Long or Short Capital

Long or Short Capital’s fiscal 1st Quarter ended on 10/31/06, and the company reported its results in a press release:

Mister Juggles: “Good morning everyone, let me welcome everyone on the line to hear me talk about our best quarter ever. Last call I introduced you to what I think is a really swell statistic, sequential same store traffic, and I put it forth as the key metric we use internally to gauge our success. Last quarter the figure was a strong 21%; this quarter that metric came in at a Googlesque (google that word with MSN Search or Yahoo if you don’t know what it means) 146%. When you consider that 146% came on top of a 21% comp, you really see the power of our model. We have maintained the highest same store traffic rate of the entire Online Financial Humor/Abstract Investment Recommendation Industry.

We generated earnings per subscriberholder of $0.60 compared to $0.38 in Q4’06 and $0.32 in Q3’06. We generated $350 in revenue for the quarter, a 222% increase YOY, and 178% sequentially. We continue to faces headwinds in our contextual advertising due to low click through rates and our experiment with Adsense has yielded lower than historic ECPM’s, but we leveraged our increased traffic volume to increase segment revenue 185% on a sequential basis.

Our strategic focus has been on growing our static ads, specifically the text link ads. Text link advertising accounted for 40% of our Q1’07 revenue, and on a runrate basis, it should rise to 50%+. This revenue is such a focus to us because of how the associated revenue tends to be recurring and very sticky, while the ads themselves are unobtrusive. Our subscribership increased from 282 to 381.

We continue to work on getting better payment terms from our ad vendors; we have had some challenges in this sector with some of suppliers of static ad inventory but we are optimistic that we can bring working capital down to 10-15% of sales. Historically, it has ranged from 25-35% of sales. In terms of liquidity, we reduced our PIK (“Payment-in-kind”) debt to zero and now have cash on the balance sheet of $114.38, despite working capital being relatively flat.

We had our best quarter ever in terms of revenue, free cash flow and qualifying traffic. We think we have established the platform both operationally and financially to build an online powerhouse, and our goal is to do 5-7% better than your expectations every day, on every post and in every quarter. If not, we will cook the books to make you think we did that.

Note that the financials below are unaudited and may contain non-GAAP measures. All numbers comply with Seldom Accepted Accounting Principles (SAAP).

Unaudited Financial Results for Q1’07

Income Statement

Contextual CPC Revenue $109.45

Static Ad Revenue $214.33

Other Revenue $27.31

Total Revenue $351.09

Cost of Sales $19.55

Marketing Expense $100.15

Operating Income $231.39

Balance Sheet

Cash $114.38

Accounts Receivable $140.36

Inventory $0.00

Prepaid Marketing/Hosting/Reg $163.05

Accounts Payable $0

Cash Flow Statement

Operating Cash Flow $222.17

Capex $0.00

Dividends $X.00

Performance Metrics

Visits 16,900

Pageviews 31,850

Clicks on ads 100

Ad impressions served 55,000

Subscribers by Email 68

Subscribers by XML 313

Inbound Links per Technorati 345 from 65 Sites (+65 on Blogger)

Inbound Links per Google ~214 sites (plus 62 on Blogger)

Past Results (due to our reliance on SAAP, previous unaudited financial results are not reliable)
Long or Short Capital Q1’06 Results
Long or Short Capital Q2’06 Results
Long or Short Capital Q3’06 Results
Long or Short Capital Q4’06 Results

People who decry the fact that businesses are in business “just to make money” seldom understand the implications of what they are saying. You make money by doing what other people want, not what you want.

-Thomas Sowell

Past Quotes Entirely Relevant to Investing

Long or Short Capital is having its strongest quarter ever in terms of revenue and expect that working capital has improved significantly. The results should be a strong growth in the dividend pool available to qualifying subscriberholders. We have also poured a significant amount of our cash flow into advertising spend but that does not affect the dividend pool. We will release our Q1’07 financial results on November 4th.

Sometimes I have questions but don’t have the answers. Here are a couple examples:

• Why do we use a french word, “entrepreneur”, to describe someone who builds a business or otherwise innovates. This type of person is effectively outlawed in France. Let’s relabel entrepenuers what they really are: “Americans”.

  Example: Those americans who started Skype are rolling in it.

• Why do we call a go-getter, a “go-getter”? If someone really is a go-getter wouldn’t they have go-gotten a position where they make others go-get for them? Types of people who are currently called “go-getters” should be relabeled “tyrants in waiting”.

