Soapstone Networks Inc (NASDAQ:SOAP) has filed its 10K for the year ended December 31, 2008.
We started following SOAP on February 2 this year (see our post archive here) because it was trading well below its net cash value with an activist investor, Mithras Capital, disclosing an 8.7% holding in October last year. The stock is up 18.8% from $2.50 when we initiated our position to close Friday at $2.97, giving SOAP a market capitalization of $39.1M. We last estimated the company’s net cash value to be $86.1M or $5.78 per share. We are maintaining our estimate of the company’s net cash value but reducing the per share estimate to $5.59 because there is additional stock on issue.
The value proposition updated
The company’s balance sheet value is now almost wholly cash (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):
Off-balance sheet arrangements and Contractual obligations
SOAP does not have any off-balance-sheet arrangements and its contractual obligations, which consist entirely of operating leases, are $4.1M. These operating lease payments are the minimum lease payments under SOAP’s non-cancellable operating leases. SOAP treats payments made under its operating leases as rent expense for the facilities, including its head office.
Conclusion
As we’ve said on a number of occasions, we continue to believe that SOAP is one of the best opportunities available at the moment. The company’s ongoing business is small in comparison to its net cash position, so it shouldn’t dissipate its cash any time soon. It has no off-balance sheet arrangements, little in the way of ongoing contractual obligations and no material litigation, so the cash position seems reasonably certain. The company’s engagement of an investment bank to explore strategic alternatives is a promising step in the right direction. The only concern for us is the continued issuance of stock and options at a huge discount to liquidation value. The sooner Mithras Capital gets control of this situation the better.
[Full Disclosure: We have a holding in SOAP. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]
[…] Hat tip to Double F. […]
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This is awful – SOAP management needed Morgan Stanley’s advise to initiate a headcount reduction…..they couldnt figure that one out by themselves. Wonder what it cost these idiots to get that advice, MS isnt cheap. These sorts of news items provide some insight into management capability. Its not just the market being down which has caused stock like SOAP to decline. As Warren Buffet says, you get to see who is swimming naked when the tide goes down.
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Soapstone Networks Announces Further Headcount Reductions
Billerica, MA, April 14, 2009 — Soapstone Networks Inc. (NASDAQ: SOAP) today announced that it has undertaken an initiative to further reduce its total headcount by approximately 40%, in order to reduce expenses and conserve cash in the current economic environment without diminishing the overall value of the Company.
The Company expects to incur charges for severance and related costs of approximately $0.5 million in the second quarter of fiscal 2009 in connection with this action and anticipates overall incremental cost savings of approximately $3.0 million during 2009 as a result of these reductions, in addition to the $5.0 million in cost savings anticipated to result from the reduction in force previously announced February 12, 2009.
“We have taken these additional steps as we continue to aggressively explore strategic alternatives with the help of our financial advisor, Morgan Stanley & Co. Incorporated,” said Bill Leighton, Soapstone’s CEO. “We believe that this is a level at which we can continue with our PNC development and sales effort into the Carrier Ethernet market, while conserving a significant amount of cash.”
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Double F,
Unbelievable. At least they “continue to aggressively explore strategic alternatives” with the help of MS.
G
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I AGREE with the move SOAP just made, reduce the headcount to keep the software company intact while burning less cash, this keeps maximum flexibility so that a sale of a reasonable operating company remains one of the possiblities, one which would probably result in the highest return for shareholders.
They did not hire MS to tell them to reduce headcount, they hired MS to explore the strategic opportunities available.
There are plenty of “idiot” managemts out there, this is not one of them however.
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CD,
From our perspective, the SOAP play is not about the business, it’s about the cash on the balance sheet and Mithras Capital liberating it. You’ve identified the risk: the new products don’t sell and they venture off into something else or just use up all the cash in the meantime. The limiting factor on that behavior is Mithras Capital, who we hope would do something if that looked possible.
