Debt Report on Sorenson
27 05 2010All..
In view of all the news regarding VRS rates and especially on SorensonVRS. This link was intriguing and clearly related to the VRS rates. It shows history way back to 2005 to recent May 2010.
I am not sure what type of report it is; looks like a report analyzed and submitted to debt holders by Debtwire company.
http://fjallfoss.fcc.gov/ecfs/document/view?id=7020492013
On 04-May10, 18:21, scroll down the story to the paragraph where it starts with "Furthermore.."
It shows approximately break even rate where SorensonVRS will be comfortable above; I am just educate-guessing that this rate probably include equipment cost, installer cost, and other cost items that are disallowed by the FCC.
This is report only CPA loves and not easy reading.
If there are CPAs among you, please provide your insights?
eyes open & thumbs up,
Ed B
Basically EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. The paper is saying that Sorenson has interest and capital expenditures of $130 million. The proposed rate cut would reduce the EBITDA to $100 million which is not enough to cover the expenditures causing Sorenson to burn through cash. A reimbursement rate of $4.90 would give Sorenson EBITDA of $140 which would allow it to cover expenditures.
Also, the paper stated that Sorenson’s bonds and debts took a fall when the proposed rates came out, which worried Sorenson’s creditors.
Ed…this is great FACTUAL information from sources outside the industry. Interesting point in the paragraph which starts with “Furthermore…”
“…management said that rates would need
to be set above USD 4.90 per minute through the
three-year cycle in order for the company to service its
debt…” meaning that if Sorenson didn’t have this added debt there would be no need to restructure and assault the community with scare tactics and lies.
Very, VERY interesting stuff. Thanks much…”eyes open, thumbs up” (Ed Bosson favorite closing)
Clarification: Taking a fall does not mean that the debts are reduced. Rather it means that the cost of debt has increased for Sorenson. Basically, it appears that Sorenson is highly leveraged, or in layman’s terms: heavily in debt, and depends on the rates staying high enough so Sorenson could make its payments.
It is completely normal for a company to have some form of debt because it allows the company to make investments with the money it borrows. However, if there is too much debt then the company risks going under due to being highly leveraged.
Transplanted Texan: Thank you for the explanation of EBITDA. Been years since I had managerial finance class.
True, it is normal and expected that companies have debt, however, there is a tipping point which debt becomes a burden and the company becomes unhealthy. As with personal debt, I would assume.
Again, thanks.
DQB
More information is needed to calculate things like debt and liquidity ratios, but that link basically confirms that Sorenson is highly leveraged and needs the rates to be higher for 500K+ minutes.
Sorenson will still continue to run for sure, but the question is whether it’s middle management and bottom line people (installers) will have jobs if the rates remain unchanged.
I looked up the full filing (http://fjallfoss.fcc.gov/ecfs/comment/view?id=6015637316) and I quote from the comments attached to the document:
“48% profit????? at the expense of TRS Fund (Public funded by Phone Companies), I am at total loss of words because this deal represented a transfer of wealth from the public – phone bill taxes fund the reimbursements – to the investors.”
There is nothing on the phone bill that pays for VRS. The surcharge on the phone bill is imposed by individual states for relay inside the state. VRS is not paid for by this surcharge.
There is a huge misunderstanding about this and no one seems to be stating the correction. CBS was allowed to go without correction while they showed a telephone bill for intrastate services as public fund for VRS. That is absolutely incorrect.
There is no tax money spent for VRS. These are not public funds in the sense that it is an appropriation. The interstate relay fund is the same as group purchasing model that all the telecoms participate in. This is the same as if a group of hospitals got together to pay for interpreters as a group instead of individually.
I also read the other document in the original posting. Mr Ziev confused EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) with profit in arriving at a 48% profit margin. Removing the interest from the “profit” cited, would reduce the margin nearly by half. Factoring in taxes, depreciation and amortization would reduce that even further.
Also, Mr Ziev assumes that Sorenson’s share of the market is the same as Sorenson’s share of the total disbursements – this isn’t so. While Sorenson must surely take the lion’s share of the pot, Sorenson’s effective reimbursement rate is lower than any other provider. So, Sorenson’s share of the fund is proportionally smaller than its market share.
