interesting article from WSJ today....
MicroStrategy Has Investors
And Some Companies Nervous
By AARON ELSTEIN
THE WALL STREET JOURNAL INTERACTIVE EDITION
The cratering of MicroStrategy's stock, after the data-mining software
company restated earnings to meet new Securities and Exchange
Commission accounting guidelines, is causing some nerves to fray on Wall
Street and in executive suites.
Investors are wondering if their favorite
stock may be next, and some corporate
executives are wary about their company's
shares becoming victim to such concerns.
After all, the accounting event that led to MicroStrategy's devastation is
hardly a unique situation.
Hundreds of companies will have to restate their earnings in coming months
to meet the new SEC guidelines issued in December. On Friday, the
agency gave companies a slight breather, extending the deadline form most
to comply to June 30 from March 31.
Worried about being swept up in the growing accounting hysteria, one
company already has taken the unusual step of releasing a statement to
quell investors' fears, underscoring that it won't have a problem with
earnings restatement due to the SEC's recently issued guidelines.
That company, InfoSpace, of Redmond, Wash., an Internet infrastructure
concern, had seen its stock fall in sympathy with MicroStrategy's shares on
Monday as investors appeared to worry that it too may have to restate
earnings.
"Accounting is a topic that's foremost on investors' minds," says Robert
Fagin, an analyst at Bear Stearns. "MicroStrategy was a wake-up call."
Since the SEC issued its accounting bulletin, about 60 companies have
restated earnings (though not with the devastating effect on their stocks as
MicroStrategy) and an equal number say they are evaluating the potential
consequences. But the MicroStrategy debacle has highlighted the issue.
Indeed, Joni Hanson, vice president of investor relations at InfoSpace,
says her company received dozens of calls from worried shareholders
Tuesday after its stock took a ride with MicroStrategy's. The company
eventually put out a release to quiet their fears and to help stabilize its
tumbling stock.
In the statement, the company said that its
accounting practices "comply with all of the
recent Staff Accounting Bulletins of the
Securities and Exchange Commission
...regarding revenue recognition." MicroStrategy said Monday that it had
restated its earnings to satisfy the SEC bulletin.
MicroStrategy, like many other companies, made liberal use of accounting
gray areas, which the SEC is moving to tighten, to book revenues from
contracts prematurely and to beef up its financial results. Its stock plunged
63% Monday after the company lowered results for two years.
The bleeding spilled over to other highflying stocks, especially technology
issues, such as Infospace. These companies need to show aggressive
growth to justify their lofty stock prices and keep investors happy. And
investors are now worried that many may be doing that through accounting
gamesmanship.
"There seems to be some belief that our company is like MicroStrategy,
even though we don't make software and our accounting practices are
different from theirs," Ms. Hanson says. "I'd been taking a lot of calls
reassuring investors, and finally we just decided to put out the release."
The soothing words seem to have helped stem
the damage to InfoSpace's stock. It closed at
175 5/8 Friday on the Nasdaq Stock Market,
after tumbling a total of 24 percent Monday
and Tuesday to 159 5/8 in the wake of the
MicroStrategy debacle.
Normally, companies don't bother to remind shareholders their accounting
policies are sound. And most investors couldn't care less about arcane
accounting bulletins. But accounting is now very much on the minds
investors, especially those with highflying stocks in their portfolio that can
fall hard.
The devastation that befell MicroStrategy, whose stock plunged from 226
3/4 to 86 3/4 Monday, demonstrates that while investors have a voracious
appetite for fast growing companies and hearty financial results, they can
be equally murderous to a stock at the slightest hint of disappointment.
Roger Siboni, chief executive of E.piphany, a San Mateo, Calif., software
company, says accounting was "the first bit of chit-chat at most meetings"
with investors, whom he met this week to pitch his company's proposed
$3 billion acquisition of privately held Octane Software. E.piphany's stock
tumbled 30 1/2, or 15%, to 170 Monday following the MicroStrategy
news. It traded for 179 Friday on the Nasdaq Stock Market.
Mr. Siboni says he didn't issue a press release about his company's
accounting practices because he doesn't see a benefit. "Where's the upside
in that?" he says. "We all like to think our accounting is the most
conservative, but who can be sure?"
The accounting bulletin that triggered such investor concern was issued by
the SEC as part of its effort to curb accounting abuses, particularly among
Internet-related companies which are under considerable pressure to show
strong revenue growth because few of them turn a profit.
SEC Chairman Arthur Levitt has been an outspoken critic of such
questionable accounting practices. In a 1999 speech at the Economic Club
of New York, Mr. Levitt reiterated his "concerns over a gradual, but
perceptible, erosion in the quality of financial reporting."
"The motivation to satisfy Wall Street earnings expectations was beginning
to override long established precepts of financial reporting and ethical
restraint. A culture of gamesmanship over the numbers was not only
emerging, but weaving itself into the fabric of accepted conduct," he
added.
Moving to curb abuses, the SEC's December bulletin requires companies
book revenue only after customers have indicated final acceptance of a
product, rather than when a sales agreement is reached. (MicroStrategy
cited this bulletin as a reason for restating earnings Monday, but on
Tuesday issued a second release saying a three-year-old accounting
industry standard was the reason for the restatement. Its stock has since
recovered a bit, trading Friday for 129.)
As companies prepare to post earnings in coming weeks for the first time
since the SEC accounting bulletin was released, online chat-rooms are
buzzing. On message boards, investors are speculating about which
companies could be the next to miss earnings because of accounting issues.
On Thursday, Treev, a Herndon, Va., software maker, became the latest
company to restate financial results to align its accounting with recent SEC
guidance. Brian Hajost, executive vice president for finance, says the
restatement of its unaudited financial results for first three quarters of 1999
would widen losses. Shares of the company fell about 7/16 Thursday to 6
7/16. They traded at 6 19/32 Friday on the Nasdaq Stock Market.
Brian McQuade, an accountant and principal at Columbia Financial
Advisors, a Washington asset-management firm, suggests investors looking
for companies with potential accounting difficulties should scrutinize those
that derive a lot of revenues from "barter" transactions, or transactions in
which companies swap goods or services.
It's difficult for investors to discern how much profit companies derive from
these transactions, he says. "Barter transactions have been around a long
time, but they've never been used to the extent they are now. I've never
seen revenues from bartering grow so high," Mr. McQuade says. |
