they will see those levels again. To be clear, we will trade around it here, cover a bunch and retain some exposure.  We did not expect the dollar to do what it did so fast and it certainly helped our case. 


    Subjectvaluation (using real revenues)
    Entry11/03/2014 10:57 PM
    Membermrsox977

    Using BRDR's guidance and only counting non pass-through revenues:

    price: $8.75 (not sure where it opens)

    shares: 34.3m (fd)

    market cap: $300m

    net cash: $130m

    EV: $130m

    real sales: $65 - $67m

    EV to sales: 1.9x - 2.0x

    Price to sales: 4.5x - 4.6x

    EBITDA: $3.5 - $4.8m (adjusted)

    EV EBITDA: 31.3x (using EBITDA midpoint)

    ** not sure why anybody would consider this valuation an attractive entry point **

     


    Subject"Something something" the messenger
    Entry11/04/2014 09:45 AM
    MemberMencken

    mm202 -- I know you're only relaying what your friend / colleague said, but I'm confused by his statement re: retail customers' inclination to bringing business in-house, as the prospectus says literally the exact opposite:

    "For example, during the quarter ended September 30, 2013 the Company’s sales volumes were negatively impacted by certain customers opting to insource selective markets"

     


    SubjectRe: "Something something" the messenger
    Entry11/04/2014 09:59 AM
    Membermm202

    He specifically brought up the subject of Macy's.  For Macy's what they sell into each of these third world countries is inconsequential to the overall business.  For smaller retailers they don't have the brand awareness to get much business and for the big guys it just doesn't ring the register.  That's the rationale anyway.  Though he's a top 5 VC insider, he does not have a board seat.  A lot of his information is coming from discussions with the sell side. 


    SubjectRe: Re: "Something something" the messenger
    Entry11/04/2014 10:10 AM
    MemberMencken

    Understood. Appreciate the color


    SubjectRe: Re: Re: "Something something" the messenger
    Entry11/04/2014 10:39 AM
    Membermrsox977

    Funny that you should mention Macy's.  We heard (via a friend) from an employee who works on Macys.com that they use BRDR as a stop-gap (like all outside vendors) just until their internal team can catch up.  This is hardly a sustainable business proposition for BRDR.  For a small sliver of teh revenues, you are on teh hook for a seamless logistics experience, fraud, charge backs, returns, customer complaints, and failure to deliver.  This business only makes sense if you are somebody like UPS, who just purchased iParcel. https://www.i-parcel.com/en/  I am not sure how BRDR can compete with this.


    Subjectstill expensive
    Entry11/06/2014 01:37 PM
    Membermrsox977

    updating the metrics as it has settled around $7.00  We have covered quite a bit but are still short.  Tax loss selling could take this to $5.50

    price: $7.00

    shares: 34.3m (fd)

    market cap: $240m

    net cash: $130m

    EV: $110m

    real sales: $65 - $67m

    EV to sales: 1.6x

    Price to sales: 3.6x

    EBITDA: $3.5 - $4.8m (adjusted)

    EV EBITDA: 26.5x (using EBITDA midpoint)


    Subjectlarge BRDR customer cuts outlook
    Entry11/12/2014 09:01 AM
    Membermrsox977

    Macys just lowered their guidance - should be a tough xmas for BRDR


    SubjectMacys aims for large online expansion
    Entry01/12/2015 12:19 AM
    Membermrsox977

    Macys announced restructuring the other day put a fair emphasis towards online sales.  My guess would be that BRDR loses Macys as a customer over time or at least gets cut back on rate, as Macys looks to keep most of the economics for themselves.


    SubjectUSD strength will crush earnings here
    Entry01/15/2015 01:31 PM
    Membermrsox977

    The model is unambiguously broken with the USD at these levels.


    SubjectRe: USD strength will crush earnings here
    Entry01/15/2015 02:11 PM
    MemberMSLM28

    mrsox,

    Thanks for the brief update and hat tip for crushing it on the name. Any thoughts on valuation? Do you think sell-side analysts are still too high and thats how you win?


    SubjectRe: Author Exit Recommendation
    Entry01/26/2015 04:39 PM
    Membermrsox977

    BRDR announced an acquisition after the close today, buying something called DutyCalculator for over $20m in cash plus some large equity grants.  It seems clear that the model is broken and that this deal will be used to spin a different story and deflect scrutiny away from the currency issues.  We would cover at these levels and short again should the stock march higher.  This has been a good one for us where the research process was able to identify multiple catalysts - the currency volatile that helped take this down was an (unforeseen) icing on the cake.


    SubjectRe: PBI Tenders For BRDR @ $14/sh Cash
    Entry05/06/2015 12:04 AM
    Membermrsox977

    Probably the only natural buyer and the only choice that Management had given how flimsy this business model is.  Amazing that Pitney has to pay this much of a premium.


    SubjectRe: Re: PBI Tenders For BRDR @ $14/sh Cash
    Entry05/06/2015 07:46 AM
    MemberNovana

    Would be interesting to see how PBI will recognise those sales number. From press release, they are taking the inflated $125m figure. PBI is desperate for growth and with this acquisition net leverage will be well over 3x for a business with negative organic growth.

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