Callouts & quotes from 1,047+ activist slides

"BR lists its number #1 driver of Non-GAAP operating income margin is from “Scale and Natural OpEx leverage from a SaaS business.” However, Spruce Point does not believe that BR is a high-quality SaaS business, if one at all, given it admits it drives no pricing power and does not report metrics consistent with other SaaS companies such as Net revenue dollar retention or remaining performance obligation, and has just $414m of deferred revenue in relation to $3.7 billion of recurring fee revenue."

"Generac's press release fails to address that it acquired the business from Caledonia Investments, a public investment vehicle listed in the UK. Caledonia acquired the business from its founders, who cashed out in October 2018. The business was sold for £162 million ($213.1 million). Generac's press release also failed to disclose it paid $420.7 million, or a 97% valuation increase, for a business that barely grew revenues and showed margin deterioration in the past few years."

"This begs three questions: 1) What is the value proposition of the Taexx system if homeowners don't even realize they have the system installed as a home buying benefit, 2) If conventional pest control sales were 90% of the business, and HomeTeam D2D marketers were successful, why does Rollins need Fox's marketers to push the use of Taexx, and 3) If HomeTeam's margins are well below corporate average, why is Rollins pushing investment in lower margin business?"

"Documents show Waterpik’s gross margins were 47.7% - 49.1% pre-acquisition, and the CFO said he expected 200 - 300bp gross margin expansion. Fast forward to early 2019, the CFO’s recent comment that gross margins are now “on par” with the company’s gross margin (pre-tariff), indicate that margins have contracted lower in this product line closer to 44% - and this even after price increases announced in Q3 2018!"

"Unlocking McGraw-Hill’s long-term conglomerate discount would result in ~$11 of value; Eliminating McGraw-Hill’s corporate cost structure would contribute ~$6 of value; Execution of McGraw-Hill’s authorized buyback would create $3.50 of immediate value; Bridging the remaining margin gap with McGraw-Hill’s peers (gap after collapsing the corporate structure) would create an additional ~$4 of value."

"As a producer of commodity products and ingredients, MGPI has to constantly innovate to maintain a competitive advantage against its larger peers that have substantially more resources and can easily out-spend it. MGPI holds very few patents, but as we highlighted earlier, its key patent rights to Fibersym® is set to expire in 2017 and could have a material adverse effect on margins."

"Freedom Holdings generates 85% of its revenues and 95% of their margin lending from FFIN. FFIN generates the majority of its revenue from Russia. FFIN is a controlled entity by Freedom's CEO, who owns 75% of Freedom's stock and therefore has an overwhelming incentive to use FFIN as an illegal piggy bank to funnel funds from Russia into FRHC to manipulate its earnings or stock."

"It appears that no matter the auditor in 2017 or 2022, there's a consistent warning that a critical audit matter relates to the carrying value of the assets. The current auditor is evaluating the historical EBITDA projections vs. actual. Based on our review, management was overly optimistic about access to milk for production, and EBITDA margins have materially declined."

"The Zio AT has long been promoted by iRhythm management as a strategic product because (1) it addressed the risk (marginally) of being a single product company, (2) it increased (marginally) the Company’s addressable market, (3) it represented a growth opportunity given iRhythm’s low MCT market share, and (4) it received about 4x the reimbursement of the Zio XT/Monitor."

"Part II: Twist’s “DNA chip” narrative - 10,000X higher throughput and lower cost - is fraudulent, covering up a manual, labor-intensive, and fatally-flawed manufacturing process crippled by errors, bottlenecks, and pitiful yields – thereby driving gross margins we estimate to be negative, not unlike Theranos which claimed to run blood tests on its “chip” but wasn’t."

"When AMR eliminated its Trading & Logistics segment in Q2 2019, it was merged with the CAPP Met segment. We investigated to see how AMR would restate its historical financials by combining these two segments. In the 2019 Annual Report, we see that AMR restated the segment which resulted in the segment's coal margins magically increasing by 4.7% without explanation."

"A 5.8 point reduction is well within what common sense indicates is the margin of error in a crude survey like ESS – the reduction is equal to a patient self-reporting that they went from a “high chance” of “dozing” to a “slight chance” in 3 of 8 settings, with still a high chance in each of the other 5 settings like “sitting and reading” or “watching TV.”"

