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Brian Finn from Findell Capital is back to dissect $CUTR and $OPRT (Podcast #167)
Brian Finn, CIO of Findell Capital Management, makes the fastest repeat podcast visit in show history, as we provide updates on after earnings from $CUTR (recently discussed with Vince Martin) and $OPRT (idea discussed on Brian's first appearance).
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Transcript begins below
Andrew Walker: All right. Hello and welcome to Yet Another Value podcast. I'm your host, Andrew Walker. If you like this podcast, would mean a lot if you could follow, rate, subscribe, review at wherever you're watching or listening to it. With me today, I'm happy to have back on for the second time, Brian Finn. Brian, how's it going?
Brian Finn: Good, Andrew. How are you?
Andrew: Doing good. Man, you were just on last month. I think you're setting a record for second guest appearance, but really excited to have you. I know we've got... well, let's do disclaimer first. Disclaimer, remind everyone, nothing on this podcast is investing advice. That's always true, particularly true today we're going to talk about two smaller, probably messier than one of them is getting less messy by the second situation. So everybody should just remember, please do your own work, nothing's investing advice, consult a financial advisor, all that. Brian, you're coming back on because I think for two reasons we wanted to follow up on OPRT, which was the first podcast you did, just announced earnings, announced a lot of cost cutting, following a lot of the playbook that you laid out in your letter and the podcast we did. Stocks performed really nicely and I think you still think there's more to go.
So we'll talk about that on the back half of the podcast. But the main reason I think we wanted to come on and do this quick follow-up was Cutera, the ticker there is C-U-T-R. I just did a podcast on them last month. You and I have been exchanging notes on them. We think it's a really interesting situation. They just announced earnings, a settlement with two of the largest shareholders, a new board. I think the earnings call was absolutely wild. And you and I are talking, we're like, "Hey, let's just get another podcast out there. Because this is one of the craziest situations I'm aware of and we just want to talk about it. So I'll pause there. What should people be knowing about Cutera now and since the last podcast?
Brian: Yeah, well maybe you guys covered a lot over the last podcast. I don't want to repeat too much. You guys went over a lot as far as the products that Cutera has and some of the board drama. But I'll maybe start at a high level of how we started looking at this. We were interested in Cutera because of AviClear and they had done a lot of calls with dermatologists and had gotten great feedback on that. But one of the things that we heard and calls with former employees and people who have been around the business was that this was a company that had a very dysfunctional board. And it was so dysfunctional that it was distracting to senior-level management and employees. So that was a risk here. Now, what that was due to was unclear. Some of them attributed it to the presence of Dan Plants, who was the activist shareholder, who was the executive chairman. Others attributed to other board members. The line that we heard on Plants was that he was excessively interfering with things that he would've to sign off on press releases and almost acted like he was an executive within the firm. And as we subsequently found out, he didn't...
Andrew: Yeah. Obviously, the last podcast we talked about him wanting to be CEO. I completely agree. And he even said in his letter, hey, I was spending 20 plus hours a week working on this company, like going to field visits, going to... it's approaching a full-time job at that point. I'm sure you and I have worked more than 20 hours a week, but it's starting to... you're going from part-time to salaried once you're over 20 hours per week.
Brian: Exactly. But to Plant's credit, he did own a lot of shares and was highly incentivized to see this share price work here. So in that sense, he was aligned with shareholders. On the other side of this you had the entrenched slate. You had two guys who'd been more legacy board members, and then the three new board members who'd come on board. Within the last two years they were the three women Sheila, Julianne, and Woodman. The issue with that slate was that none of them really owned shares. And while they did, as we had conversations with them, they made a good point that, "Hey, look, Dan's a bad guy." Or at least this was their point. "Hey, Dan's a bad guy and we can't let this guy who owns 6% of the company take the whole thing over. That's not in the fiduciary interest of shareholders." All right. Point taken. But the problem was, they didn't really own much in the way of shares. So it was hard to see where their incentives were. They hired Kyla Fig from Sidley, who really is regarded as the best activist defense lawyer in the world. And he's very aggressive, but he's is very good at what he does and that I think would install fear in the heart of folks who are on the opposite side of him. So that they hired very good and a very aggressive lawyer.
Andrew: One thing I heard on the heels of the podcast, two people reached out and they were like, oh, I saw this situation. I thought about getting involved, but when they saw the lawyer who was hired, they were like, no, it's really just not worth the headache at that point. So obviously, extremely well respected on the activist defense side.
