I think most UBNT investors think that Citron moved on after their initial September 18 short report on the company. Right before investor day, Citron issued a seeking alpha article that listed 10 questions that they wanted the company to address (https://seekingalpha.com/article/4109414-questions-ubiquitis…). The questions were more researched than the initial short report and would almost make you think that they were no longer calling UBNT a fraud, except that 4 of the 10 questions related to cash. They also tweeted the following:
$UBNT @RobertPera @ScottWapnerCNBC Investor day tom Let’s get answers for these 10 questions. http://citronresearch.com . Fake cash is Fraud
https://twitter.com/CitronResearch/status/912342274406735872…
I still think that Citron covered on the day they issued the short report and they are trying to make it seem that they are not letting down so there is less damage to their reputation and to help the follow on shorts that blindly followed them into shorting UBNT.
We can see that short interest actually came down a lot after the Q4 earnings was announced in early August and the pop in the stock of 25% was partially helped with short covering as we can see shares short went down from 8M shares on 7/31 to 6.8M shares on 8/15. The short volume then started to go back up and as of 9/15 (right before the Citron report was released), the short interest went back up to 7.5M. I imagine a good part of the increase of 700K shares short was related to Citron going short before they issued their report. See short data here: http://www.nasdaq.com/symbol/ubnt/short-interest
It will be interesting to see how many shares are short as of the end of September, which we should find out soon. However, poster Curioustock
on UBNT’s StockTwits board posted that shorts are paying a very high interest rate to short shares right now:
$UBNT Almost 15% borrowing rate now. Well done shorts! You’ve almost tripled the rate since Citron’s BS hit piece
This means that most likely a lot of people followed Citron into shorting UBNT given that the borrowing rate to short UBNT is so high. To me this means there are a lot of people shorting UBNT that do not really understand the company and still believe that there is fraud.
As I mentioned in my other post (http://discussion.fool.com/why-i-bought-more-ubnt-32844489.aspx), I am very confident that there is no fraud due to KPMG issuing a clean opinion on the recently released 10K:
UBNT is a much larger company that paid their external auditor (PwC) $1.8M in fiscal 2015 and $2.1M in fiscal 2016. For a Big 4 auditor, a $200 per hour blended rate is typical, so for fiscal 2016, PwC would have incurred around 10,500 hours for the SOX and the financial audit. Also, the external auditor has full access to all the accounting records, Board minutes, accounting personnel, management, etc. For audit engagements, Big 4 firms don’t sell anything other than their seal of approval and they are audited every year by the PCAOB, so they need to make sure they audit extensively and document all their testing because they will be audited sooner or later and they don’t want too many black marks from the PCAOB. See https://pcaobus.org/Standards/Auditing/Pages/AS1215.aspxfor the audit documentation standards that the auditors are held to. This isn’t the pre-SOX days where you could get away with not fully understanding the business and controls like what happened with Enron. In the SOX world, the PCAOB will review the external auditor’s workpapers to verify they fully documented according to the standards. Also, the PCAOB performs their audits based on risk, so you better believe that KPMG (the fiscal 2017 external auditor) was fully expecting a PCAOB audit and dotted every i and crossed every t when it came to the UBNT audit.
I am pretty sure that due to the material weaknesses found in previous years, PwC tried to jack up the audit fee for fiscal 2017 knowing that they would have to increase their audit hours in preparation of getting scrutinized by the PCAOB. This is likely the reason they switched to KPMG. KPMG isn’t cheap either so I assume that the 2017 audit fee will be at least as much is the 2016 $2.1M fee. We will find out the 2017 audit fee once UBNT files their proxy in December. Knowing that KPMG gave UBNT a clean audit and that the previous material misstatements were remediated in 2017, I have no doubt that there are no material misstatements or material fraud. I know this because I work closely with my company’s external auditor and my team performs SOX control testing in order for management to sign their 302 SOX certification (http://www.soxlaw.com/s302.htm). Pera and the CAO sign the 302 certification as well making them personally liable if a material fraud is later found out. So who do you believe: KPMG who had over 10,000 hours of trained auditors go over UBNT’s accounting records or Andrew Left who has no audit background and no access to company records in addition to having done very little research into UBNT (based on some of the easily refutable claims he made)? I’ll go with the external auditor charging $200 per hours with full access to company personnel and records. No external auditor wants to be the next Arthur Andersen and KPMG knows that their UBNT audit workpapers will likely be closely dissected by the PCAOB. Left does not need to prove anything. He just shorts the stock, posts a report that has many glaring holes, goes on CNBC crying fraud and makes millions with no external government agency scrutinizing his claims.
Citron’s new post does focus on cash, which make sense from their standpoint. UBNT’s business is pretty simple from an audit standpoint. They outsource all the manufacturing, so no complex costing to worry about and not a lot of machinery & equipment. In fact, when you look at their balance sheet, their total $972M in assets are made up of $604M (62%) in cash. They also have $141M in receivables owed by customers and $142M in inventory. On the liabilities side, debt makes up $256M out of $371M. As an auditor, this balance sheet would be very easy to audit. Given the very low fixed asset balance of $13M, there is very little risk of the fraud that took down Worldcom where they capitalized expenses and moved them to fixed assets. This made them look more profitable and delayed expense recognition. UBNT’s balance sheet is so simple, there is no good place to hide any fraud. $12M in fixed assets is tiny and would not be a good place to hide expenses for a company projecting sales of over $1 billion this fiscal year.
Given the simplicity of the balance sheet, Citron targets the only thing they really can, which is the big $604M cash balance. Most of this is stuck outside of the US, which means that the company would need to borrow against it to buy back stock as they do not want to pay repatriation tax. This has caused UBNT to borrow $256M using the foreign cash as collateral. This debt will likely go up when they report the Q1 financials given the additional $150M in authorized buybacks approved on September 5 and 18.
Cash is one of the easiest things to audit with the main test being an independent confirmation being sent out by KPMG directly to the bank. The bank would then complete the confirmation with the cash balance and send it back directly to KPMG. Given the direct confirmation, there is not much opportunity for the company to interfere if they were trying to fake a cash balance. In addition, given the high balance, KPMG, would likely test multiple controls around cash from a SOX perspective. The main control would be the reconciliation of the cash on the balance sheet to the bank statement. A UBNT accountant would need to perform the reconciliation and a separate supervisor would need to review it. There are likely multiple bank accounts, so there would be multiple cash reconciliations and multiple UBNT accountants involved in the reconciliation process. If the cash was a fraud, the company would need multiple people to be in on it, which is not likely. In addition, KPMG would reperform the cash reconciliations using bank statements that come directly from the bank. Given the large balance, KPMG would focus a lot of attention on the cash, so the risk of fraud around cash is close to zero. In addition, given that the debt is secured by the cash, the lender (Wells Fargo) would have done some work to verify the cash being used as collateral.
I am frankly surprised that the audit fees are so high given the simplicity of the balance sheet and this is likely driven by the previous material weaknesses. Now that they have gotten a clean audit opinion, UBNT can likely start to negotiate lower fees in the future. Citron’s focus on cash fraud is not very well thought out from an audit standpoint given the ease of confirming cash balances. UBNT’s balance sheet is just too plain and boring to be able to hide material accounting fraud. Fraud would be easier to hide in complex balance sheets that use fancy derivatives (see Enron) or high capitalized expenses (see Worldcom). As investors in UBNT, accounting fraud risk is pretty low.
As time goes by, I imagine the shorts that followed Citron will lose their patience as no fraud is exposed and eventually cover. This should put upward pressure on the stock.