Finally, he estimates Sorenson’s share of the market to be 80-85% though the document he submits uses an estimate of 75%. He seems to be picking only the numbers that cast Sorenson in a poor light.
“He seems to be picking only the numbers that cast Sorenson in a poor light.”
Sorenson-bashing seems popular. A legitimate complaint is fine, but no number fudging would be needed in such a case.
Sorenson is not a publicly traded company. All we can do is speculate, but all of the estimates are probably close give or take 15-25 million. Sorenson bashing or not, the fact is that Sorenson is the eight hundred pound gorilla in the middle of the room. They have the greatest influence on what the rates will be through political capital and on the other hand they are borrowing a lot of money.
Sorenson has earned every bash and more. I’m glad their overspending is being revealed outside the walls of their sweatshop.
I thought there was an 11% profit cap. If so, you could make a large amount of money with high volume if you make 11% profit off of a very large dollar amount, but 48% would not be possible. What am I missing here?
Terpgirl,
A little bit of history there. When TRS first started way back in early 1990′s, FCC estimated the cost of providing TTY relay service by collecting cost items from states that already have relay service. Keep in mind in that time states are responsible in providing TTY relay service, but FCC is responsible for interstate TRS fund (out of state TRS calls) so FCC had to estimate reimbursement rates for interstate relay minutes. FCC added 11.25% to the – hmm – I forgot the account word – want to say return on investment (ROI) but not sure..anyway added 11.25% of the total “selected cost items”.
States adopted that for a very short while, and then ultimately adopted competitive bidding procedure via Request for Proposal (RFP).
Later on FCC decided to provide a temporary federal funding for VRS. Yes, you read this right “temporary”. FCC started out with low reimbursement rates and there were no takers – eventually increased to $17 per min. There were takers, contrary to many people’s comments, Sorenson joined when reimbursement rates were at around $7.50 something, not at $17. FCC realized that VRS is vastly different than TTY relay service in the sense that VRS is labor-intensive so require different reimbursement rates.
The problem as I see it is that the FCC does not fully understand full breadth of VRS costs from small to large. Greatly underestimate for the small to medium range, and greatly overestimate for the large ones.
To finally answer your question, Terpgirl, yes 48% is possible with current rates for VRS providers that have high call volume.
Fortunately, FCC just released Further Notice of Proposed Rulemaking, hopefully FCC will be able to receive comments that will help FCC find the balance for all sizes of VRS providers.
Edsalert next post will be that.
eyes open & thumbs up..
(Guessing): One reason that Sorenson’s costs and debt are higher than the competitors is that Sorenson has invested heavily in R&D developing and installing video phones and invested the outreach cost of letting people know about the video phones and the service. FCC rates do not reimburse for those costs.
Our responsibility as consumers of VRS is to help all VRS providers find funding for non-reimbursed costs. That funding could come from Congress, from individual state equipment programs or (gasp) we could be asked to pay for the equipment.
Paying off Sorenson’s excessive debt for past equipment development and distribution costs is a special challenge because any equipment development and distribution reimbursement will (most likely) be for “current” costs, not pre-existing debt.
It’s fine to bash Sorenson (or any other provider), but before we do, we should send Sorenson a check for the cost of our VP200s.
I read the blog, the link attached, and all the comments in this thread. I have to say I learned a lot from all of you. I wonder though, the added debt that Sorenson took on, don’t you think it was premature in light of FCC possible VRS cuts in Tier 3?
Secondly, I’ve personally spoken to Mr. Ziev and from what I understand one of the issues he has is not the added debt that Sorenson took on, it’s the 180 million in divided payout to GTCR and another public-equity firm, which will come from the public TRS fund.
Correct me if I’m wrong, but I don’t think the public fund wasn’t intended to make its potential investors richer, but to ensure that VRS providers like Sorenson are reimbursed for its actual cost to provide a VRS service to the Deaf and Hard-of-hearing. Penny for thoughts?