Brian: Yeah, I would not want to get on this guy's bad side put it that way. Having heard stories. So, they hired in a great lawyer, but they were in a weak position here in many respects. They didn't own any shares against them. You had obviously Plants and Maori, the former executive chairman and the former CEO, you had the different employees that had written in support of Maori and Plants. And then you had the 13D fathers, PiVida and RTW who'd written basically not totally neutral, but saying, "Hey look, you guys, you need to keep Maori, you need to not fire Plants. Let's get to a resolution here. Let's have the special meeting." In thinking about these different cast of characters, with Plants obviously thinking about trying to come on as CEO and having whatever incentives he has, these board members wanting to perhaps stay on as board members because of the prestige and the money that comes with that, but not owning any shares, really the only side here that it made sense to side with as a shareholder were the other large shareholders in RTW and PiVida.
These were at least two big hedge funds that know the space and care about shareholder returns and weren't looking, weren't angling to run the company. They just wanted to make money. So, in seeing them file their 13Ds, our hope was that, you get to some resolution with them that the company or the entrench board would see the light and realize that their best shot of of winning this battle was to align with those shareholders and we finally got that. The problem is that it came late Tuesday night after the earnings. So, the messaging on this was all terrible.
Andrew: You say after the earnings, I think it was actually during the earnings call it came...
Brian: Yeah. Maybe like a couple of minutes before the earnings call ended. So the whole thing was super bizarre. Why couldn't they have announced this at four o'clock on earnings or the morning of, the whole conversation would've been about this new slate and talking about what an amazing new slate this is and how this really does go a long way towards solving the issues here. I can go through each of them, but you basically to think about it in basketball analogy terms, this new slate is bringing on LeBron James and Joel Embiid and Luka Doncic onto what has Heather too been like a dysfunctional college basketball team?
Andrew: Right. Luka didn't even make the playoffs this year. You got to give you careful throwing around Luka Docic's name. He's not even making the playoffs.
Brian: Hold on a second. I just got to... I think it's important to go through who each of these guys are. But rather than having that be what gets discussed on this call instead, we have what was a really bad earnings call, bad on a number of levels from just the timid and tentative tone of the interim CEO Sheila Hopkins to the lack of guidance.
Andrew: It really strange because as you said, timid can... there was one point I was wondering what the heck was going on. Because how is she doing this? The earnings call while she... again, the press release with the settlement with the two major shareholders came out like halfway to actually more like 80% through the earnings call. And at one point somebody said, hey, they pulled guidance and they said we can't pull guidance. And they said, hey, we really depend on guidance or at least product placements to think about this company. How are you guys doing? And almost direct quote is, "Hey, I'm not familiar enough with this company to provide guidance yet." And the CFO left alongside earnings, one of the many members who signed something supporting the prior management. It's like the CFO left, the interim CO from the board takes over, gives this really type of call, and says, "I'm not familiar enough with the business." I almost thought she was trying to light the company on fire during this call until... it was just very strange. Sorry to ramble, but that's been sticking in my brain for 48 hours and I had to say it or else I might have gone crazy
Brian: Yeah. And I think if they hadn't announced the slate, the stock would've opened way lower than where it actually opened. If they had announced the slate prior to the call and had the call be about, "Hey look, this is where we're headed towards, we've got this new board slate coming on and we're going to bring on a real CEO, not this whole interim CEO situation." Sheila's just not the right person, not qualified.
Andrew: So you mentioned the LeBron James and Joel Embiid coming onto the board and I know there's one in particular whose background you'd want to describe, but one thing I thought was very interesting on the call was she said, "Hey, none of the current board members... I promise to everyone, none of the current board members are going to become the CEO of this company." And I thought that was really interesting for two reasons. A, there'd been a lot of accusations that the current board members were trying to become the CEO of the company, but B, the use of current was very big in there because right after she says that the settlement with the new Joel Embiid and LeBron James of the board come on. And I thought that was interesting use current because I said, oh, these guys do have good backgrounds. Maybe one of them is a high-priority candidate, not just to become a board member, but to become the CEO. Probably not guaranteed because... obviously not guaranteed because they're still doing a search. They could have just named them CEO to begin with if they wanted to, but it seems like that use of the current board members there instead of just board members, I thought that was very targeted.
Brian: Yeah. And this is all speculation. I'm sure we're still miles away from actually figuring out who the right CEO of this firm is. But the only thing that did... another thing that did catch my eye was the fact that they named Taylor Harris as a special advisor consultant. William Blair also came out with a piece after earnings and after this press release noting that Taylor might be the one to be the next CEO. And if you just do a quick switch on that guy's background, he's someone who he's been a CFO of a number of three different businesses, each of which has sold for multiples of when he started to when the business was sold.
