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Roger Lawson sticks it to Blancco - calls for FRC to look at dodgy accounts

By Tom Winnifrith | Wednesday 8 November 2017


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.


The old goat has turned over a new leaf and today really sticks it to Blancco Technology (BLTG) in which he admits he has a trivial holding. I doff my hat to Lawson for that and his comments on the ShareSoc blog are spot on. Personally this company's revenue recognition policies stink so much that I'd have to rate it as a sell.

Lawson opines: on the ShareSoc blog

Blancco Technology Group has been in turmoil for a couple of years. Results for the year to June were published today. They changed the nature of the business to focus on software for “erasure” and “mobile phone diagnostics” and new management was put in place a couple of years ago. But today’s announcement makes grim reading. The Chairman, Rob Woodward, spells it out to begin with by saying: “2017 has been a year of substantial challenges for the Group, with the business performing far below our expectations”, But he does say: “However, the underlying strengths of Blancco remain in place and I am confident that these, together with the significant number of remedial actions we are taking, will restore a sustainable growth trajectory and build long-term shareholder value”.

But the detail makes for horrific reading. For example: “During April the Group undertook a review of cash flow forecasts and identified anticipated pressure on the cash position of the Group. This pressure was caused by the non-collection of £3.5 million of outstanding receivables relating to a sale booked in June 2016 and a sale booked in December 2016, and costs associated with past acquisition activity, including earn-outs and M&A advisory fees”; and “On 4 September 2017 the Group announced the reversal of two contracts totalling £2.9 million booked as revenue during June 2017, following a number of matters being brought to the Board’s attention”. As a result the 2016 accounts have been restated. In addition, the new interim CFO, Simon Herrick, was appointed interim CEO and the former CEO departed.

Last year’s accounts were full of adjustments and the complexity compounded by the number of disposals and acquisitions. This year is not much different, and they even report “adjusted cash flows”. I always thought cash was cash, but apparently not. But the share price perked up somewhat – up 30% at 72p at the time of writing after a long decline. The company does seem to have some interesting technology but whether all the problems have now been revealed we do not know. The Chairman is sticking around after previously announcing his departure but they are still looking for a new CEO.

I would not care to predict the future for this business. But one question worth asking is “what were the auditors doing last year?”. Revenue recognition is often a problem in this kind of company and it looks like a case of sales proving to be fictitious when some questions were asked about them. This is yet another example of the audit profession falling down on the job which we have seen so many times before. Shareholders in Blancco should consider asking for the Financial Reporting Council (FRC) to undertake an investigation into the audits of this company. The auditors last year were KPMG.

Ends.

Any company that mentions pressures on cashflows is one I'd be worried about. At 73p the company is valued at £47 million. It had year end cash of £1.7 million but at an underlying level spunked £8.8 million last year ( you will note it is a hefty capitaliser of R&D spend). Sure it is bullish about its prospects but that balance sheet looks weak to me. I'm sure brokers Panmure and Peel Hunt are itching to sort that out with a placing, earning a pleasant 5% to pay for the Christmas coke and hookers along the way. Ahead of that I'd be a seller.


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