8/14/2023 0 Comments Compare carbonite plansCARB’s compensation structure consists of base salary (~20%), incentive cash bonus (~30%) and equity incentives (~50%). Revenue and non-GAAP performance targets can be an incentive to sacrifice profitability for volume, or worse, engage in acquisitions that destroy shareholder value.ĬARB management focusses exclusively on non-GAAP in their presentation of company performance and to determine executive compensation. Accordingly, I favor compensation plans that use ROIC to measure performance to ensure executives’ interests are aligned with shareholders’ interests. We know from numerous case studies that changes in ROIC are directly correlated to changes in market value. However, a low single-digit profit margin provides little room to maneuver, while invested capital seems more likely to balloon than remain flat given the investment in new business lines and acquisition-driven strategy.Įxecutive Comp Aligned with Misleading Metrics This hurdle appears manageable given the software sector’s median 5% NOPAT margin. For the company to earn an adequate ROIC above the cost of capital, it would need to earn a 3% NOPAT margin on TTM revenue without growing invested capital. CARB’s capital turnover ratio (revenue divided by invested capital) is 2.6 compared to an average of 1.3 for the software and services sector. The main impediment to higher ROIC is NOPAT margin as the balance sheet is relatively efficient. The current ROIC of -9% (TTM) is in the bottom quintile of my firm's coverage universe and well below the median 5% ROIC generated by 230 companies in the software and services sector. Removing so many expenses relevant to the operations of the business, especially with the new acquisition-driven strategy, is suspect.ĬARB Non-GAAP Metrics New Constructs, LLCĬARB’s return on invested capital ( ROIC) has averaged -5% over the past two years. Specifically, management’s definition of ‘non-GAAP net income per share’ allows for the exclusion of: purchase accounting adjustments, stock-based compensation, litigation expenses, acquisition expenses, intangible amortization, non-cash convertible debt interest expense, and the tax effect of non-GAAP adjustments at a 13% effective rate. Per Figure 2 below, management’s focus on non-GAAP metrics creates an illusion of profitability. In addition, free cash flow ( FCF) swung to -$76 million TTM from $10 million in 2016 due to the decline in NOPAT and capital investment in acquisitions. 2Q16 while 2Q17 revenue increased only 10% vs. CARB’s current NOPAT margin has dipped to -2% (TTM) due to expense growth. Profitability then swung between -7% and +2% NOPAT margins over the next two years. The company posted a break-even 0% NOPAT margin in 2014. CARB has not achieved consistent profitability since going public.
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