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Endurance View
ARPU increased +11%
High Quality Subscribers
High Quality Products
We are transparent and honest
Customers First
We leave it better than we found it
Reality
ARPU decreased -13%
History of terrorist & spam/malware subs
R&D as % revenue is 1/6th of Godaddys
A U.A.E. subsidiary tried to deceive the US
Service outages, poor customer service
Customers say otherwise; High churn
The United States filed an early warning against all 31 proposals submitted by Radix Registry because
the application "inappropriately" included a supposed emailed recommendation from the Federal
Bureau of Investigation. Those proposals - which were for options like.shop,.web,.bank and.law - did not
have FBI backing, the federal government wrote.
Radix Registry is an Undisclosed Subsidiary of Endurance International Group
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Page 2 of 61
Table of Contents
I.
II.
III.
IV.
V.
VI.
VII.
VIII.
IX.
X.
XI.
XII.
XIII.
XIV.
XV.
Disclaimer
Summary
Introduction
EIGI Uses Related Parties (Itself?) to Inflate Earnings
30%-67% of Directis Revenues are Suspect
EIGIs Undisclosed U.A.E. subsidiary and its False Credentials
Average Revenue per Subscriber is Down -13%, Not Up +11%
Suspect Customers: Terrorism & Malware-related
Underinvestment leads to Service Outages and High Churn
40%-100%+ of Profits are Suspect: Putting it all Together
Valuation: Interest Expense Exceeds Normalized Adj. EBITDA
Appendix A: The Ravichandran Ties that Blind
Appendix B: Directi Revenue Does Not Reconcile
Appendix C: Organic Growth Calculations
End Notes
Page 3 of 61
SUMMARY OF FINDINGS
Company: Endurance
International Group
CEO: Hari Ravichandran
Ticker: EIGI
Exchanges: NASDAQ
Price Target: $0.00/share
Share price: $21.94/share
Market cap: $3.03B
52-week high: $23.49
52-week low: $11.88
Shares outstanding:
132.36M
2014 FCF: -226M
EBITDA 3-year avg: $70M
Interest expense 3-year
avg: $94M
2014 Cash: $33M
2014 Debt: $1,020M
Fiscal Year: Dec. 31
Auditor: BDO
IPO Date: November 2013
(JOBs ACT IPO)
Page 4 of 61
INTRODUCTION
Endurance International Group is an extraordinary company. EIGIs stock has risen 2x since going public
in late 2013, handily outperforming its peers. The company has also generated industry-leading margins1:
ADJUSTED EBITDA MARGIN - EIGI vs PEERS
2012
2013
2014
GDDY
19.1%
17.4%
19.6%
WWWW
35.5%
31.1%
29.8%
EIGI
45.8%
40.0%
37.4%
High debt level for a traditionally low ARPU and high churn business.
Related party transactions between EIGI and entities tied to EIGI CEO.
No International revenue disclosure, despite promoting itself as an international growth story.
Suspect accounting, some of which widely deviates from its peers.
We dug deeper. Our due diligence spanned across several continents and included industry experts
input. We have come to believe that Endurance is, indeed, an extraordinary company just for all the
wrong reasons. Once we learned that CEO Hari Ravichandran has been spending an unusual amount of
time promoting the stock rather than running the business in recent months 15+ investor meetings in
recent months2 we decided to share our findings with the public.
Gotham City Research believes 40%-100%+ of reported profits are suspect, and that normalized profits
do not cover interest expense for the following reasons:
Related party transactions account for 17% of EBITDA, and resemble transactions with it-self.
ARPU declined -13% yet EIGIs 10K claims ARPU grew +11%.
Accounting irregularities found with its International business.
A significant undisclosed subsidiary lied to the US government about its credentials.
The company hosts terrorist-related websites, and a high % of malware/spam-related accounts.
Churn is high as a result of service outages, poor customer support, and slow loading speeds.
EIGI claims otherwise, yet EIGI has under-invested in its business, spending 80% less on
infrastructure vs. Godaddy.
Page 5 of 61
Gotham City Research believes that the companys above representations are not in agreement with
reality. In fact, it seems that the Company is characterized by low quality products, low quality
subscribers, mediocre/poor technology platforms. The remainder of the report details how exactly. We
first begin by explaining how we believe EIGI uses related parties to overstate earnings.
Page 6 of 61
EIGI Uses Related Parties, Improper Accounting, & Other Dubious Practices to Overstate Earnings
We believe the keys to EIGIs success have been its Ravichandran related parties, suspect accounting, &
other dubious business practices (these have helped the CEO unload ~30% of his shares recently). With
respect to the related parties, we believe the company has engaged in two parallel schemes:
EIGI uses the Ravichandran entities and its other captive vendors to overstate profits:
EIGI Secretly
Controls
Ravichandran
Entities
Realized Capital
Gains in EIGI Stock
Compensate the
Ravichandrans
Ravichandran entities sell its services to EIGI at below-market prices (while harming customers
via poor user experiences), allowing EIGI to achieve an artificial cost advantage:
Ravichandran
Entities provide
EIGI services
below-market
Realized Capital
Gains in EIGI Stock
Compensate the
Ravichandrans
EIGI benefits by
Achieving
Artificially Higher
Profit Margins
EIGI's Positive
Earnings Boost
EIGI Stock Price
Page 7 of 61
The Largest Related Parties are Secretly Controlled by the Company Itself
CEO Ravichandran
Director Ravichandran
Gowex, Quindell, Tile Shop, Crazy Eddies, Sino-Forest, and many other frauds shared (at least) one
common characteristic: material related party transactions with captive or quasi-captive entities. In
many cases, these captive or quasi-captive entities were substantially the companies themselves.
