Let's get one thing straight, the number actually reported to the SEC is -$.46, not either -$.15 or -$.12. The "pro forma" numbers are for our amusement and for the analysts, not for the SEC. Analysts are willing to overlook the amortization of intangibles and stock based compensation. The intangibles are largely fictitious in any case. KD1 was purchased with stock valued at $52.64 a share. Thus what happens is that $117 million went into paid in capital, and the offsetting amount (other than hard assets) went into intangibles. From there the intangibles get amortized off from the assets and from the equity. In the end you have the shares issued left on one side, and the hard assets on the other.
Just as a comparison, if the identical transaction took place today with NETP stock at $11.25, the amount paid for KD1 would be $25.2 million instead of $117.8 million. The amortization would be about $1.55 million a quarter instead of $7.25 million. The reported earnings would be $-.18 instead of -$.46. But the number of shares outstanding would be the same, and NETP would still own KD1. Even the tangible book value would be the same. Thus the intangibles are properly ignored because they are dependent on the stock price at the time of the acquisition. On the other hand you must also back the intangibles out when computing book value for the same reason. Ergo the real book value is $4.81 a share, not the $8.97 you would get if you include the intangibles.
As for the lease, it is a bone fide operating expense. It is true that it is non-recurring, but it is a real loss. Suppose they just continued to expense the lease every month? It would certainly flow through earnings, wouldn't it? Companies are always trying to play games, rolling up expenses into a one-time writeoff so that future quarters will look better. In its extreme, this is called the "big bath", where companies try to write off everything in sight so that the next several quarters are assured of profitability. Analysts are wise to these games, however, and each time they see one they make a decision as to how they want to treat them. I think it is good that NETP just wrote off the remainder of the lease expense, but it is still an operating expense, and should properly be included. Thus in my opinion the correct number for this quarter is -$.15. On the other hand, when forecasting next quarter you would work off the -$.12 and measure any improvement from there. LOL
I am confused about one thing though. If you look at the end of the quarter balance sheet, they have $47.431 million in cash, and $34.778 million in short term investments, presumably money market funds, etc. They also hold $33.329 million in "marketable securities". These are listed under long term assets, not current assets, so they clearly aren't cash, or cash like. On the other hand in their 10Q they say that they don't have any risky investments, so can I presume these are intermediate term bonds, as in 1 year or so?
Carl |