So he did it with Myocardial, which was a clinical-stage biotech company, developing treatments for cardiovascular diseases that was sold for $13.1 billion to Bristol Myers. He did it with Zalte, which is the best comp here, which is an aesthetic device company that did the whole cool sculpting that reduction device. He sold that for $2.5 billion to Allergan, which was roughly six-time sales. And then he did it with Thoratec which is another medical device company. And he sold that to St. Jude for $3.4 billion. I can't, I wish I could pull up the chart prices here, but each of these, these were all multi backers for the investors that came in when Taylor came on. So I think he'd be an amazing CEO candidate and hope someone like him or someone of his caliber gets brought on.
But I think what makes Cutera so interesting and why I think there's all this agitiles about gaining control over it is because they really do have a potentially game-changing product here in AviClear. And I think that's why there is this whole, as you referred to it, Game of Thrones power struggle happening to get control. Luckily, I think the guys that have the best our interests at heart the most in these two different hedge funds are, it looks like now leading the... directing the ship here and bringing on the right set of people who can have the right set of experiences to do what needs to be done to take advantage of the opportunity that AviClear presents.
Andrew: That all makes sense. I want to talk valuation and I know one of the things... and one of the things I regret that we didn't really dive into in the first podcast is, I think AviClear... I do think we talked about how big AviClear could be, but if it hits its potential, this has like blockbuster grand slam opportunity. And I know some people who think, hey, this is going to be well not, but I do think this has a lot of... but there is one thing I want to talk out before we get there. The company is burning a lot of cash. And now they have a lot of cash on their balance sheet as well, but they're burning a lot of cash. And I think there has been some debate over, and there were two questions on the earnings call on this and there was some analyst chatter after.
And if something gets asked twice on an earnings call, it's generally because people are worried about that and it's, "Hey, you're burning a lot of cash. Are you guys going to need to raise more capital to fund this business?" Because it's pretty simple. The stock has been roughly cut in half by all this Game of Thrones drama. If you're burning cash and you need to say raise capital now, it's probably going to be pretty expensive capital. It's probably going to be pretty diluted to shareholders. I guess I'll pause there. What do you think about the company's cash burn and financing needs going forward?
Brian: I think the analysts that, I think it was Piper that came out saying they might need to raise cash, I think they're completely wrong. They've got plenty of cash. The cash burn is going down each quarter. So I really view it as a complete non-issue. I know it's causing agitiles among investors right now, but they have a couple hundred million dollars in cash here. I think there's things they can do to maybe clear out some of the debt overhangs, but that was one thing I heard. I didn't speak to the management team, but I spoke to an investor who did, who said that they did mention that the cash burn situation is getting a lot better and should subsequently get better each quarter. So, again, I think this is what happens when you have an interim CEO who doesn't really know the street, aboard. There's just all this stuff agitiles that's being dealt with at the moment where that the communications about the basic things that are happening in the business are not happening the way they would normally happen.
Andrew: It was just...
Brian: It is one of the reasons why they need to bring back Dave Mauri, the former CEO to at least provide some consulting arrangement and help improve their ability to do things like guide and to communicate to the street. Because I think the street's totally wrong about the need to raise cash here.
Andrew: It was just surprising to me because as you... I think they've got about $270 million in cash on the balance sheet at the end of last quarter. They burned $37-ish million in cash from operations during the quarter. A little bit more if you include CapEx, but they said on the call like, "Hey, this is the peak burn period and it makes sense, right?" Like you're approaching I think it's a thousand Abbey clearers have been slotted. You placed a thousand products in the past year, of course, you're going to burn cash. But now the cashes start flowing and if you're burning cash even faster, it's because you're placing these products at an exponentially higher rate, which you would hope would be good for the business long term and the stock would rise a lot higher. But if not, it does seem... it just makes sense that the cash burn should start coming down. I was just very surprised by the focus on that with 10 quarters worth or eight quarters worth of cash burn at the peak in the bank account. I was just very surprised by that focus.
Brian: Yeah. I think that's the communication that will hopefully get cleared up and clarified here as they bring on a new management team, back to Maori.
Andrew: You mentioned Maori coming back, the former CEO and former chairman. The one-hanging thread from this. So we've got the settlement with the two larger shareholders, we've got the new board, they've got all stars coming back. We've got that in place at this point. It doesn't seem like... given the settlement with the two larger shareholders and that they agreed to vote for the remaining board members, it doesn't seem like you're going to have like mass exodus of the board or change of control. The last hanging thread from the Game of Throne-style corporate is what happens with the former CEO and the former chairman. It sounds like you think the former CEO should be brought back in an advisory role in some capacity. I don't know because I think the company might push back, hey, the Q1 results which she was in there for most of were, I don't want to say bad because AviClear did well, but it's clear that the sales force was still having issues. There are some other issues like they might say, hey, look, it was time for a change. Why do we need to bring him back? We've got this all-star new board, let's just move forward, not look in the past.