Gotham City Research believes that EIGIs largest related parties are substantially EIGI itself for the
following reasons:
Endurance CEO Hari Ravichandran and/or immediate family were and/or is a director and/or
owner of related parties, Glowtouch Technologies and Innovative Business Services (IBS).
The transactions are material to EIGI, as the transactions have accounted for at least 16.5% of
2012-2014 EBITDA.
EIGIs payments to Glowtouch account for the majority of Glowtouchs revenues.
Glowtouch currently staffs and operates the HostGator India (an Endurance subsidiary) business.
Glowtouch/Endurance employees name Glowtouch/Endurance as if theyre the same entities
on linkedin or other on-line profiles.
http://www.glowtouch.co.in/ website doesnt work as of April 17, 2015.
We have documentation that shows Glowtouch pays &/or receives payment-in-kind from EIGI.
Pattern of related party transactions beyond those involving Ravichandran, including loans at
favorable rates between Endurance and its management & consulting contracts.
EIGI was exempted from the auditor attestation requirements in the assessment of internal
control over financial reporting, because it technically qualifies as an emerging growth
company per the JOBS Act (despite being in business since the late 1990s).
Endurance International appears to be web hostings Crazy Eddies, but with an Indian twist:
Crazy Eddies
Antar Family
Suspect Accounting
Seemingly high growth
Captive Vendor (Wren Distributors)
Related Party Loans & Other Payments
TOTAL
$210,615
$34,698
16.5%
The above payments include those made out to Glowtouch Technologies, Diya Systems, Tregaron India
Holdings (Glowtouch refers to all Ravichandran entities), and IBS.
So Hari Ravichandran, according to the employment agreement, is concurrently the CEO of Endurance
and Director of Glowtouch Technologies.
Glowtouch Technologies = Tregaron India Holdings LLC = Diya Systems
See the appendix for further details regarding the Ravichandrans web, but here are the highlights:
Page 9 of 61
2013
$13.2
$7.3
55.3%
Page 10 of 61
Glowtouch, via its Diya subsidiary shares the same address as Endurance i.e. Hostgator India9:
Page 11 of 61
Page 12 of 61
$41.2
$38.5
$56.7
$55.3
$56.3
$60.0
$49.9
$46.2
$59.1
$56.5
$58.0
$62.0
$ in millions
Glowtouch Helps Endurance Make Margin at the Expense of Endurance Customers
GlowTouch provides outsourcing services such as: customer and technical support, billing support, web
development and maintenance, data entry and quality assurance (QA) testing.13
Endurances tech infrastructure spending is less than 1/5th of Godaddys (as a % of revenue):14
2012
2013
2014
19.3%
8.4%
38.4%
4.7%
24.5%
18.4%
6.6%
36.9%
4.5%
24.3%
18.3%
5.5%
40.8%
3.1%
16.9%
outages,
poor
Date
Aug-13
Dec-13
Apr-14
May-14
Oct-14
Duration
24 hours of downtime
3 days of downtime
24 hours of downtime
9 hours of downtime
5 days of downtime
Gotham City Research believes these are no coincidences. We also believe that EIGIs practice of
profiting at the expense of its customers is coming to an end. EIGI is no longer a private company
operating in the shadows. Furthermore, Godaddy recently went public. Sunshine will prove to be the
best disinfectant.
Page 13 of 61
Given that Directi is an International company, the #2 and #4 priorities listed above suggest that EIGIs
international business is a very big priority. Yet EIGI reveals very little information about its international
operations. We think we know why.
Gotham City Research believes that Endurances international revenues are neither accurate nor reliable.
We specifically believe 30%-67% of Directs revenues are of dubious quality for the following reasons:
EIGI does not disclose International revenues (yet pitches itself to Wall Street as an International
Cloud play). Godaddy discloses international revenue.
EIGIs International tangible long-lived assets are only 2.9% of total tangible long-lived assets.
30%-67% of Directis reported revenue do not reconcile with Directis Indian filings.
EIGI has a few different figures for Directi revenue in its 2014 10K. None of them reconcile with
one another. Its as if Directi has several sets of books, just as the characters in The Producer did.
EIGI management did not assess the effectiveness of internal control over financial reporting of
Directi.
The Directi website does not appear to be maintained or updated.
Directis owners have publicly claimed that its business is worth $300 million + for many years,
yet EIGI acquired it for 67% lower, roughly ~$100 million.
EIGI has an undisclosed international subsidiary that EIGI secretly acquired for ~$60 million. We
believe this is the Domain Name Business EIGI cryptically refers to in the 10K. We think we
know why EIGI does not disclose this subsidiary. See the next section for more information
about this subsidiary.
Page 14 of 61
EIGI Sells Itself as an International Growth Play but it Does Not Disclose International Revenues
Endurances explanation, as to why it does not disclose international revenue is one of the funniest (and
absurd) weve ever read. It claims it is impracticable to do so, and that there are limitations in certain
accounting systems2:
"It is impracticable for the Company to provide revenue information by geography for December
31, 2012, 2013 and 2014 due to unavailability of geographic information for some subscribers
acquired as part of previous acquisitions as well as limitations in certain accounting systems that
are currently in use."
