One of the unusual aspects of Israel’s stock exchange is that certain foreign companies with certain unique characteristics are able to join the country’s leading stock indexes, simply because they have a “connection to Israel.” Obviously there are lots of stock exchanges in countries around the world that register stocks with solely foreign operations. But what makes Israel unique in this respect is that because our largest publicly held companies are small in international terms, the “imported” companies, considered small and speculative in their home countries, where they would never be inducted into the respectable list of blue-chip corporations, find their way into Israel’s top indices.
In the United States, Germany and the United Kingdom, for instance, many foreign companies are listed for trade, the large majority of the small and speculative. You’d never find them listed on the indexes of the Dow Jones, DAX or FTSE. These indexes are reserved for large, well-established companies with long histories. Here, however, the foreign companies are listed for trade on the Tel Aviv Stock Exchange – often by acquiring a local company or thanks to some local operations, thus creating an “Israeli connection” – and quickly make their way onto Israel’s top stock indexes. There are several examples of this, but our current discussion will be about the U.S. company Liveperson, which is dual-listed in Tel Aviv.
Liveperson is a small company in U.S. terms. It published its third-quarter financial results last week, and the results weren’t good. The company’s share price dropped in response, but it’s still nearly double its price as of a year ago. The company develops customer service programs that enable giving customer service digitally instead of via telephones and call centers. The company isn’t particularly young – it was founded in 1995 and first launched on NASDAQ in 2000. It registered for trade in Israel in 2011, after acquiring an Israeli company in its field. Liveperson made it onto the Tel Aviv-100 Index – which has since become the Tel Aviv-125 Index – and thanks to steady gains in its market cap, was included in the blue-chip Tel Aviv-35 Index as of last summer. The company’s weight on these indexes accounts for a bit more than 1% – not a large figure, but enough to get all the passively-managed funds to buy up its shares when they invest directly in Israel’s major indexes.
Even though the company has been locally traded for several years, it’s not well-known here, and its media exposure has been minimal. The moment I started reviewing its financial reports, I began to ask: Why is such a company listed on Israel’s major indexes, and should Israelis really be passively investing in its shares?
Liveperson has a market cap of $7.6 billion. That’s a lot in Israeli terms – blue-chip territory. In American terms, though, this is a small company, just a common share. Furthermore, since its founding 24 years ago, the company has never reported accounting profits, it’s never accumulated cash, and never distributed a dividend. In fact, since its founding, it’s lost a total of $260 million.
All of its operations, including its ongoing losses and its acquisitions, have been funded until recently by raising debt, and as of March, also via debt convertible to shares. The company has annual revenues of $290 million.
Plus, like many companies, Liveperson has given its executives and senior employees generous options. Over the past few years, as the company’s stock rose, they cashed in on a large quantity of them, at low strike prices, selling millions of dollars of shares in the process.
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Meanwhile, Liveperson’s accounting losses have grown. In 2016 it reported losses of $25 million; for the first nine months of 2019, the figure was $69 million. Revenue from operations, minus investments and acquisitions was $12 million in 2016; it went into the minus in 2017, and as of the first nine months of 2019, it was negative $75 million.
The company has written off a significant portion of this negative cash flow as an investment in programming cost capitalization. This is a practice whereby technology companies list ongoing R&D costs as an asset, and thus acquire a significant quantity of non tangible assets. Often, this hides and offsets losses in the company’s books. It also makes the use of EBITDA meaningless, as it doesn’t reflect the company’s cash burn, and enables EBITDA figures to be much more flattering than the truth.
As of the end of 2018, \had $19 million in capitalized programming expenses. As of September 2019 the figure was $44 million. That $25 million gap doesn’t appear on the company’s profits or losses, but it definitely disappeared from its bank account.
I can’t predict whether Liveperson will become profitable over the next few years, but if it doesn’t, and its stock price doesn’t increase, then its latest issue of $230 million in debt convertible to shares will become a considerable weight on the company’s survival prospects – investors won’t want to convert the debt to shares, and the company will have to repay it.
And regarding its share price – Liveperson is trading at a market cap equal to 7.5 times its sales revenue. Regardless of what you think the company’s value should be, investors should know that shares like these have been known to entirely collapse when they don’t meet investors’ optimistic forecasts.
One such company was Opko Health, another U.S. company listed on Tel Aviv’s leading indexes, via a particularly tenuous connection to Israel. Its share price plummeted 86% over the past three years. This is what happens when stocks are built on dreams that don’t translate into reality.
Liveperson, too, has seen its share price rise thanks to hopes for the future, not due to current profits. Will Liveperson offer a repeat performance of Opko’s crash, damaging the investments of all Israelis invested in the country’s major stock indexes? We can’t prophesy, but the potential exists.
So to summarize, what do we have here? A small company in global terms, with years of no profits or positive cash flow, that uses liberal accounting practices to present its financial results in a confusing manner? Check. Management generously compensated through options who are taking in millions by cashing in on these options? Check. Covering past expenses via current debt sales that could seriously weigh on the company in the future? Check.
It’s true that there’s no small number of companies like these on stock exchanges around the world, and if people want to invest in them, that’s their right. But the real question is, why is such a company on Israel’s leading stock indexes, which are typically reserved for a country’s strongest companies?
It’s true that Liveperson has a connection to Israel, as it employs many people in research and development here. It’s also clear what the company’s interest is in being listed in Tel Aviv – Israeli funds automatically buy up its shares thanks to its placement on the leading indexes, and since the TASE accepts the same financial reports that the company presents in the United States in any case, it costs Liveperson nearly nothing to be listed here.
But the question remains – who’s protecting the interests of the Israeli investing public from such companies taking advantage of them?