Brian: Well, no, look, I think it's right that they move on from Dave Mallory as a long-term solution to running this company. And so there's no disagreement there and they'll find someone great with a lot of experience like a Taylor Harris or whoever. But the reality is, is that you need a stop-gap measure that you need someone in there who knows the employees who can keep the employees there, who understands the business even if they're not going to be the person that's going to be running it for the next four or five years. They talked about the fact that they're still negotiating with Maori and Plants. I have no idea how things end up with Plants, but I hope that he sees that this new compromise slate is a decent path forward and he doesn't look to torch the company and continue to fight.
But I don't know to what degree he could even really do that at this point, but I hope that they do get to a resolution with Maori. He does come back in some capacity and everyone just sucks up their egos and realizes that we got to right the ship here because there's a huge opportunity if we do so, and this company gets the right leadership to pursue AviClear the way it could be pursued. AviClear represents a step change in the treatment of acne. This isn't a treatment, this is a cure for acne. And it's cure that's much different than something like Accutane, which has all sorts of side effects and issues and reasons why patients really shouldn't take it. This is a treatment that I think once people... I could see AviClear being something that gets on TikTok where you have teenagers showing how they took three treatments of AviClear and how they went from having acne to never having acne again. And this becoming a viral marketing phenomenon and dermatologists and med spas having to really need to get these lasers in place so they can do these treatments.
I think that's what makes this so interesting and compelling is that AviClear is a step change in the treatment paradigm here. It's not a treatment, it's a cure. And all the feedback we've gotten from dermatologists about the efficacy of this has all been super, super positive. Now whether people will pay for it, how it gets rolled out, how it gets commercialized, those are all things that the new management team will have to figure out. But they have an amazing product here. It's better than the other product AviClear which is much more expensive and is permanently more expensive because of some patents that they had to acquire in order to make the product. So AviClear should be the clear winner from a cost perspective, from efficacy perspective, and also from a customer experience perspective, it's just less painful than the alternative.
Andrew: No, I think that's a great segue into... look, they've got AviClear and one thing that I think investors struggle with is AviClear released a year ago, right? They're just really getting into. It did less than $5 million in revenue in 2022. It is rapidly rolling out the products. It has the chance to be a winner in the acne space. But people I do think struggle a little bit with, hey, there's this super messy situation going on. The company is burning a lot of cash. How do we look at AviClear and assign... specifically AviClear, I guess the core business will, but how do we look at that and assign a value to it?
Brian: Yeah, I guess two things. Let's just take the core business, let's say that does about $250 million in revenue. Those types of businesses might at the low end get like a two X revenue multiple which would put you at evaluation that's below where we're currently trading right now.
Andrew: Yeah, I think that's right.
Brian: So, we're trading with no AviClear upside. And I think that's because of all this board uncertainty, all this management team uncertainty, do people stay on board and continue to sell these lasers? Do they leave and defect to other companies, obviously salespeople in this industry, they're just going to go work for whoever gives them the best compensation. But to think about AviClear and why it's really exciting. The way we modeled it out, you've got about, call it 8,000 med spas and 8,000 derm clinics. So that gets you to 16,000 potential places where you could place a device. They're at 900, I think.
Andrew: I had a thousand in my head, but it's approaching a 1,000, yeah.
Brian: Yeah. So call it 1,000 right now. And they probably get to like 1500 by the end of this year. Maybe they're just adding 1,000 of these a year. You can see a couple of years out, say by 2025, 2026, they're in, call it a quarter of the effective market here. They get to like 4,500 installations of this. If you have them doing, call it 1.5 sessions per device per week now, how this thing gets utilized, how it gets penetrated, how it gets utilized, will depend a lot on customer feedback and how they market it and how this new management team goes about bringing this thing to market. So there's a lot of barriers.
Andrew: And if there are people on TikTok talking about how the lasers have cleared their skin up and everything like that.
Brian: Exactly. But I think there's a conservative case here where you get to a quarter of the effective penetration, you assume like a relatively low per session, per device, per week rate. And you're already at, call it $250,000 in revenue and this is a very high EBIT margin product. This is like a 50% EBIT margin product at scale. So that's looking at $125 million in EBIT. I think there's upside scenarios there. I think this could easily be a $200 million or higher EBIT business if it really catches fire. So I think you're looking at between $100 to $200 million in EBIT for this business. Apply whatever multiple you want to that, but that could easily get you to a stock price. That's five to six.
Andrew: Let's talk multiple real quick. This is like recurring MedTech-ish type revenue. If it was doing a hun... let's just take the low end to make the math very easy. $100 in EBIT at full-scale run rate. What type of multiple do you think peers would suggest this would trade out?