Sorenson is a great company and doing more for the deaf then ever before, having a vp and having them with my friends all over the country helps me communicate and you know what Sorenson has never charge me a dime.
I even us their equipment at times with other VRS providers and they still come and fix it..
How much debt sorenson has does not matter to me, is the government going to start saying VRS providers can not borrow money? They all have loans, it has become a part of them doing business..
Do not be fooled by those jealous of Sorenson and miracle they have given the deaf community.
.
Kyra: The gripe with Sorenson isn’t that they have debt or borrow money. It’s that they say they need a certain $ reimbursment, and then change their story, cry wolf and expect the goverment to bail them out of excessive borrowing to PAY DIVIDENDS TO SHARE HOLDERS.
Having debt is good as a corporation – but too much is not good – and expecting the government to increase the per minute reimbursement so you can pay off your debtors of over 1 billion dollars is not good. Plus the scare tactic of VRS in danger of going away is not true.
Ed – correct me if I am wrong – Sorenson is not the only VRS provider who is reimbursed in Tier 3. The largest portion of their minutes are from Tier 3 due to the sheer size of their minutes.
Ok, so Sorenson cannot pay debt what happens?
Hello folks!!!
I have read the link and blogs. Also I do my homework by collecting many information about this company. I admit that this company had treated us as their VRS Deaf customers and its investors very poor, unprofessional and untrustworthy by not admitting about their heavy debts or make bad investment in the first place.
For an example, Ford had bailed out by the government by telling their investors and its customers that they were bankrupt and in heavy debt. I know that Ford is a public corporation and Sorenson is a private corporation. But Ford is a professional and trustworthy corporation.
Therefore, Ford generates more profit after that. I, a Deaf investor, admitted that I made a lot of money by buying Ford last year while they sold near $1 per share. Right now their shares still grow. Even I do not buy one of their cars yet!
Therefore, if you think that Sorenson is a great company for Deaf customer and its communities, I want to ask you why this company scare us in the first place about the VRS will be gone. This company should tell us that they are in a heavy debt and make a bad investment and need our help to make it look better. We will be happy to help the company out!
“Tell Truth will set free!”
“expecting the government to increase the per minute reimbursement”
not increase. just a smaller decrease. smaller than %40.
ed, thx for clarification.
tg
DJ Stacey,
“Correct me if I’m wrong, but I don’t think the public fund wasn’t intended to make its potential investors richer, but to ensure that VRS providers like Sorenson are reimbursed for its actual cost to provide a VRS service to the Deaf and Hard-of-hearing. ”
It is not a public fund. The money never touches the government treasury! It is a “contribution” from all telecoms/exchange carriers to pay for their ADA compliance. The money is sent to a private non-profit industry association (National Exchange Carriers Association) that deposits the money into a private bank account. The money is used to pay providers to their private bank account.
Where does the idea of “public fund” come from?
It is NOT a tax. It is NOT a surcharge.
The only thing you see on your phone bill is for STATE relay services.
Well Daryl that is the rub, what is actual cost?
If we want VRS providers to make no profit why would the do it?
JK-ll,
You’re so right on target. Part of the funds, the reason why Sorenson is in debt is because of research and development. They have been pouring money into a wireless webcam like the V-PAD. They wanted it to be of peerless quality, just as if you were using your computer or home TV. I’ve heard rumors from insiders that they have even been fooling around with holographic images. I think that’s a long way away but it’s good to know that Sorenson may be the first ones to make it happen. Innovation is remarkable but most people do not understand that it costs money. And I agree that any company’s R&D should be funded outside of the TRS fund.
What is Purple Debt?
What is Z Debt?
Do they disclose??
Why is it ok for Sorenson to have spent R&D time and money to develop the YP100 & VP200, give them FREE to deaf consumers, but then be forced to allow all other VRS companies to use these VP200 to conduct their business, without those other VRS companies having to PAY Sorenson for the use of the VP200?
There is NO justification for all the Sorenson bashing.