Gotham City Research believes EIGIs explanation above is a serious misrepresentation (were reporting
EIGI to the SEC and other regulatory bodies), for the following reasons:
EIGI discloses tangible long-lived assets and total loss before income taxes of international origin
(so much for impracticable and limitations in certain accounting systems)
EIGI discloses Directi revenue (though there are serious issues with the Directi numbers) and
Directi is an international company. So how is it impracticable for EIGI to report total
international revenue, when it already discloses its largest contributor to international revenue?
CEO Ravichandran states: But primarily all the growth on the international side at this point for
this year we anticipate coming through organic means.3 How can he make this claim about
international organic growth without knowing the 2014 international revenue?
Page 15 of 61
So its not enough data to actually have a sort of a real comparison there. But international -talk about the Directi business to be the large portion of our localized international business, it
was about 11%ish of our revenue, between 10% to 11%. Did CEO Ravichandran say 11% of
revenue was from localized international business ?
Godaddy discloses international revenue4
Endurance has paid its auditor considerable sums of money in the past5
it seems EIGI has the resources to render itself able to report international revenue (Endurance
has paid BDO more in fees than it has paid the US Federal or Local governments in taxes). One
would think that the least EIGI can do to thank Uncle Sam for the low tax bill (assuming they are
filing taxes truthfully), would be to file accurate, reliable, and truthful financial statements.
Perhaps its too much to ask.
EIGIs Reported Directi Revenue Figures are Unreliable
After reviewing EIGIs Directi figures in EIGIs 10K, one would get the impression EIGI manages several
sets of books just as the characters in The Producers did. $29 million does not equal $31.3 million and
EIGI provides no explanations as to why they differ (the highlighted amounts differ)6:
For the year ended December 31, 2014, $29.0 million of revenue from the Companys 2014
acquisition of Directi was included in the Companys consolidated statement of operations and
comprehensive loss.
Page 16 of 61
Revenue increased by $109.5 million, or 21%, from $520.3 million for the year ended
December 31, 2013 to $629.8 million for the year ended December 31, 2014. Of this increase,
$31.3 million was related to revenues from our acquisition of Directi.
This explanation does not reconcile Directi, Webzai, BuyDomains and Arvixe represented
approximately 3% and (2)% of our total assets and net assets, respectively as of December 31,
2014 and 6% of our total revenues for the year ended December 31, 2014.
a. With respect to revenue, the application of purchase accounting requires us to record
purchase accounting adjustments for acquired deferred revenue, which reduces the
revenue recorded from acquisitions.
30%-67% of Directis Revenues According to EIGI 10K Dont Reconcile with Indian Filings
We reviewed Directis Indian filings and estimated total Directis revenue according to them 7:
See the appendix for a more detailed breakout of the above calculations.
Page 17 of 61
Directi revenues are materially overstated (EIGIs refusal to disclose international revenue and
existence of several varying figures for Directi revenue support this theory).
The unexplained differences are fully explained by the Radix FZC and/or P.D.R. Solutions FZC
subsidiaries.
Endurance does not want to draw attention to its international operations (we explore why, in
the next section), specifically because it has problem undisclosed subsidiaries.
Endurance does not want to draw attention to its international operations (we explore why, in
the next section), specifically because they play critical roles in driving suspect
malware/clickfraud related revenue.
Page 18 of 61
Endurance mentions buying a Domain Name Business (without naming it) in its most recent 10K 1:
In addition, in connection with the acquisition of Directi, the Company was initially obligated to
make additional aggregate payments of up to approximately $62.0 million subject to specified
terms, conditions and operational contingencies. Of this $62.0 million, the Company has
committed a total of $36.2 million consisting of cash payments of $27.2 million and future earnout payments of $9.0 million to purchase a domain name business from a company associated
with the founders of Directi Holdings
Radix Registry is the undisclosed subsidiary and has misrepresented its credentials to the USA
We believe Radix is the Domain Name Business for the following reasons:
Radix is related to the founders of Directi Holdings, the Turakhia brothers & Brijesh Joshi.
Radix is a domain name business (specifically participates in gTLD auctions)
Those familiar with Directi and Endurance (at the time acquisition discussions) wrote, In buying
Directi, Endurance would also get Radix Registry which has 29 active new gTLD applications of
which 26 are in contention. It seems they were off on the deal terms, but right on the target.
Who.is shows Radix Registrys name as PDR LTD. D/B/A PUBLICDOMAINREGISTRY.COM
PDR LTD. D/B/A PUBLICDOMAINREGISTRY.COM is a wholly-owned subsidiary of Endurance:
Radix FZC and P.D.R. Solutions FZC (a EIGI subsidiary) are in the same building in the UAE.
Page 19 of 61
Radix Registry Lied to the US Government and its Radix/Directi Founders Are Highly Suspect
The US Federal Government filed an early warning against all 31 proposals submitted by Radix Registry,
in Radixs attempt to register the .army, .navy and .airforce and other addresses on the Internet. Radixs
application "inappropriately" included a supposed emailed recommendation from the Federal Bureau of
Investigation (seems the equivalent of a CEO lying about graduating from Harvard)2:
Radix Registry is suspect for reasons beyond attempting to deceive the US Government:
Radix FZC (its legal name) is a Free Zone Company in Hamriyah Free Zone, a tax haven in the
United Arab Emirates (think of it as the Singapore for Indians and others).