Brian: That's a good question. I had the math like 15.
Andrew: Yeah, I was thinking 12 to 15 in my head. MedTech, acne's not going anywhere until they cure your acne, but then there's a new person coming who's got it. I was thinking 12 to 15 in my head, if they hit $100 million, so that would be, let's take 15, that'd be $1.5 billion. The enterprise value here is $500 million. The converts would start kicking in at some point. But you'd be talking about at four to five X at minimum on the current stock price. And that's without giving any value for the core business. That, as you mentioned, does have value that covers a lot of enterprise value today.
Brian: Correct. Yeah. And what I'd say about this treatment is that right now we're thinking about this just in terms of how many teenagers will want to go do this, but if this really represents a cure for acne, there are lots of adults that still struggle with acne or get flareups occasionally. $3,000, never have to worry about that again. I think it's worth, worth it. They might not be in a market for Accutane or for other types of acne treatments, but if it's like, hey, you come three times and you never have to think about this problem again, I think the market's a lot bigger than people think. People that aren't in the acne market today, because they're not teenagers that are constantly dealing with acne, but people that have had acne occasionally or still have remnants of it, I think will get treated with this. Because again, it cures you versus treating you.
Andrew: That makes sense.
Brian: So that's why I think everyone has dollar signs in their eyes when they look at Cutera and they look at the potential upside here that could be realized with the right approach to commercialization and go-to-market strategy. So that's why there's been all this drama. All this drama has obviously caused the stock price to get killed. But therein lies the opportunity. You've got at the moment, it looks like peak pessimism. There's still no resolution on the management side. Me talking about Taylor Harris, with's speculation, we don't know who's going to be the UCO. Sheila did not inspire any confidence in talking to investors. She's not, and she's a placeholder too.
We still have the concern about people leaving the company and do they get to a solution with Dave Maori and does that help stem whatever folks are leaving? People might still have concern about the cash burn, but I think again, those have been over-exaggerated. The sell-side all just gave up on the stock entirely. We had a total capitulation after this earnings call, so to me it looks like peak pessimism. But now we're starting to see the right things in place. We've got this board that comes from two well-respected hedge funds in the med-tech world who have our interests as shareholders at heart. We'll hopefully have a management succession plan here, put in place shortly. I think moving forward, once we get past all this drama, we'll have a much clearer sense as to what the commercial potential of AviClear is. And that I think will we'll start to bring people back into the stock who've been burned.
Andrew: I just want to mention one more thing. I guess a couple of more things, look, it has been rocky, but I do think the fact you just had more than half the board is now going to be replaced and appointed by the two largest shareholders who are, I don't want to say smart money, but they are very large, they're very experienced. They just put more than half the board on, if I remember the number of people they did correctly. Whether you think the opportunity works out or not, this should be a board that is pretty focused on driving and creating value. Could be wrong. Maybe tomorrow we come out with a pill that solves acne and one swallow with no side effects or something. That is a risk, there's risk here, but you should have a board that's pretty focused on the business.
And I think it's pretty asymmetric once you've got all this fight. I think one of the reasons people are fighting over this is because they do see a lot of value and upside here. And this is going to be about the best line board you can think of after this changes. As you said, the LeBron James and Joel Embiid. Just two more quick things on the conference call that I had to point out. I will never get over when she said, hey, I can't provide guidance because I'm not that familiar with the business. It's like, okay, great. Good to hear the board member who's interim CEO, been here for a month, isn't familiar enough with the business to provide guidance. Awesome. Number two, I did love when... to your point, and I want to switch this to a risk factor in a second, but people were asking, "Hey you had a bunch of executives sign a letter saying keep the old CEO in charge, the CFO left just before the call. How are you guys dealing with turnover?"
And I loved when the interim CEO said, "I'm looking around the room and everyone in the room is nodding at me and saying, yes, we've got your back. Like this is great." It's like, yeah, you're the interim CEO and you're looking at people with direct eye contact. Of course, they're going to be like, good job, girl. Come on, what's going on? But I do want to ask, it's been less than two months since all this drama really started. Do you think that with the new board in place, hopefully, a new CEO soon, the turnover from this can be minimized because we are in launch phase. If you botch a launch that can have dramatic implications for the business longer term, the sales force can get motivated, retain all that stuff. Have you seen that or you think it's okay?
Brian: Yeah. From what I heard, we had an analyst go to the... they had a big conference out in Vegas like a big dermatology conference. And we talked to different folks on these who sell these products. They were all like, look, none of this matters to us. Like we're out here trying to place products, we don't really care what's happening at the board level. At least that was the color from those guys. I don't know to what degree that's true. I've heard some of our other calls from people that have left, but these were more senior people. They thought that the board drama was just generally distracting. But I imagine if you're a guy and you're out there selling lasers, you care about making sales and getting commissions and they put in a package to, to retain a lot of these folks. That cost them about $13 million. So I think generally the sales guys, the guys that are driving the ship forward every day. They're probably not affected by any of this, but you're right that I don't think that earnings call did not give anyone confidence in Sheila Hopkins's leadership.