"As shown in our presentation, the upside from a more focused, streamlined PepsiCo is substantial – greater strategic focus, faster organic growth and meaningful profit-margin expansion would warrant a valuation in line with peers, the market and PepsiCo’s own history, representing a path to more than 50% stock-price increase from today’s depressed levels."

"When we remove AMR's three least common cost of coal adjustments, and include the cost of operating Dominion Terminal Associates ("DTA") - its coal export facility necessary and critical for delivering the coal to its export customers which we evaluate in the coming slides - we find that its cost of coal margin per ton is materially lower than portrayed."

"We believe that if Quectel were added to the Covered List that it would not only be a headwind to government (and perhaps all sector) sales, but it would also necessitate a widespread replacement of existing hardware, which would be accompanied by a requisite write-off of capitalized connected device costs, thus further compressing Samsara gross margins."

"Given the issues we have highlighted regarding Procept's revenue recognition, gross margin accounting, and DSOs, we are concerned that Procept has never had a lead audit partner who has audited a publicly-listed company with more than $150 million of revenue, and its current audit partner has never had a publicly-listed client with any revenue at all."

"Management touted Antuit as a "high-margin SaaS business" with revenue growth that doubled over a 3-year period. However, after obtaining Antuit's financial statements, we observe that revenue growth flat-lined in the year leading up to the acquisition, and its gross margin at 46.7% is wildly below the 70%-80% margins of typical SaaS companies."

"When I joined the business I think we had a 15% gross margin, but this just wasn't sustainable at that level of profit. And so the last round of label negotiations was about elevating the margins to a point where, I think, the business would self-sustain...So what was good for Spotify was good for the labels and that's why the margin increased."

"As Dexcom's remaining market opportunity is rapidly exhausted at its current price point, long-term Dexcom bulls are effectively betting that the Company will be able to overcome its extensive failures in bringing a down-market CGM to market - in addition to its monumental scale disadvantage - to produce a low-cost CGM at a reasonable margin."

"BR claims that management is compensated on segment profit, allowing it to elect to record certain segment operating and non-operating expense items in “Other”. However, this does not appear to be true as recent Proxy Statements do not reward management at all based on “segment profit”. As a result, segment margins are potentially inflated."

"We believe Nuvei's talk about having to “accelerated investments” that are being pulled forward from 2022 into 2021 is a negative development that dovetails with our research findings that many of its technology processes are dated, and that its easiest high risk, higher margin business that benefited results recently won't be repeated."

"With the FOIA data collected from the Florida DOT indicating a -22% decline in contact awards, and ROAD's commentary that new backlog over the period that Florida revenues ramped supported higher margins, we estimate the impact to the Company's EBITDA in FY25 to be approximately $10 - $15 million or approximately 3% - 5% of EBITDA."

"Heska's gross margins generally fall between those of high value-added diagnostic equipment companies and pure animal health distributors. Heska's EBITDA margins fall below those of nearly all possible comparable companies. We believe this is indicative of Heska's lack of proprietary technology and poor competitive position."

"Spruce Point believes there is little margin for error in food manufacturing, since the slightest mistake can cause contamination, illness, and even death. The repercussions could be long-lasting and tarnish the manufacturer's brand. We've noticed a recent uptick in product recall notices by Saputo, particularly in Canada."

"Coca-Cola is an iconic world-wide American brand that also depends on its “trade secret” formula and brand equity. To put WD-40’s extreme valuation in perspective, we compare the two. Not only does Coca-Cola have broader diversification, but also significantly higher margins and growth potential despite being 88x larger."

"We believe the market wildly overvalues the entirety of BR by not considering that 40% of its business is tied to low/no margin distribution revenue and services such as credit statement printing. Its gross margins and capex spending (due to aggressive capitalization of costs) are vastly below financial technology peers."

"REZI has been talking up its growing relationship with home builders for the First Alert smoke detector business. However, based on our research interview of a former executive familiar with the business, it is a narrower product opportunity which depends on larger volumes and carries less margin than the retail channel."