Radix FZC does not appear in the Hamriyah Free Zone company directory, despite Hamriyah
listing over 5,890 entities (it is our understanding that there are only 5,000ish total entities).3
PrivacyProtect.org, controlled by Radix Registrys founders (i.e. the Turakhia brothers), have
been the losing respondent in more than 60 Uniform Domain Name Dispute Resolution Policy
(UDRP) proceedings.4
The ICANN gTLD Applicant Guidebook forbids applicants with a history of adverse UDRP
decisions from applying for new gTLDs.
Page 20 of 61
Reported Average Revenue per Subscriber (ARPS) is Growing but Actual ARPS is Declining
Despite the related party transactions, suspect international revenue, undisclosed subsidiary, and the
undisclosed subsidiarys lies, perhaps Endurance possesses a strong core business. After all, EIGI reports
very strong ARPU (they call it ARPS or Average Revenue per Subscriber, which in tech-land is similar
to Comp Store Sales) of over ~10%1:
2012
2013
$ 474,115 $ 528,119 $
Adjusted revenue
2,845
3,223
3,502
Total subscribers
$12.84
$12.92
$13.09
Reported ARPS
0.62%
1.32%
% change
Revenue in 1,000s of $s, and total subscribers in 1,000s
2014
651,945
4,087
$14.48
10.62%
Page 21 of 61
Not only is EIGIs reported ARPS growing, Endurance appears to be outperforming its peers2:
GDDY
WWWW
EIGI
$7.75
$13.44
$12.92
GDDY
WWWW
EIGI
2013
2014
$8.67
$9.50
$14.24
$14.62
$13.09
$14.48
% change in ARPU
11.8%
9.6%
6.0%
2.7%
1.3%
10.6%
Icing on the cake: Directis ARPS looks breathtakingly amazing and accretive to overall ARPS. The
implied Directi ARPS is $72 per month or 5x-6x EIGIs historical ARPS:
n.a.
Directi subscribers
n.a.
Directi ARPS
n.a.
EIGI Reported ARPS
$13.09
$ & subscribers in 1,000s except ARPS
Directi revenue
2014
$48,499
56
$72.17
$14.48
We estimate that EIGIs true ARPS actually declined in 2014 by around ~13%3:
EIGI Actual 2014 ARPS Declined
2011
2012
2013
$ 474,115 $ 528,119 $
Adjusted revenue
3,223
3,502
total subscribers - reported 2,845
1,000
Directi end subscribers
total subscribers - actual
4,502
$12.92
$13.09
Reported ARPS ######
Actual ARPS 12.84
$12.92
$13.09
% growth in ARPS
$
0.01
1.3%
All figures except ARPS are in 1,000s
total subscribers subtracts the 56 implied directi resellers.
2014
651,945
4,031
1,000
5,031
$14.48
$11.40
(12.9%)
Reseller
subscriber
subscriber
subscriber
subscriber
subscriber
subscriber
subscriber
subscriber
subscriber
subscriber
In Q4 2014 the company changed the definition of a subscriber (which added increases
subscribers), and did not discuss this change on the quarterly call.
EIGI does not count as subscribers those who purchase only domain names as subscribers (but
they count the revenue!).
EIGI does not count subscribers those who access solutions via resellers as subscribers. The
directi adjustment we make does not account for domestic resellers that EIGI counts as
subscribers.
Investors rely on accurate figures from companies so that they can then make their investment
decisions accordingly. Clearly CEO Ravichandran and the Companys misrepresentations regarding ARPS
betray that trust.
Page 23 of 61
WWWW, EIGIs most comparable peer (and whose shares have declined -36% over the last 12 months),
has recently warned about ARPS declining:5
ARPU is expected to decline sequentially in the first quarter of 2015, primarily due to the issues
that impacted our DIY and DIFM businesses in the fourth quarter of 2014.
Endurances ARPS Dont Add Up A common symptom in cases where numbers are fabricated
Unsurprisingly, EIGIs reported ARPS does not add up to the calculated amounts derived from using the
figures they disclose:
Adjusted revenue
total subscribers
Reported ARPS
Calculated ARPS
Irregularity
2012
2013
474,115 $
528,119 $
2014
651,945
2,845
3,223
3,502
4,087
$12.84
$12.92
$13.09
$14.48
$
$
13.02 $
0.10 $
13.09 $
(0.00) $
14.32
(0.16)
Endurances slippery total subscriber definition may account for the entire variation. For
example, Endurance may count certain domestic resellers as subscribers, rather than counting
the end customers. This may sufficiently lower EIGIs ARPU.
Endurance may attractive far more suspect accounts, e.g. malware/spam accounts. These
accounts are probably very profitable on a per subscriber basis (we explore this further in the
following sections).
Page 24 of 61
Gotham City Research believes organic growth is much lower in the 0%-7% range for 2013, and ~5%
for 2014:
EIGI's Revenue Organic Growth
2013
EIGI
Gotham
17.0%
5.9%
2014
13.0%-15.0%
5.6%
2013
$64,123
$7,311
$90,150 $245,800
2014
$629,845
$651,945
($48,500)
($14,600)
($31,000)
$557,845
5.6%
2014s organic growth seems heavily dependent on domain-related businesses. This is strange, given the
company tends to downplay the importance of this business.
The presentation accompanying the Q4 2013 earnings call uses the word organic quite a bit, but does
not disclose organic revenue growth.
See the appendix for further details.
Page 25 of 61
Its theoretically possibly, but highly slippery, that the $17 million variance between the $47.2 million
and $64.12 million is a result of a GAAP purchase accounting adjustment vs a Non-GAAP
purchasing accounting adjustment. The problem is if this is the case, the Company did not disclose it.