It was just not. She didn't seem like she had a firm grip on the relevant details here from her posture and her tone and the content of what she was saying. But the reality is like, look, that would be a major problem if she was the CEO going forward, but she's not. She's just the placeholder and she'll... sooner they get her out and bring on a real hitter, this company will be in a much different position.
Andrew: On the salesforce. I guess my worry was... so Q4 last year, they said, hey... the old CEO says, "Hey, we had some problems. We were probably encouraging AviClear a little bit too much with our Salesforce and neglecting the core business. We've made some incentive changes and we think we've got that buttoned up going forward." Then Q1 this year, Sheila comes on and says, "Hey, the incentive changes we made at the end of last year weren't enough. We had to really go back and redo all the incentives and we think we've got in place." She didn't mention a retention program, but we think we've got it in place now. It's going to be okay going forward. And I look at that and say, ooh, like normally, I do think the corporate boardroom drama gets overstated in terms of the effects it has on the underlings.
It could have an effect on the people you're selling to who might worry the company's not stable, but here you're selling to doctors and you're selling... once they have the product, they don't care who has it. So I have trouble believing that, but I just worried two different incentive changes inside of four months for the Salesforce plus corporate turnover. It does seem, as you said, these Salesforce are very in demand, always good selling people. It does seem like, oh, if there was ever a time to see a lot of turnover and stuff, this would be the time. But as you said, we got the retention package in place, it doesn't seem like they've seen that yet. So hopefully, they get the new killer CEO in here in the very near future and then we can just be focused on, hey, AviClear they're placing a lot of devices, we're just starting to see the revenue and cash flow coming. By the end of this year, cashburn should be down a ton. Yeah. Anything else you want to talk about Cutera?
Brian: No, look, I think the sooner they get someone like Maori back in as a consultant, the sooner they get a real heavy hitter CEO. Then I think at least from a stock perspective, it should start to work. And then the longer term story here, there's massive upside if they get out to clear to really work. So I think right now it's like the near term, the medium term, and the long term I think all are look good. I think the near term, just given where the stock's trading, it's just already... it was at a super depressed level. And then this board botched this whole announcement, so it went to an even lower level, but it's like, we know the ship's finally turning here. And so I think in the short term, the stock should rerate and I think in the medium term it should go even higher as they get these other pieces in place. And then the long term, if this really works with AviClear, then you've got a multi-bagger.
Andrew: Yeah. No, I'm with you. The interesting things to me is like at this point when we did the last podcast with Vince, all options were on the table. And now I do feel like we've narrowed it down to, hey, with the settlement, with some really good board members on here, I don't think the company is going to sell in semi-distress or internally like it. I do think we're at the point where, hey, we're going to hire a full-time CEO and we're going to run this business for two to three years and see if we're right on AviClear and how big it can be. The math on the stock is almost undeniable at these levels, right? And if we're wrong or wrong, but it does seem like a lot of the more tail things. Now, there was the possibility that this board just tried to sell the company for a premium. And it might look silly in hindsight, but I think we know what we're getting at this point and you can just safely bet on AviClear. It doesn't mean there won't be bumps along the road, but the math here seems pretty compelling to me.
Brian: Yeah. And the reality is the base business provides a margin of safety and they also have lots of cash. They're not going to run out of cash anytime soon. The cash burns going down. So I don't know, the business is going to do fine. Resolving all the stuff on the board level is what really mattered and it looks to be resolved. And now we got to follow the next couple steps here.
Andrew: Right. Perfect. And hey, I just want to do a quick update on OPRT. So I'll include a link to the podcast we did about a month ago in the show notes, obviously you came out, you said, "Hey look, the company..." the main focus of the letter, and I believe this is the first public letter to board you ever put out was, "Hey, the costs here are absolutely outrageous. We need to admit our prior mistakes and cut some costs." And just a couple of days ago, the company released earnings and they credit to you this stocks up nicely on it, but they said, hey I don't think they're going as far as you suggest they could, but they're cutting like $80 million in costs. I think there's probably more room to go. They're winding down a lot of the things that you had said, that you had wanted them to do, probably not all, but anyway, I'm rambling. I'll let you talk about OPRT, what they said on the earnings call and where you think we go from here.