  Example: Michael Milken was a real tyrant in waiting in his youth.

• Who buys those Bowflex machines sold on TV? …Actually, there really is no answer to this one. [Edit: the first commenter links to a great NY Times article on the bowflex]

Rap critics they say he’s “Money Cash Hoes”
I’m from the hood stupid, what type of facts are those
If you grew up with holes in ya zapatos
You’d be celebrating the minute you was havin’ dough(s)
I’m like fuck critics you can kiss my whole asshole
If you don’t like my lyrics you can press fast forward

-Jay Z in his track 99 Problems

Past Quotes Entirely Relevant to Investing

Mr. Cohen’s purchase,”Police Gazette,” is described in the Times as one of the artist’s “more abstract canvases, primarily yellow, red and green.” Others might say it looks a bit like an exploded taxi cab.

Whatever it resembles, it is a lot less fearsome than Damien Hirst’s “The Physical Impossibility of Death in the Mind of Someone Living,” for which Mr. Cohen paid $8 million two years ago. That work consists of a 14-foot shark suspended in a glass tank. The shark has since begun to rot and is now being painstakingly replaced with another, slightly smaller one — a process that apparently requires 224 gallons of formaldehyde, among other things.
–Dealbook

An $8mm shark in formaldehyde that rots and must be replaced every two years isn’t art, it’s an incredibly inefficient way to spend money that could have been spent on bottle service. Alterntatively, it’s an incredibly efficient way to WASTE money. Previously, someone who — like Mr. Cohen — had money to burn might have bought an expensive shark tank with live sharks. But Mr. Cohen raises the bar on the efficiency of waste by spending 80x as much for a shark tank with a rotting shark corpse. The sheer brilliance of this frivolousness is hard to comprehend.

Over the last few years, Mr. Cohen’s annual earnings have varied between $428mm (2001) and ~$1bn (2005) adding up to a fortune now estimated at $5bn. Such huge, rapid gains in wealth have clearly caused him to increase his investment in the research and development of new, efficient ways to waste large sums of money.

Rotting shark corpses are an early sign that this research has paid off. Note the brilliant use of a unique art artifact, making other stupillionaires hesistant to directly copy his maneuver.

Recommendation: We see a long term rise in top-tier spenders’ ability to fritter away stupefying amounts of money. Go long cyrogenically-frozen elephants, a likely next target for money-wasting.

When handwritten essays were introduced on the SAT exams for the class of 2006, just 15 percent of the almost 1.5 million students wrote their answers in cursive.
–The Handwriting Is on the Wall, Washington Post

I gave up cursive a long time ago and so it’s somewhat embarassing for me to have overlooked such a glaring opportunity for outsized returns on the short side. Cursive writing is clearly in secular decline. The thought of teaching and grading penmanship in an age when everyone types anyway seems downright archaic.

Recommendation: Short Cursive and penmanship graders. For hedging purposes, go long the Signature tranche — people’s tendency to sign documents in cursive should lead to a lower decay right.

When buying and selling are controlled by legislation, the first things to be bought and sold are legislators.

-P.J. O’Rourke

Past Quotes Entirely Relevant to Investing

Bill Burnham,former venture capitalist, former Wall Street analyst, current blogger and now founder of a tech fund, took a 6 month hiatus from his blog but now is back. We mention it because back in February his post about Long or Short Capital is what gave us the momentum, both mentally and traffically, to keep this site going when our momentum at its lowest. He highlighted how much he enjoyed different articles on our site and basically spun some lies about how amusing we are.

Here is his current plotted course:

I suspect I my have some commentary on the hedge fund industry from time to time, but given that my new fund will continue to be deeply embedded in the high-tech venture capital space I will continue to write about venture capital and interesting new technology trends.

So if you were a former Bill Burhman reader, flock back to his site, and if you haven’t read him in the past, read him now @ Burnham’s Beat. His commentary on the internet and tech industries is as sharp as occam’s razor.

What happened to [the Amaranth hedge fund] shows that when you’re really right, you always overstay the position and that’s when you get murdered. It’s better not to be right so much.

-Peter Bernstein, author of Against the Gods: The Remarkable Story of Risk

Past Quotes Entirely Relevant to Investing

In this installment (Read Mr Juggles Investing Commandments #1 and #2, #3 & #4), the focus is differentiating real passion in a CEO from unreal CEO’s.

Commandment #5: Invest with CEOs who are smart and passionate. Do not invest in companies with fabricated CEOs.

