Piecing Together the Puzzle at MagicJack

MagicJack announced an estimate of their Q1 results today, which is consistent with past practices.   Last quarter management announced a wonderful preliminary estimate to much fanfare and multiple press releases.

The results which were eventually reported on form 10-K bore very little resemblance to the estimate.


The differences between the two numbers is shown in the table above, additionally (with tongue firmly in-cheek) a calculation of what we can expect the real results to look like if the same magnitude of miss is applied to this quarter as last quarter.

Today’s announcement by the company is especially noteworthy not only because the headline included the words “The Company is Hoping”, but primarily because it attempts to place a fig leaf over their evening filing before a holiday weekend of a prospectus for $300 million of primary and insider stock.

Based on the news from last Thursday, we had anticipated a big drop in the stock today, yet the earning pre-release helped to propel the stock much higher, as $CALL jumped 11% on huge volume.

We continue to remain troubled with the practices of MagicJack, especially the complete lack of transparency in regards to units sold, churn and many other specifics relating to company financials.     Transparency is one thing, but the actions from management especially in regards to overly optimistic press releases appear to be shielding the true health of the business.

Red flags aplenty here at MagicJack, yet sometimes it takes a while for the whole ball of yarn to unwind in the way you would like.   We don’t have evidence of fraud, misconduct or any accounting regularities, yet the puzzle seems to be slowly piecing itself together.

I’ve never seen a company with any sort of positive reputation find the need to consistently pre-release expectations for the upcoming quarter.    And it appears that the news always tends to coincide with a cloud of negativity surrounding the company.  It is either the case that MagicJack including Dan Borislow et al are the biggest pioneers in the telecom industry or that they are the greatest stock manipulators seen since the days of Enron.   I’m opting for the latter.

While it is frustrating to see a near 20% gain erode in front of our eyes, we remain committed to our short position, and are willing to wait this one out.   Warning- since we are potentially dealing with a group of master manipulators here, the risks are substantial. Management has an obvious ability to create artificial news out of thin air in order to prop up the stock price.

Now we could be wrong.   Maybe MagicJack sales are firing on all cylinders.   Maybe MagicJack is indeed operating as a legitimate company with true organic growth.   But everything we have observed with blurry reporting, false promises of management, past dealings of Borislow, etc, leads us to believe that the short case is the right one here.   Stop still set at $28.  Good Luck Shorts!