Brian: Yeah. I guess two. Well, the first thought is like, look, it's good that they did this cost cut that helps show that they listened to shareholders, they listened to my letter, but it wasn't just... other people felt the same way. So I wasn't alone in advocating for this. I think this was a universal thought about the company, was that it had been gross, seamless, mismanaged by Raul. The enterprise value had come down literally every year, the revenue had gone up. That fact alone should tell you that you've got a management team that's trying to grow an empire, but not thinking about shareholders. So we got them to stop building that empire and begin to curtail it. And the stock react, the stock was up.
Now I think they could have gone a lot further. They're still doing a lot of stupid FinTech stuff. I'm sure there are many people that are still there that shouldn't be there. It remains to be seen how they really pivot back to the specialty lending business and taking advantage of the fact that they have this retail presence. They have these call centers, they have these assets that are valuable if they really spend time and exploit them, and away from all of the glittery FinTech stuff that's just been a stupid distraction and wasted lots of money. So I'm pleased to see that they're turning the ship in the right direction, but what will matter here going forward is how they actually execute on that.
So I still don't think Raul's the right guy to lead this company. I still think that the board needs to be pressed. I'm happy that they made this first pivot here. But the jury's still out on how they execute. If they do execute, then this is a company that could easily do $3 to $4 in earnings next year, that should do that. And that should be a $20 stock versus $5 today. So it's like you go out there and you fire a bunch of your silly middle management folks who aren't adding any value to the company. You stop spending money on these different FinTech initiatives, you can generate a 4X return for your shareholders. You should be pressing full speed ahead to do exactly that.
It's annoying that we basically had to metaphorically put a gun to their head to tell them to do this and they did it. But I'm happy to see that they did it. I'm happy to see that they were willing to think about it in a constructive way. So I want to continue to be constructive with them and to the degree that we have follow up conversations with the board and with the management team. But I think we reserve the right to press harder if we don't think that they are as fully committed to this pivot as they should be. So we put out a nice statement commending them for starting the cost cuts, want to have a constructive dialogue with them. And there's no reason to be too antagonistic about this, but we were right about the need to cut costs. We were right about how the market would react to that. And we're right that they need to go further, and the further they go, the better the stock will react and the better and the more viable the company will be in the long run.
Andrew: I just want to ask one other question on OPRT. Look, obviously this is a "Digital bank," but they're digital banking products. They're more FinTech, they don't have bank deposits and everything. They're subprime the unbanked. But I just had to... since we last talked, the regional banking "crisis," it's definitely spread, right? First republic went under. Pacific West seems to be struggling quite a bit. A lot of banks were struggling. Obviously, this is more a cost-cutting story than anything. Their funding is fine. They do rely on external funding at some point, they've got credit lines and stuff. But does everything going on in the regional banking sector, does that have any impact on them either on the negative side where, hey, it's going to be tougher to roll their funding and get all these lines of credits going forward and warehouse your loans or on the positive side where, hey, a bunch of banks are going down, banks are reigning in their credit, that's probably more like business and loan and construction related, but on the margin, there's probably more on bank to, maybe that's more opportunity for these guys to underwrite loans or maybe what used to be... maybe they get a little bit more spread on their loans because there's just no one else or there's less competition for it.
Brian: Yeah. No, I think I've heard obviously both sides of it. I think generally though, if you have someone who's more of like a prime borrower who all of a sudden becomes more of a... isn't considered more in the prime borrower bucket, but prime lending goes away, then he's going to maybe seek to get money from more of a subprime lending source. So I think they can upgrade their credit quality, the type of people that are borrowing from them in situations like this. The counter that is obviously the macro environment's getting worse, and so people's ability to repay is getting worse. When thinking about their lending book, obviously the pre-2022 vintages are problematic and will probably stay problematic. But they're being cured in the sense that they're lower and lower percentage of the overall book here.
And the post-July, 2022 vintage has been performing well. So it was really when they made this big grab to increase their lending and in 2021 that they ran into trouble. So I think as inflation comes down and unemployment stays at a relatively stable level, these guys should be fine. The folks that they're lending to are folks that we still need more of these types of people working in our economy. We might need less white-collar service workers, but we do need more people working at restaurants and in construction and the people that they lend to. So I think from a macro perspective, it's fine, but those types of people are more affected by inflation. And that was always the scary variable for people looking at this company was, well, if inflation gets way worse, how does this cohort do? And I think at least for now, inflation looks like it's tempering and the unemployment situation's fine for them.
Andrew: And you and I are both in Tidewater, so we know oil prices have come down, inflation can't help but come down, right?
Brian: Exactly. Yeah.
