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Thursday, June 23, 2005

The RIGHT way to deliver bad news

BakBone Software shows what it means to have a backbone.


You go to the owners, hat in hand, and you give them the straight story, in plain talk, exactly as you'd want to hear it if you were a shareholder.

I had considered this as an investment (I may still even own some shares!) but decided against it. If the price drops by much I'll consider buying.

UPDATE: Apparently I picked up some shares at $1.50. Score!

UPDATE: I bought more shares below $1.50, but it's still nowhere near a full investment. They've been having troubles with accounting... for a long time. That's a very large, very bright red flag. From a cash flow perspective, they're fine. But their earnings will definitely take a hit as stuff gets pushed out into the deferred category. This is serious stuff. Dangerous stuff. But you take a step back and ask, "What if I owned the entire company, including the Laurel and Hardy finance people?" At what price would it be worth it? And translating that back into price-per-share, how many shares does this company really have? The answer to the last question is "definitely less than 120 million" if you want to be really sure of yourself. The answer to the second question, in my opinion, is "definitely less than $360 million" (to pick a nice round number per share). So then what's a share worth in my opinion? At least $3. So what's a good price to buy with a margin of safety? $1.50. How much can I buy? Not much without knowing more.

UPDATE Oct 18, 2005: I've gone back to this paragraph above a couple of times now and I don't make any sense of it whatsoever. Back in the June time frame this blog was more like scribbled notes and I didn't write down any rationale for things.

This company has maybe $50 million in revenue per year now with extremely high gross profits, yes we can admit that. SG&A scales slowly with increasing revenue, which is what makes BKBO attractive. There are maybe as many as 100 million shares "extremely diluted" (not "totally" using my own terminology, but 10% more than if every stock option as of last year was a share). $1.50 per share value would correspond to free cash flow of 10 cents per share or $10 million. That doesn't strike me as being deep value, certainly not compared to other stuff I've been finding.

So I think it's best to avoid BKBO unless the price gets to say $1.

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