The numbers are sacrosanct: iSelect’s hard lesson for entrepreneurs

James Thomson Editor

The numbers are sacrosanct: iSelect’s hard lesson for entrepreneurs

Published 17 September 2013 07:46, Updated 17 September 2013 08:09

Shares in newly-listed insurance comparison site fell more than 4 per cent on Monday after the company confirmed it is co-operating with an ASIC investigation into how the company missed it’s prospectus revenue for the 12 months to June 30. It will not surprise to see the stock fall further in the coming days. iSelect already had committed one of the big sins of the market – getting its numbers wrong. This subsequent ASIC matters only rubs salt into that wound. Reports in Fairfax revealed on Monday that ASIC had written to iSelect demanding emails, documents and board papers regarding its missed revenue forecasts. iSelect, which listed on June 24, forecast in its prospectus that it would post revenue of $121.6 million for the year to June 30. But in late August the company revealed it had booked revenue of $118 million. The company did not publicly revise its revenue forecasts in the intervening period. iSelect said yesterday that it would fully comply with ASIC, but defended its actions.“The company notes that ASIC’s information request states it should not be construed as an indication by ASIC that a contravention of the law has occurred,” it said in a statement to the ASX.

“The company remains of the view that it has fully complied with all of its regulatory obligations.”

That may be but for a company that has already has seemingly been battling a series of questions about its management practices and policies.

There were questions raised over iSelect’s accounting policies even before the float, with some brokers struggling to get their heads around the iSelect model.

Here what BRW said about this issue on June 19, just days before iSelect listed:

“At the core of the iSelect model is the agreement that product providers – such as healthcare funds – will pay a trailing commission over periods as long as four to five years, provided the individual end customer stays with that fund.

“iSelect counts the bulk of that revenue straight away, and then discounts it based on the probability that person might leave the fund.

“This model also sits behind the group’s other, less developed offerings, like car insurance, life insurance and home loans.

“Listed mortgage broker Mortgage Choice has a similar method of recording its deferred revenue. But to give investors better clarity on its cash position, Mortgage Choice explains its earnings both in terms of cash and expected earnings at its briefings.

“While investors will acknowledge the appropriateness of the forward counting cash method for the iSelect business model, they might question how easy it is to predict what individuals will do, particularly in the healthcare segment, where changes in government regulation have been a significant factor influencing behaviour.”

iSelect was forced to subsequently defend its accounting policies in early September, saying they were supported by accounting standards and had been fully disclosed in the prospectus.

At the same, it was forced to clarify the ties between management and a separate company called NIA Health, which runs health insurance provide health.com.au The Australian Financial Review revealed that Leslie Webb, a director of iSelect, is also a shareholder in NIA, while NIA chief Andy Sheats is also the brother-in-law of iSelect boss, Matt McCann.

iSelect’s prospectus noted the group provided a “secured facility” to NIA Health, but did not say Webb was a shareholder in NIA and made no mention of McCann’s ties with Sheats.

iSelect rejected any suggestions of corporate government problems and said it was not required to disclose either issue in its prospectus.

iSelect, which raised $215 million in its IPO, was supposed to be the big float of the year. But the shares opened below their $1.85 issue price and have been falling ever since. They closed on Monday at $1.35.

iSelect’s leaders might feel they have been hard done by, picked on even, over relatively small issues. They might justifiably say suggestions of poor corporate governance are wrong and the ASIC investigation, such as it is, will come to nothing.

But take away all this and there is still a core issue that will worry investors: How could the company miss its very first revenue forecast, less than three months after listing?

For investors of all sizes, from the mums and he dads to the big institutions, the numbers are everything. iSelect has a lot of work to win back the market regardless of what ASIC might find.