Watch CNBC's full interview with short-seller Carson Block — Transcript

Full transcript

1. 0:00shares of luck and coffee have fallen
2. 0:01massively since the company disclosed
3. 0:03last week an internal investigation that
4. 0:06found its CEO had fabricated sales this
5. 0:09comes as no surprise to our next guest
6. 0:11he's announced a short position against
7. 0:13luck and did that back in January now
8. 0:15he's here with another short against
9. 0:17another company joining us is noted
10. 0:20short seller Karsten black founder and
11. 0:21CIO at muddy waters capital good morning
12. 0:24to Carson thanks for joining us want to
13. 0:27talk about the luck and experience also
14. 0:29want to talk about your support for
15. 0:31another short that was announced
16. 0:33yesterday but I gather you have a new
17. 0:35short that you've put on and that you're
18. 0:38willing to disclose this morning
19. 0:43yes meaning a short that I mean we think
20. 0:47should be down significantly the US
21. 0:51company it's he helped and he helped he
22. 0:56house while not a fraud yell yes he
23. 1:00helped is in our view a massive stock
24. 1:03promotion it's a perfect storm of a new
25. 1:08management that really wanted and argue
26. 1:11to pump the stock and a new accounting
27. 1:15standard that really is perverse when
28. 1:18applied to this business but it masks
29. 1:21what is actually now a very unprofitable
30. 1:24business and makes it look highly
31. 1:27profitable
32. 1:28so this experiments been running around
33. 1:32and sure so there was a new standard
34. 1:37that went into effect as a 20-18 that
35. 1:40really was intended for software
36. 1:42companies that have recurring license
37. 1:44revenue so these guys are insurance
38. 1:47brokers mostly in the Medicare space and
39. 1:49what they started doing is they said
40. 1:51okay we sell a Medicare Advantage policy
41. 1:53we're just going to book three years of
42. 1:55revenue upfront and what in so the key
43. 1:59is though there are assumptions that go
44. 2:02into how they book or what they book is
45. 2:04revenue it's it's marked model
46. 2:06accounting literally I mean that's and
47. 2:08we see this blow companies up all the
48. 2:10time so they booked
49. 2:13dear 500 million in revenue you off
50. 2:17based on their highly aggressive
51. 2:18assumptions that we don't think are
52. 2:20realistic I mean we adjust that down by
53. 2:23about 128 million or 25% but more
54. 2:27egregiously looks like they're very
55. 2:30profitable they reported about a hundred
56. 2:32million in operating profit but we think
57. 2:36that they actually really lost about 181
58. 2:38million on an operating basis that's
59. 2:40what our adjustment is and the tell is
60. 2:43cash they incinerate cash now they they
61. 2:46say well you know we're we're investing
62. 2:48for growth but the problem is once that
63. 2:51accounting standard went into effect
64. 2:53they changed the business and started
65. 2:56doing those late-night TV ads you know
66. 2:58side by side with mesothelioma lawyer'
67. 3:01ads and they get in a very low quality
68. 3:04high churn group of enrollees so they
69. 3:09face their model off of what was kind of
70. 3:11steady state business higher quality
71. 3:14stickier enrollees but now they're
72. 3:17jamming into the pipeline
73. 3:18these enrollees that churn quite quickly
74. 3:21and they're basically booking all of
75. 3:23that theoretical revenue today and that
76. 3:26is that's the crux to the of the problem
77. 3:29and that's why these guys around they're
78. 3:31raising money and also why management's
79. 3:33out they're dumping stock Carson what
80. 3:37does the company said specifically about
81. 3:39this issue a churn which seems to be the
82. 3:41linchpin of the argument you're making
83. 3:42against the company well so they
84. 3:46actually mislead on the churn so when
85. 3:49you look at when you compare the churn
86. 3:51in 2017 which was managed the new
87. 3:55management's first full year running the
88. 3:57company it's kind of like these slow
89. 3:59walks the business that you're you know
90. 4:02I suspect deliberately in order to
91. 4:04really you know in order to basically
92. 4:06game the test so to speak or gain the
93. 4:09model and then that churn now went from
94. 4:1230 started went from 37 percent in 2020
95. 4:1517 to 47 percent last year now we we put
96. 4:20our calculations of turn into our report
97. 4:23is very straightforward it's very basic
98. 4:25when they present sure
99. 4:27they used an aggressively small
100. 4:29numerator and misleadingly large
101. 4:32denominator to say oh well you know
102. 4:34churn is actually you know only thirty
103. 4:37you know six percent or so so that's the
104. 4:41way that they're they're pulling the
105. 4:42wool over investors eyes with respect to
106. 4:45just the Delta and quality but it's
107. 4:48clear when you use a you know a basic
108. 4:52means of calculating churn that the
109. 4:54profile of your 12 to 2018 and 2019
110. 4:58cohorts is very different from that of
111. 5:00the 2017 code right
112. 5:02Carson real quick the stock as you've
113. 5:06spoken has dropped precipitously about
114. 5:08fifteen percent down we should also note
115. 5:10CNBC has reached out to you health for
116. 5:12comment and of course will bring it to
117. 5:14you when we get one what do you think
118. 5:16this company is worth I mean we think
119. 5:22it's you know back-of-the-envelope you
120. 5:24know worth about 20 bucks I mean it you
121. 5:27know the problem is this is not
122. 5:29sustainable I mean you cannot keep
123. 5:32running a business that is destroying
124. 5:34value I mean we estimate that on every
125. 5:37Medicare Advantage and Roley Latin dere
126. 5:40they lost about they lost about 400
127. 5:42dollars and they say that you know
128. 5:44where's they think you're their
129. 5:46reporting a profit you know positive
130. 5:48profit of a few hundred dollars and you
131. 5:50can't you know you keep doing that and
132. 5:52you lose capital market access right
133. 5:55that's it Carson real quick because we
134. 5:59have literally 20 seconds at the
135. 6:00beginning of the conversation you said
136. 6:01this was not a fraud and I just want to
137. 6:03be clear about that do you think this is
138. 6:05a fraud then or do you think these are
139. 6:07just aggressive assumption this is what
140. 6:09we've got ten seconds well it from a
141. 6:12legal legal perspective it's not a fraud
142. 6:14intellectually its fraudulent legally
143. 6:17it's they have the latitude in the
144. 6:20standard to do this stuff that's the
145. 6:22problem with Mark the model accounting
146. 6:25you
147. 6:33you