"The fact that IONQ is using funds raised from investors hoping to get a first bite of the apple on a highly innovative, high-margin, secular growth story in quantum computing and using it to buy a highly cyclical low-margin business in a mature industry like semiconductor fabrication is an inconvenient fact to overlook."

"In 2016, Deckers combined its e-commerce and retail segments into a single segment called Direct-to-Consumer (DTC). This combination in reporting makes it very difficult to isolate retail results. Allowing for a modest decline in e-commerce margins would still imply a single digit margin for retail in FY2016 and FY2017"

"Heska’s market cap grew 218% from the close of the scil transaction through the end of 2020. However, despite scil adding a relatively large chunk of negative-growth, ~30% gross margin revenue and Heska consensus 2021E EBITDA estimates not changing, the implied value of scil and CVM grew 282% over just eight months."

"Mercury is now spinning excuses for gross margin contraction as related to acquisitions...while not quantifying any added costs related to the loss of its small business designation, DFARS compliance requirements, or potential recalls and/or new product costs related to replacing Supermicro as a technology partner."

"LSPD has cobbled together a motley collection of assets at increasingly expensive valuations. LSPD does not disclose target EBITDA margins, and generally hasn't disclosed historical growth rates. We believe a majority of the assets lose money and had already peaked in their growth cycle prior to LSPD's acquisition."

"Revealing language buried in Twist’s SEC filings confirms our belief that Twist is misclassifying manufacturing expenses as R&D - the kind of language that lawyers add in an attempt to cover-your-ass, which nonetheless conflicts with the CEO and CFO’s strong, unambiguous statements using the phrase “gross margin.”"

"Optically, PGNY would like investors to believe that it is achieving significant operating leverage. In reality, the largest contributor to its operating leverage story has been its aggressive use of stock-based compensation (SBC). Netting out the benefit of SBC uncovers that PGNY’s EBITDA margins are in decline."

"Not only has Heska had challenges growing organically, but the Company's profit margins have declined materially since peaking in 2017. Both absolute margins and margin expansion since 2019 trail IDEXX Labs by a wide margin. Investors should be concerned that margins are not expected to improve for several years."

"Smart2Pay’s margin increase is unlikely to be explained by its ability to rationalize its operational footprint. Using the Wayback Machine, we see that even through May 2021, it was still operating out of five global locations. The website has recently been updated and now omits operations in the U.S. and Spain."

"Spruce Point believes that Dollarama is significantly overvalued based on its undifferentiated and increasingly uncompetitive business model, inflated and unsustainable margins which are posed to decline, and its limited growth prospects which will restrain its ability to hit its long-term earnings expectations."

"In addition to receiving up to c.US$3.7 in potential value per share in the demerged US petroleum business(1), Australian tax-resident shareholders could receive additional value, depending on their marginal tax rate, of up to c.22%(2) per core BHP share that they tender into the discounted off-market buybacks."

"We estimate gross profit per system will continue to drop as the solar investment tax credit steps down over the next 2 years. Lower margins and a reduced benefit for tax equity investors look to pressure an industry which already has tight margins and relies on tax equity to support their negative cash flows."

"A 15% decrease in the price of product requires a substantial volume increase - even for high margin businesses such as Box - to contribute the same gross margin dollars to the company. Compare this to the volume needed for a price increase - decreasing price hurts a company worse than increasing price helps."

"There's Chinese companies making this stuff really cheap all day long. And that's a threat because whenever there's a market like the rugged tablet market is a good example and even the video conferencing market that I'm in, those are very high-margin businesses, like 40%, 50%, 60%, even sometimes 70% margin."

"Spruce Point does not believe that BR is justified in calling itself a SaaS company with margins that scale. In fact, its financials look nothing like a high quality SaaS company. When we benchmark BR's gross margins and deferred revenue relative to its recurring revenue, we find it to be wildly below peers."

"The senior employee noted that inventory mis-valuation in the semiconductor equipment industry “is a common thing, unfortunately, that I’ve seen across multiple companies in the space...to manipulate earnings: “they defer out...that impairment...because they don’t want to record a hit on their gross margin.”"