Andrew: I haven't talked Tidewater on the call, not to put you on the spot, but I thought earnings were great. I did two podcasts including one with the CEO at the start of the year. I don't think you and I have mentioned Tidwater on the podcast, but we got two minutes might as well. I thought earnings were great and the thesis are right on track. Obviously, if oil goes to 20, like everything changes, but to me, it's been reassuring them all the offshore drillers and everything have basically said, look, oil went from 80 to 70, but we've seen no slowdown in demand, like the cycle is playing out exactly as we've been thinking. And I continue to think that's a massive positive.
Brian: Yeah. No, we had a call yesterday with someone from transition and we also talked to Polaris, and one of the things that we asked both folks was like, hey, look, just do the basic math here. There's a limited supply of these rigs and demand has to be going higher just because of replacement, right? Even if we assume that oil consumption doesn't go higher, how does this not eventually get to new build economics? The way this cycle's always ended has been because of new build, right?
Brian: That's how it's always ended. And the color and the commentary that you get from these guys is that no one's building another rig ever again. And that looks to be right. The shipyards are obviously full, it's hard to get delivery, the prices are way higher, but you think eventually you get to new build economics at some point you just have to from a pricing perspective because that's how these cycles always end. So that would suggest that either we end up in a situation where day rates are like a million dollars a day for a floater and you see more floaters ordered or they just have to stay at some super high rate for a very long period of time. But I think in both those situations, you win as an offshore investor.
Andrew: I do hear you on that. I haven't done the math in a while. I think the setup is fantastic. I think Polaris and Tidewater in particular are really attractive. It's tough for me to see a million dollars a day, day rate because... which would be the thing that was needed to incentivize new build, because I don't think offshore wells would be profitable at like... I think at current oil level is like $650, is about where you could pay a day rate without really starting to question the returns from offshore drilling. So I don't know, I think it's almost the best of both worlds where you could have... as long as oil doesn't completely crack, which would obviously impact everything, but you could have like $500,000 to $600,000 day rates forever ish because it's not high enough to incentivize new build because nobody wants to go. Or it would have to just scream higher, but $500,000 to $600,000 run the math on these things and you just keep them forever and you have the current fleet of drill ships and that's what the fleet looks like, and maybe some profit offshore wells can't get done because yeah, oil's 80 and it'd be great to have more drill ships, but you can't. So you max them out at this $550,000, $600,000, $650,000 range. Oh no, I'm rambling, but what do you think about that part?
Brian: No, that would be the goldilocks scenario here, is that you just have some extended long period of time where rates are above, they just need to be above $300,000 and you're good. We'll see. I think the key thing to watch here will be to see when you start to see longer-term contracts signed, when you see someone like Petrobras sign like a four or five-year contract, at what rate do they do it? When do they do that? And Petrobras is regarded as the leading indicator, the best most forward-thinking customer in this space. So when they start to sign multi-year contracts at healthy rates, I think that's when you really know that you're going to win no matter what in this trade.
Andrew: Is Petrobras the leading indicator or are they just the most aggressive?
Brian: I've been told they're the leading indicator. I've been told where they are and...
Andrew: Oh, sorry, they are the leading indicator. I just don't know if they're the most innovative or the most aggressive. But either one works for me as long as we eventually get some four or five-year $500,000 per day rates on the drilling side and stuff. Is Tidewater your favorite in the space?
Brian: I would say we're more heavily into Polaris and Noble Energy. Tidewater's a great name too. I guess it's just easier for me to follow the floater and the jacked-up market and it's easier for me to see the supply situation there. Whispsy and PSV are obviously, there's just way more of them. But Tidewater obviously can continue to go out and do accretive deals and they've got a good management team in place and they can generate the entire market cap and free cash flow over the next couple of years. So that's always also a no-brainer.
Andrew: I think all of them work, but the thing I've struggled with my head is Tidewater announced a very lucrative deal. They're much shorter-term contracts. The stocks up like 50% this year. And then I compare it to something like Polaris where the stock is flat-ish on the year, the multiples coming down. And I feel like the inflection is just starting to come. But this same thesis holds and either of them probably work. I will say people can listen to the podcast I did with Tidewater. I really like the management team and the control. And there is something too, hey, you might want to back the management team that you feel the most comfortable with. Because that does end up mattering eventually.
It's just a brainer. But look, all of them probably work. It's just the Polaris look so cheap versus... people don't even give them credit for the Saudi JV. It looks very, very cheap. Anyway, Brian, it's been almost an hour. This has been great. I really appreciate you hopping on, making the first record, second appearance. People can follow up with you. Look, I'll include a link to the first podcast we did on OPRT. I'll include a link to the podcast I did last month on Cutera and people can follow up with you on Twitter if they've got any questions on either of those or now I've introduced the whole offshore energy crowd to you as well, so we can go from there. Cool. But Brian, thanks for coming on, and looking forward to the third one.
Brian: Cool. Thank you, Andrew.