I do remember hearing that all telephone carriers in the United States are required to pay into a fund for this. My understanding is that companies that want to be certified to provide relay have to first become carriers in the financial sense, even if they do not provide telephone service in homes or offices beyond relay. Tell me if I’m wrong, but I was told that companies like Sorenson and others that were not connected with Sprint or another telecom company had to pay into a fund, open a center, do relay minutes, and bill them back to the government to be paid from the same fund they just put the money into. Thus, any company that is not already a telecom company would have the added expense of paying into this fund in order to become a carrier and be permitted to do relay. Is that right? If so, it seems circular. I give you money, I bill you for it, you give my money back to me.
Folks,
Another clarification on Interstate TRS Fund (ITRSF) and exactly what it is? It is NOT from Universal Service Fund that many people mistakenly assumed. TRS regulation as expanded from Title IV specifically said funds collected for ITRSF will come from all telephone companies and telecommunications service providers; the collecting fee is based like .0003something of the revenue of each. FCC is given the responsibility of ITRSF. National Exchange Carrier Association (NECA) is the contracted ITRS administrator (FCC released ‘RFP and NECA won the bid).
Now here is the rub, the TRS regulation also said the companies cannot put down on their subscriber’s invoice a line item showing ITRSF fee. So the fee although invisible on subscriber’s monthly statement, in reality, we consumers are paying for TRS as the fee for ITRS is hidden from the public. This is an important point. We ARE paying for the service of TRS (VRS), not the telephone companies or telecommunications service providers.
eyes open & thumbs up..
Nana
I agree that the bashing is not getting anybody anywhere. If you have something to say that’s important, negative or positive, sure, say it. But if you just hate a certain company because you hate them, okay, don’t use them. We can’t get rid of them now just because we’re mad at them. They’re here, and so are the other companies. We all have our preferences, but I like to think that the different video relay providers are like anything else in the world- – they all have something I like and something I don’t like. As for your justification question regarding the device that Sorenson has license to, I think it is just a D-link camera with the brand name. Correct me if I’m wrong. Anyway, the justification is that if I have an Ojo in my house, I can set it up to call through Sorenson interpreters if I want to. I do not need to have a VP 200 in order to do this.
tg
[...] See the article here: Ed's Telecom Alert » Debt Report on Sorenson [...]
Terpgirl wrote:
>> “As for your justification question regarding the device that Sorenson has license to, I think it is just a D-link camera with the brand name. Correct me if I’m wrong.”
You are wrong. Sorenson developed the technology; they own the patents. Sorenson gave a license to D-Link to produce a video camera with the D-Link brand name with Sorenson technology on the inside. Sorenson limited the license so there are features on the VP100 and VP200 that are not available on the D-Link.
JK-II,
You’re right about patent and how this is handled. Remember VP-200 products are loaned, not given to the deaf/hoh. It is reason why SVRS does not sell to hearing persons; no profit in just sales work. Much profit in service.
Also, it is important to remember that the VRS regulations DO NOT include video phones as part of cost items to be calculated for reimbursement rates. The reimbursement rates are for the service only, not for any VP phones (VP-200, Ojo, VPAd, and so on).
eyes open & thumbs up…
“I also read the other document in the original posting. Mr Ziev confused EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) with profit in arriving at a 48% profit margin. Removing the interest from the “profit” cited, would reduce the margin nearly by half. Factoring in taxes, depreciation and amortization would reduce that even further”
Is %20 a fair estimate?
Terpgirl,
Be careful in guessing account work. EBITDA from DebtWire included the cost of Video Phones, Installers, Pension Plan, and other cost items that are disallowed by the FCC. DebtWire looks at all the cost items whereas FCC only looks at selected cost items. If figured from Debtwire, you would be right about 20%. If figured by FCC’s criteria, it is more than 40%.
Truth be told, I do not fully understand all the gritty details and all the guesses are only guesses including mine.
eyes open & thumbs up…
Hello Ed,
I’m an occasional reader of your blog. Thanks for providing all this info! I’m not a CPA, but I’m an personal investor. I’ve been able to pick up on some financial mumbo-jumbo here and there, but I’m by no means an expert. Here’s what I gathered from the articles:
4 Oct 2005
Sorenson sold to the management. The executives now own the company, along with backing from a venture capital firm. Exact ownership structure isn’t clear. They don’t disclose this information, as they’re a private company.