Page 26 of 61
Some companies aim to improve long-term profitability by putting the customers needs first. Other
companies improve short-term profitability by profiting at their customers and/or others expense.
Blinkx, a click fraud/malware concern whose shares have declined over -80% since Ben Edelman
exposed their nefarious practices, is an example of the latter case. Blink engaged in suspect activities,
and the company eventually reaped what it sowed. Gotham City Research believes that Endurance
International Group resembles Blink, and EIGIs stock will share a similar fate. We specifically believe
that Endurance has been boosting profitability by turning a blind eye to the suspect but profitable
business of providing Internet hosting to harmful activities such as malware/spam and terrorism.
Endurance aggressively attracts customers, spending $23 on sales & marketing for every $100 it earns in
revenue. Thats twice as much as Godaddy spends1:
2012
2013
2014
14.3%
28.4%
1.99x
12.9%
22.6%
1.76x
11.9%
23.3%
1.96x
Yet Endurance, at minimum lacks the infrastructure necessary to minimize suspect customers. It spends
only $3 on its tech infrastructure for every $100 it earns in revenue, less 1/5th Godaddy spending:
2012
2013
2014
19.3%
4.7%
0.25x
18.4%
4.5%
0.24x
18.3%
3.1%
0.17x
Page 27 of 61
The following further support our belief that (I) Endurance generates revenue from harmful activities (or
is willfully ignorant of the fact that their aggressive sales and marketing approach leads to ends justify
the means results) and (II) revenues-derived from these activities mask a high churn business:
Terrorist related
Endurance International Group was recently hacked for hosting terrorist website.
The list of hacked Endurance companies include: BlueHost, FastDomain, Hostgator,
HostMonster and JustHost.
Endurance was exposed by the Boston Globe for hosting Taliban-related website several years
ago. A senior executive at Endurance (still with the company) claimed its terms of service
explicitly prohibits terrorist-related activities.
The Terms of service for BlueHost, FastDomain, Hostgator, HostMonster and JustHost do not
explicitly forbid terrorism related activities. It seems Endurance only paid lip service back in
2008.
Endurance transacted with several "Specially Designated Nationals" ("SDNs) for years, even
though SDNs assets are blocked & U.S. persons are generally prohibited from dealing with them.
Endurance hosts a group designated by the UAE as a terrorist group. Recall that Endurance owns
a few UAE subsidiaries.
Malware/Spam related
Endurance has a far higher concentration of black-listed domains versus Godaddy, at 41% v. %11.
Endurances domains are consistently in the top 5-10 of Top 100 Registrars with Blacklisted
Domains.
EIGI owns many registrars with 80% or higher spam vs ham registrations.
Other
Page 28 of 61
Endurance International Group Hacked ~1 Month Ago for Hosting Terrorist Websites
A hacking group that had hacked websites and social media accounts affiliated with the ISIS group,
recently hacked some of Endurance groups crown jewels (i.e., largest acquisitions), include BlueHost,
FastDomain, Hostgator, HostMonster and JustHost for hosting terrorist websites2:
Page 29 of 61
The hacker group warned Endurance International Group to stop hosting terrorist websites or next time
their DNS settings will be changed. Attracting terrorists as customers and underinvesting in core
infrastructure seems like a perfect recipe for disaster.
islam-army.com is one specific terrorist website that Endurance Hosts/Hosted 3
The twitter account of Bluehost was also hacked for hosting terrorists4:
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HostGator:
We have taken all appropriate security measures to ensure that our platform is secure. Per our
security protocol, we will continue to conduct a thorough review of this incident.
Hostmonster:
We have regained control late last night and are investigating this matter extensively.
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An Endurance subsidiary was doing business with an SDR named Kahane Chai for many years after Chai
was designated an SDN (in 2001)7:
It seems Endurances subsidiary did business with Kahane Chai for at least 6 years 8:
Endurance detected a few additional SDRs as well (these are just the publicly disclosed ones): 9
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Endurance and the Taliban Nearly All Endurance Companies Dont Expressly Prohibit Terrorism
Endurance has had terrorism-related problem going back to 2008. It hosted a website that taught its
members how to outfit a suicide bomber, included al-Qaeda propaganda videos, and offered a Taliban
video showing the beheadings of three spies:10
Endurance International previously hosted another website that supported holy war in Iraq.11
Most Endurance Company Terms of Service Does Not Expressly Prohibit Terrorism
Jean McCarthy, marketing director for Endurance International, told the Boston Globe:
"Our terms of service expressly prohibit the use of our services for terrorist or unlawful
purposes,"
We checked several of Endurance companies terms of service, and we found the above claim is
substantially false12:
Bluehosts terms of service does not expressly prohibit the use of its services for terrorist
purposes
Hostgators terms of service does not expressly prohibit the use of its services for terrorist
purposes
Hostmonsters terms of service does not expressly prohibit the use of its services for terrorist
purposes
Bluehosts terms of service does not expressly prohibit the use of its services for terrorist
purposes
Bizlands expressly prohibits the use of its services for terrorist purposes.
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Uribl gathered the Top 100 Registrars with Blacklisted Domains, and Endurance is consistently one of
the top 4 (if you add all its subsidiary domains). The list is updated on a rolling 5 day period, but weve
found that Endurance has consistently ranked highly in total number, as well as yielding a high % of
spam sites versus non spam sites.