"Spruce Point believes Heska Corp (Nasdaq: HSKA or “the Company”), a $2.8 billion market cap animal health equipment distributor, has been struggling to grow organically and has been using low-quality acquisitions as a means to deflect market share loss and margin erosion and to generate investor enthusiasm."

"At DuPont’s 2013 Investor Day, management was not transparent about reducing margin targets, suggesting that reduced margin targets were correlated to the accounting change. Were DuPont’s independent directors aware of this? Trian’s nominees will seek to ensure that the board holds management accountable."

"At DuPont's 2013 Investor Day, management was not transparent about reducing margin targets, suggesting that reduced margin targets were correlated to the accounting change. Were DuPont's independent directors aware of this? Trian's nominees will seek to ensure that the board holds management accountable."

"At DuPont’s 2013 Investor Day, management was not transparent about reducing margin targets, suggesting that reduced margin targets were correlated to the accounting change. Were DuPont’s independent directors aware of this? Trian’s nominees will seek to ensure that the board holds management accountable."

"While clear aligner producers can ship anywhere, their increasingly broad distribution across the US highlights the fact that, collectively, individual labs are quickly growing capacity and achieving national scale. Even individual orthodontists with in-house printers are offering capacity at the margin."

"Spruce Point believes that Rollins' gross margins reporting is also opaque. Recently in 2022, the Company provided no qualitative discussion at all about factors affecting its performance. While we applaud recent efforts for more transparency, we believe gross margin discussion could be enhanced further."

"At an average sensor and transmitter revenue per patient per day of $2.00 – close to the Libre’s current level of $2.04 – Abbott would realize a gross margin of 59% on the Libre 2 (vs. our estimate of 60% today), while Dexcom would realize a gross margin of -7% on the G6 (vs. our estimate of 70% today)."

"With no gross margin volatility, EBITDA margins consistently expand. USCR has offered an identical boilerplate explanation that it is related to volume, pricing, and efficiencies, up until recently. We will explore how aggressive use of capital leases likely explain some of the EBITDA margin expansion."

"Lasertec is an extreme, textbook accounting fraud that checks off every box: claiming to have the highest margins in the industry; but alarmingly little cash flow and the lowest cash conversion among its peers; accompanied by the highest inventory level of any semicap equipment supplier in the world."

"Spruce Point believes BR has also experienced operating expense bloat in the past few years that will amplify the downside risks. We observe that its SG&A margin has creeped back to levels not seen since the 2014-2016 period. This is even despite efforts to rationalize its real estate footprint."

"Lasertec's reported margin is significantly higher than every one of the five largest semiconductor equipment companies in the world by revenue – even eclipsing ASML's, a $350 billion market cap giant which invented EUV lithography systems and has a real monopoly unlike Lasertec's fictional one."

"Employer Services' overall margin increased from 30.4% to 30.6% for fiscal 2017, as compared to fiscal 2016. This 20 basis point increase was driven by operational efficiencies partially offset by 30 basis points of pressure from dual operation costs related to our Service Alignment Initiative."

"Part of the reason we struggle to underwrite Box's story of accelerating growth and expanding margins is the fact that Box has discussed initiatives to accelerate growth in the past, but not delivered on it, and has had several different target models, consistently needing to walk them back..."

"Assuming 5-year useful lives for the intangibles related to customer lists from the Credit Karma and Mailchimp acquisitions results in estimated 21% to 26% reductions in GAAP net income in each of the past three fiscal years and a near halving of GAAP net margins since FY 2020 from 24% to 14%."

"Arconic originally projected that Firth Rixson would do $2 billion of revenue in 2019. At the same margins as originally projected for 2016 (i.e., conservatively assuming no incremental volume leverage), Firth Rixson will produce approximately 50% less EBITDA than originally targeted for 2019"

"In order to conceal the spiraling losses from its manufacturing meltdown and pricing scheme - and to prevent its Ponzi-like nature from becoming obvious - we believe that Twist has resorted to Worldcom-esque accounting fraud, fabricating a 45% gross margin that it promotes will rise to 60%."

"When we adjust Samsara's Adj. EBITDA calculation for incremental device cost and sales commission amortization, we estimate it to be overstated by $134 million in the past two fiscal years and that FY2023 adjusted EBITDA margin stands at -22% as opposed to the -10% reported by the Company."