The positions on Greenbackd are a subset of Graham’s liquidation value stocks. They are all Graham cigar butts (companies with broken business models, and yet some residual balance sheet value), but not all Graham cigar butts are for Greenbackd. Our universe is slightly smaller because we also require some path to unlocking / realizing that balance sheet value.
We’re not looking for a turnaround, because we don’t think they can be identified reliably. It is possible – but, we think, highly unlikely – that some will return to profitability. The real play is a liquidation or an outside investor seeking the assets, usually the cash, and the listed company shell. We try to buy at a >1/3 discount to the written down value and then get out if it gets to value or thereabouts. The race is always between dwindling value and the catalyst. Some will work out, some won’t.
We don’t think it’s necessarily preferrable to any other method of value investment (or investment for that matter), but we like it for a few reasons:
1. We’re hopeless business analysts, and we think one needs to be a reasonable business analyst to pick Buffett / Magic Formula stocks (which we recall K-Swiss has been for some time) rather than just buying a basket of Magic Formula stocks. We’d love to own a stock that goes up ten times in five years and starts paying annual dividends equal to our initial investment, we just don’t think we can pick ‘em with any certainty. If you can, you’re the next Warren Buffett.
2. The liquidation plays dry up at the top of the market, which we hope will help us avoid the inevitable down-draft. The Magic Formula stocks, on the other hand, often look cheapest at the top of the market. They also often look cheapest just before their earnings start regressing to the long-run mean (which might be a good argument for Graham’s 10-year earnings analysis and a position in K-Swiss).
3. It’s fun. We love the dogfight for control.
G
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JM,
We missed the conference call. What do they (or you) think the software is worth? Is it valuable enough to wait around for a buyer at that burn rate? We’d be happy to have it liquidate and return the cash now.
G
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Greenbackd: Burn rate didn’t look so bad in 2008 because they still had some router service revenues coming in, but that’s ended now. I’m not sure what the software is worth, but management thinks enough of it to build the company around it. Management did a decent job in the router business. But something needs to happen now because they’ve had a year, one of their markets didn’t develop as they had hoped, and of course the great 2008 economy didn’t help. They’re burning 2mm a month, should still have well north of 80mm, so still very cheap, we’ll see what MS comes up with, sooner the better.
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JM,
Thanks for your comment. We understand that Mark Nelson, who runs Mithras, has a background in software development, so perhaps he’s identified some value in it. We agree that we need some indication of MS’s progress sooner rather than later.
G
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From what I understand, they have no source of revenue coming in, how much cash will they burn through in 2009 if they still have not found any takers for their new products.
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CD,
In 2008, SOAP consumed $10.5M in operating cash flow, so that’s probably a good starting point. $10.5M off the cash reduces SOAP’s net cash value to around $76M or $4.95 per share. They’ve now exited the router business and the other products are in R&D stage, so much of this spend is discretionary and could be reduced to care and maintenance if they chose to do so. At $3.12, we think it’s still very good value. Any thoughts?
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Soapstone in their last conference call said they had reduced expenses to 6mm to 6.5mm per quarter, I’ll take them at their word. At that rate they have appx 15 quarters to burn through the cash. They left the router business over a year ago and have been marketing their software ever since, but no revenues so far, so before they burn through the cash hired MS, which probably has the strongest technology banking group on the street.
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In chapter 50 of Security Analysis, Graham talks about these statistical bargains. He mentions it is more difficult determining whether the qualitative factors will justify the quantitative indications and that is how I see it. No doubt it is a statistical bargain, but if am trying to limit my downside I have to ask myself what if their new products don’t sell. On page 9 of their 10-k they mention what the competition is like. At least with their former line of business I had a reference point of how it was performing. If these new products don’t sell, will they venture off into something else ,will they decide to liquidate and return all their cash to shareholders? These are things I don’t know. Uncertainty is ok, but for me this kind of uncertainty is d/f. Compare this company to K-Swiss. K-Swiss is cheap statistically, not as cheap as SOAP, but qualitatively I know what line of business they’re in, how they have performed in past recessions, and they have a history of buying back their own stock. Anyway that is my view. Thoughts?
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