Note that one of the largest contributors to the Endurance related black-listed websites are from Directi
related companies. publicdomainregistry.com, the undisclosed subsidiary, is one of the largest blacklisted website registrars:
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Very low R&D spending underinvests in its core infrastructure (e.g. servers)
Service outages, frequent service disruptions
Poor customer reviews with specific and detailed grievances.
EIGI twists the definition of churn/retention to the point that the disclosures resemble lies.
An industry expert explicitly states EIGIs churn/retention definition/framework is not the
industry common practice, while using industry terminology. Their businesses suffers from the
same issues other hosters suffer.3
Documented examples of cannibalism
Endurance Underinvests in Infrastructure so It Can Squeeze Out as Much as Possible from Customers
In the prior section, we indicated how Endurances suspect practices have attracted terrorist-related and
spam/malware-related subscribers. We find that EIGIs practices not only contribute to harming the
general public, it also profits at its customers expense.
Endurance spends 60-80% less per customer on infrastructure, than Godaddy does4:
Godaddy
EIGI
variance
2013
2014
Endurances R&D spending per revenue dollar is even low compared to the much larger Salsesforce.com,
which is seen as a sales heavy organization in the tech world.5
We use the words R&D and infrastructure synonymously, as both Godaddy and Endurance have
comparable definitions. Here is EIGIs R&D definition i.e. Engineering and Development Costs:
Engineering and development costs incurred in the development and maintenance of the
Companys technology infrastructure.
Our engineering and development activity is focused on enhancing our systems, developing and
expanding product and service offerings, and integrating technology capabilities from our
acquisitions.
Page 38 of 61
Godaddy
Some might assume that EIGIs R&D efficiency is greater than Godaddys. However, that fails to explain a
clear pattern of service disruptions and consistent post-acquisition customer complaints
How valuable is a web hosting company with frequent (and worsening) service outages?
Endurance companies experienced at least 4 large-scale service outages last year, and they seem to be
worsening with timing6:
Service Outages are Worsening
Date
Duration
Aug-13 24 hours of downtime
Dec-13 3 days of downtime
EIGI seems to have trouble monitoring outages (it seems the company is not even aware until customers
complain)7:
The official Twitter accounts for BlueHost and HostGator at first sent out messages suggesting
that the hosts were not aware of any outages, but shortly before 3 p.m. Tuesday, BlueHost's
official Twitter account tweeted the following announcement: "FYI we're experiencing a
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temporary network issue with our data center that's affecting some customers. If that's you stay
tuned for updates!" HostGator's official Twitter account tweeted a similar message out around
the same time, alerting users to the fact that the site was aware of the service outage and was
working to address it.
The outage led a number of BlueHost and HostGator customers to send tweets of frustration to
the accounts for the hosting services.
"Really @bluehostsupport @bluehost? You have my website down (& phone support broken) on
the BIGGEST fundraing day of the year? Unacceptable," @tweeted @AimeeCustis.
"been an hour+ and we're still down. you gonna explain yourselves, gator?? we want 2014 for
FREE.@HGSupport @hostgator #hategator," tweeted @Lazytravelers.
Some Twitter users even threatened to cancel their accounts, including @JohnTVokc: "New Years
Resolution for 2014 - Find a much more reliable host for my dedicated server account.
@hostgatorcontinues to disappoint."
The tagline on EIG's Google search listing states that "Endurance International empowers the
spirit of the entrepreneur with better web solutions for better success," but Tuesday's was at
least the second major outage its customers endured in 2013, as thewhir.com reports that
HostGator, BlueHost and other EIG services went down for an extended period of time in August.
The following twitter exchange (on the next page) reveals a few qualities we believe are companywide8
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49 comments, nearly all complaining about outage More Downtime for HostGator and BlueHost
Customers as Router Issues Plague Utah Data Center http://www.thewhir.com/web-hostingnews/downtime-hostgator-bluehost-customers-router-issues-plague-utah-data-center
23 very negative reviews about Homestead (Google homestead hosting and you get to
http://www.cnet.com/products/homestead-web-host/user-reviews/
Bluehost 6 pages of reviews. Reviews since 2014 are terrible, reviews in 2013 were mixed,
and
reviews
up
to
2012
were
excellent.
https://www.webhostinghero.com/reviews/bluehost/2/#listing
Hostmonster 62 reviews most are terrible http://www.whoishostingthis.com/hostingreviews/hostmonster/ Dotser all 19 reviews are poor http://www.whoishostingthis.com/hosting-reviews/dotster/
Bluehost
user
ratings
far
worse
than
the
experts
rating
http://www.whoishostingthis.com/hosting-reviews/bluehost/
Hostgator On yelp 1.5 stars out of 5 25 reviews: http://yelp.com/biz/hostgator-houston-3
15 negative comments about Hostgator and other Endurance companies
http://www.linux-depot.com/non-endurance-international-group-eig-hosting/
hostgator
sucksany
alternative
one
of
many
similar
threads
http://www.webhostingtalk.com/showthread.php?page=2&t=1326038#postcount9389876&ut
m_source=twitterfeed&utm_medium=twitter
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Endurance probably hopes that customer confusion leads customers to simply leave one Endurance
company for another one. The problem with this strategy, and the unintended consequences:
Long-term brand erosion, leading to higher churn (or worst case, discontinuing a brand).