10 Dec 2009
Sorenson attempts to negotiate with their lenders to secure $250 million in funding in order to pay $200 million in dividends to the venture capital firm. In other words, they wanted to secure the ability to borrow $250 million from their lenders. But the lenders objected to this amount.
14 Dec 2009
Sorenson reduces their request from $250m to $215m.
The rest of December is just more about Sorenson trying to get that funding.
5 Jan 2010
Sorenson successfully got new funding. They’re using that to refinance existing debt, and also pay $178.9m in dividends to the owners of the company (the article isn’t clear, but it seems to imply this goes to the venture capital firm; I don’t know if it also goes to the executives that have an ownership stake). It appears that the owners have already secured a nice fat dividend, regardless of what happens with the FCC rates.
3 May 2010
Lenders start to worry about the new FCC rates and Sorenson’s ability to repay its debt. At this point, the value of Sorenson’s bonds dropped (down about 12% that day based on the numbers in the article).
4 May 2010
Sorenson explains how it’s going to fight the new FCC rates. Calculations show that with the new FCC rates, Sorenson would basically be spending more on paying off its debt than it makes in earnings. The value of its bonds dropped about 40% over the week prior to this article.
If I remembered, Sorenson did billed FCC for providing the VP100. I think they use some kind of format and had the FCC to pay for it. As of now, FCC will not pay for any equipments.
What happened to responsible spending and prudent financial planning? As an individual, I can’t spend as I please because I’m assuming I will continue to have my same job for years to come and that it will be at the same pay rate…so why should they?
Here’s something to think about – there are companies that can/do provide VRS services under the license of another company. This, of course, means that they will will receive a reduced reimbursement following the agreement they have entered into. These companies can stay afloat and profit even while receiving a reduced amount.
With that being said, why the problems with Sorenson? I would assume that with the amount of money they are receiving, and have been for some time, that they could well afford to hire the assitance of a financial planner or related professional.
I can absolutely understand R&D as well as PR(giving/loaning VPs), but there is a limit. I can give everyone in my area a TV if they vote me into local office, but if that job doesn’t pay me enough to justify they gifts, was it really the best idea?
If they really are commited to providing the best interpreting services, the clients will still use them, even if they have to purchase their own VPs.
The point is, it sounds like they have created their own problems. Perhaps they need to look at how they can resolve it and not ask for help from someone else.
The real cost that’s hurting providers is labor. The only way out of that is robots.
tg
Terpgirl,
Ahhhhh. that explains why some companies treat their interpreters like machines….
Ha ha, good joke. (Did I walk into that?) I have worked in three places, and three places have asked me and the others to work longer than an interpreter should work without a break, consistently. I guess they think if they didn’t treat us like machines, they wouldn’t make a good profit. I still manage to love my job, the managers in my center are lovely to me, but the system is what the system is.
umm something’s a-missing! Borrowed money to pay dividends ??? Last time I looked, dividend is to pay out of profits or surplus. If Sorenson is unable to pay investors their promised monies, well, that’s what ‘risk’ part of investment is all about. They lose. Don’t borrow to fix this – irresponsible. Do not make us (fcc, the public, etc) pay for their bad decisions.
bob
You do make a point, but this is going on with everybody. Everybody in the video relay business is either living on borrowed money, investments, or a combination of both. I know there is some myth out there that providers are making a fortune and lining their pockets with gold. I just don’t think that’s the case. I don’t think that’s happening with anybody, although we like to imagine that it is happening with the companies we hate. I’m not sure what is happening behind the scenes at any company, but from their financial behaviors, it’s pretty easy to see that the profits come in more slowly than they did before the many cuts we have experienced, and will continue to slow after the following cuts which we are yet to experience, but which are coming, each and every July 1 for the rest of our lives, apparently.