5a. Nidec (NYSE: NJ), a Japanese electronics comany that specializes in brushless motors, has a CEO with smarts and passion. Investors who have bet on Mr. Shigenbou Nagamori have been well rewarded. Here’s a passage from a recent Barron’s profile where Mr. Nagamori discusses the business potential of using brushless motors in air conditioners:

“Can you hear this conversation?” Nagamori asks, suggesting we can because “this hotel has Japanese motors for its air conditioners.”
“Last week in Boston, my hotel air conditioner was so loud, I couldn’t sleep,” he say. “Finally, I lulled myself to sleep by thinking of the business opportunity!“

5b. CEOs to avoid include that of China Energy Savings Technology (OTC: CESV), which was suspended from trading by the SEC this week. Here’s the relevant excerpt from the SEC order:

Questions have arisen regarding the accuracy and completeness of information contained in China Energy’s press releases and public filings with the Commission concerning, among other things: (i) the company’s purported ownership and control of its sole asset, Shenzhen Dicken Industrial Development, a manufacturer of energy saving devices located and doing business in the People’s Republic of China; and (ii) the existence and/or identity of the company’s purported former Chairman and Chief Executive Officer, Mr. Sun Li.

For every complex problem there is an answer that is clear, simple, and wrong.

-H. L. Mencken

Past Quotes Entirely Relevant to Investing

Mr. Moore said it was possible that Yahoo, in its race to compete with Google, was simply overoptimistic in its forecasts and too eager to appeal to investors. “You are expected to grow every quarter,” he said. “There is a law of large numbers. It just gets tougher and tougher to please the Street.”
-NYTimes article, Ad Sales Fall Short at Yahoo

Every day I hear some wannabe business guru citing The Law of Large Numbers. Listen to the 3Q’06 Google (NYSE: GOOG) conference call and you will not fail to hear the Law mentioned and referenced numerous times by Wall St analysts. However, in each instance, this is a case of silly business people trying to sound knowledgeable and failing miserably.

These empty suits are trying to describe the situation when a company’s increased size makes it more difficult for them to grow, perhaps because it has already penetrated most of its potential market. However, saying just that would be far too straightforward and they instead opt for convoluted and misguided jargon.

Here’s a mini-lesson, dumbed down for the target audience:

The Law of Large Numbers states that when taking a random sample from a population, the observed mean will converge towards the actual mean as the sample size increases. Dumbed down even further: you get better estimates from larger sample sizes. This is The Law of Large Numbers.

Recommendation: Short The Law of Large Numbers. Upgrade Eric Schmidt, CEO of Google, from “Sell on Extreme Arrogance” to “Hold”. After invoking The Law of Large Numbers on one of Google’s initial conference calls, he has changed his rhetoric to focus on The Law of Diminishing Returns, a more appropriate rule for the discussion.

Following last week’s pieces on Patricia Dunn of Hewlett-Packard (NYSE: HPQ), Dunn, board member/connoisseur of SpyTech, now has unidentified insiders justifying her actions to the press off the record. Nothing screams credibility more than unindentified insiders off the record. Keep in mind, Dunn started this controversy by violating Board members’ privacy during an internal investigation she initiated to stop Board members from leaking to the press.

Other tidbits from the article:
-“[Dunn] is deeply involved with the Conference Board’s Global Corporate Governance Research Center, and her photograph and a quote from her are featured on the center’s home page.”
-HP has a Chief Privacy Officer (CPO) who testified to Congress that “Privacy is a core HP value. As a company, HP is 100 percent committed to excellence in consumer and employee privacy.”

One caveat to this saga: Dunn is apparently quite sick and underwent surgery to address cancer at approximately the same time that this scandal was unfolding. Therefore, it seems that — while she has a track record of mediocrity — she may have been incapacitated and/or unable to fully oversee her investigation due to medical reasons. Long or Short Capital is a “compassionate critic.” We wish Patricia Dunn a speedy recovery so that she can get back to violating board members privacy at full strength with the off the record approval of unidentified insiders.

Recommendation: We expect to see large scale corporate purchases of spy technologies as a veritable cornucopia of value is created by illegally invading board member’s privacy, clearly. Likewise, we expect healthy demand for counter-intelligence equipment, as board members protect themselves. Suppliers of both techs are not at risk of disruption by cut rate ex-KGB services and suppliers, as those agents are too busy owning all of the former Soviet Union’s natural resources.