Dilutive cannibalism the example in the next page shows how an affiliate marketer of A Small
Orange (ASO an EIGI company), bad-mouths Hostgator (an EIGI company). Hostgator is a
much bigger company versus ASO, so cannibalism seems counterproductive:
The above Tweet concurrently badmouths Hostgator whilst complimenting ASO. IT was RT-ed 20x
EIGIs True Churn is Very High Revenue not as stable as Portrayed
EIGI discloses a Monthly Recurring Revenue Retention Rate of 99%.12
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The implied churn rate of 1% (since EIGI does not disclose churn), implies the company has industry leading churn:
Monthly Churn
GDDY
1.3%
WWWW
1.0%
WIX
2.0%
EIGI Undisclosed
What is Endurances secret sauce? An industry veteran does not understand how Endurance reports such low churn,
given that some of its more high profile subsidiaries suffered from higher churn, EIGI acquired them13:
I closely watched Endurance presentations, and their claim of 1% Churn got my attention. They
have repeated that claim on their Q4-2013 earnings call while defining the MRR retention at 99%.
They have kept that statement in their Q1-2014 results.
Out of the over 50+ companies that were bought over the past years, there are a few which were
players in the Hosting market for many years and were struggling with churn throughout those
years. Included among them are: HostCentric, Hostmonster, Bizland, homestead, domain.com,
Ehost, ApolloHosting [these are all Endurance subsidiaries].
I wondered what the Endurance team did in order to reduce the industry-inherited churn in these
companies.
After analyzing EIGIs numbers more carefully, he concluded that EIGIs figures are not consistent with industry
norms:
The Endurance guys used in their analysis a model which is not the industry common practice,
while using industry terminology.
Their businesses suffers from the same issues other hosters suffer, and most probably at the
same level.
In summary, Churn has always been a key performance indicator of a Hosting company. No
hosting company can avoid it, and they all continue to struggle to minimize it.
CEO Ravichandrans explanation of churn does not make sense
closure (due to failure or voluntary closure) within the first year has been a remarkably steady 20-25%
the 1994-2010 period15:
Ravichandrans explanation would imply that new customers hosting on EIGI brands only close shop at a rate of
10%-11%, significantly less than the 20-26% historical rate. We dont think thats the case, especially coupled with
the significant service outages, customer complaints, integration issues, and other problems weve discussed in prior
sections.
EIGIs Distorted ARPS Figures Contributes to a Distorted Churn
Recall how Endurance was magically able to transform a -13% decline in ARPU to a +11% improvement in 2014.
Since churn requires accurate, relevant, and consistent disclosures of customer counts, a distorted ARPU implies a
distorted churn.
Page 46 of 61
Recent Subscriber #s
GDDY
12.7
EIGI
4.1
WWWW
3.3
WIX
1.2
TOTAL
21.3
Core Markets
25.0
as % of Core
85%
On a reported Adjusted EBITDA basis (which we believe is really EBITDA before costs) EIGI looks
profitable & far more profitable than its peers:
Page 47 of 61
Competition and commoditization leads some companies to innovate and others to cut corners.
Gotham City Research believes Endurances behaviors are more consistent with the latter (following in
the footsteps of Blinkx). The below-mentioned explains some of EIGIs higher Adj. EBITDA vs peers:
Boost revenue by either willfully ignoring or outright attracting suspect (but highly profitable)
accounts, e.g. malware/spam-related. Hosting terrorist-websites and other black-listed sites are
symptomatic of aggressive profits at any cost practices.
Cut costs by squeezing as much out of customers as possible Slash infrastructure spending and
customer support-related spending, leading to service outages, slow speeds, and poor customer
service.
Yet EIGI looks far worse than its peers on a cash flow, gross margin, and revenue per employee bases:
2014
62.6%
64.7%
81.6%
39.4%
55.7%
Something else must contribute to the wide variance between EIGIs Adjusted EBITDA & FCF
Page 48 of 61
Cash collected & cash spent provides insight to an investor to gauge the overall health of EIGI
EIGI includes the following definition/description of Adjusted EBITDA, and states the importance of
emphasizing cash-in and cash-out to properly gauge its health2:
Endurances rhetoric seems sound except EIGIs calculation of Adjusted EBITDA adds back highly
relevant cash spent, pretending as if cash spent does not matter (EIGIs words & actions contradict):
2014
(32,767) (45,036)
(4,787)
(294) (45,594) (19,927)
Changes in ST + LT Deferred Revenue (124,257) (62,125)
(75,923)
Adjusted EBITDA - Standardized $ (23,654) $ 55,176 $ 134,981
Overstatement (117.7%)
(73.5%)
(42.7%)
Transaction expenses and charges
Page 49 of 61
Transaction expenses and charges and Integration and restructuring expenses are cash costs
Endurance is a roll-up, and has a long and consistent history of M&A since 2002 (13 years ago) as the
article titled Bizland [Endurances former name] Growing Through Acquisitions clearly demonstrates3.
Because on-going acquisitions has been core to Endurances DNA, these cash expenses have been
normal and recurring, and should be added back.
Endurances peer companies WWWW and GDDY are far more conservative in adding back these
other adjustments to Adj. EBITDA (in fact, Godaddys other adjustments actually reduces Adj. EBITDA) 4:
Deferred revenue adjustments incorrect given accounting irregularities, no refund reserve disclosures
Although adding back deferred revenue to Adjusted EBITDA is standard for publicly-traded web hosting
companies, we believe the deferred revenue add-backs are improper for Endurance specifically because:
EIGIs Total customer, ARPU, and Churn definitions are not consistent with peers (as
discussed).
True churn is higher than EIGI reports. Higher churn leads to higher refunds which reduces
deferred revenue (and therefore, future revenues).
EIGI does not disclose its refund reserves, despite discussing its importance. The concern is that
deferred revenue balances are inaccurate.
Weve identified accounting irregularities in EIGIs deferred revenue balances.
Date
Duration
Aug-13 24 hours of downtime
Dec-13 3 days of downtime
Apr-14 24 hours of downtime
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2014
$65,371
$10,552
$75,923
$67,654
$8,269
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($126,165)
($98,449)
2014
$134,981
($95,972)
$39,009
($57,414)
In either scenario, the Companys ability to service debt is a near-term risk factor. As a result, we believe
the shares will approach $0.00 per share.
Absent Debt, the Shares See 80+% Downside
If we were to assume Endurance had zero debt on its balance sheet, EIGI stock faces 80%+ downside:
EIGIs ARPU is declining Declining ARPU tends to mean game over for a companys stock. See
Blackberry as an example.
EIGI trades at higher multiples compared against the true industry leader, GDDY
WWWW seems like the most appropriate comparable company:
WWWW trades at ~10x adj EBITDA, and 10x Free cash flow WWWWs adj EBITDA and
free cash flow figures are cleaner than EIGIs (WWWW also actually generates FCF).
EIGIs suspect accounting and business practices resemble WWWW. We think EIGIs
practices are worse, as detailed in this report.
EIGI is worth $2.98 per share, once it trades in-line with WWWW, at 10x Adj. EBITDA
EIGI's Value per Share Calculation
EBITDA Multiple
10.0x
Normalized Adjusted EBITDA
$39,009
Fully Diluted Shares
131,000
Equity value per share
$2.98
Market value per share
$21.94
Upside/(Downside)
(86.4%)
Page 52 of 61
Indira Ravichandran
Page 53 of 61
GlowTouch Technologies
The Summit II
4360 Brownsboro Rd.
Suite 200
Louisville, KY 40207
Same address (same suite) as glowtech http://www.manta.com/c/mb5826b/tregaron-indiaholdings-llc
http://www.glowtouch.com/contact/
Glowtouch is diya http://company.monsterindia.com/diyasmin/
Glowtouch and and eig both invested in by a tregaron capital
http://www.tregaroncapital.com/recent_news.htm
Diya Systems
o Seems to use EIGI services, per https://who.is/whois/diya.net
o Diya Systems is a fully owned subsidiary of GlowTouch Technologies
http://www.diya.net/aboutus/companies
Same phone number as glowtech contact
The Summit II
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Source: http://www.consumercomplaints.in/complaints/glowtouch-technologies-pvt-ltd-c50718.html
Page 55 of 61
High
277,126,173
50,774,780
1,726,063
411,314,905
502,555
2,621,188
744,065,664
0.0162
$12,053,864
$48,500,000
$29,000,000
Notes:
Page 56 of 61
2013
$64,123
$7,311
$90,150 $245,800
Notes:
2014
$629,845
$651,945
($48,500)
($14,600)
($31,000)
$557,845
5.6%
Page 57 of 61
End Notes
Introduction
1. GDDY, WWWW, and EIGI SEC filings
2. GCR Investigation
EIGI Uses Related Parties (Itself?) to Inflate Earnings
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
Page 58 of 61
7. directi internet solutions pvt ltd, directi web services pvt ltd, directi services pvt ltd, Directi Web
Technology Pvt Ltd, PDR DOMAINS SOLUTIONS PVT LTD, Big Rock Solutions Indian filings with
the Ministry of Corporate of Affairs
8. directi.com , recent media coverage
5. https://www.hackread.com/syrian-electronic-army-hacks-bluehost-hostgator-for-hostingterrorist-websites/
6. Specially
Designated
Nationals
List
(SDN)
http://www.treasury.gov/resourcecenter/sanctions/SDN-List/Pages/default.aspx
7. EIGI 10K 2014
8. http://who.is/domain-history/kahanetzadak.com
9. EIGI 10K 2014
10. Terrorism in Cyberspace: The Next Generation
11. http://www.boston.com/news/nation/articles/2008/03/27/unwittingly_hosting_terror/?page=f
ull
12. The respect websites terms of service
13. http://rss.uribl.com/nic/
14. https://www.scamwarners.com/forum/viewtopic.php?f=4&t=11184
15. Source: http://cyberwarzone.com/malicious-history-of-66-96-147-66/
16. http://www.malwareurl.com/ns_listing.php?as=AS29873
17. https://wpsecuritylock.com/godaddy-other-network-providers-bulk-injection-hack/
18. http://www.tucows.com/domain-registrar-tucows-inc-reaches-milestone-10000000-domainsunder-management/
19. http://www.reuters.com/article/2015/03/05/us-usa-trade-piracy-idUSKBN0M121F20150305
20. http://blog.legitscript.com/2015/01/twitter-spat-russian-rogue-internet-pharmacy-operator/
Underinvestment leads to Service Outages and High Churn
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
https://twitter.com/BrittMalka/with_replies
Source: http://www.webhostingtalk.com/showthread.php?t=1451220
Source: https://www.drupal.org/node/2407073
http://www.datacenterknowledge.com/archives/2013/08/05/how-did-the-failure-of-networkswitches-at-a-little-known-data-center-in-provo-utah-knock-four-major-services-and-millionsof-web-pages-offline/
12. EIGI Investor Presentation, EIGI, GDDY, WIX, WWWW filings
13. http://cloudtweaks.com/2014/07/endurance-new-way-measure-churn/
14. Q1 2014 earnings call
Page 60 of 61
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