JMD,
channel inventory and revenue recognition
Would it be appropriate to assess accounts receivable normalized to total sales and look at the historical ratio for SanDisk? As of 12/31/99 account receivables totaled $52.4 million vs. the current $133.5 million. For the corresponding time periods total sales were $247 million vs. over $600 million for 2000. Assuming receivables don't go up significantly by the end of Q4, this ratio seems pretty consistent.
Unsold retail merchandise that is at risk for return or repricing considerations are reflected, as I understand it, in the deferred revenues line item. Let's say that each store has, on average, $600 of shelved SanDisk product that includes CF cards, SmartMedia cards, card readers, PCMCIA adapters, photo kits,... With over 20,000 retail outlets currently selling the SanDisk product line once could estimate that about $12,000,000 of product is waiting to be sold at any one time. This number does not include on-line "e-retailer" inventory such as Ingram Micro or Tech Data who supply many of the Internet store fronts.
Deferred revenues were $29.4 vs. $41.9 million over the corresponding time frames. If you subtract this $12,000,000 in shelved product you end up with about $30 million which must be pre-paid licensing fees. Recall that licensing fees on a quarterly basis now total about $20 million.
PERHAPS SOMEONE SHOULD CONTACT MR. CALDERONI FOR AN EXPLANATION OF THE ACCOUNTS RECEIVABLE/DEFERRED REVENUE SITUATION
Channel stuffing can be a serious problem, as you have pointed out.
I invested in a software company that provided a program for data management and collection ("data harvesting") for some common medical and surgical procedures. The software tabulated procedure volumes, success rates, complication rates,... The company made money by selling the software and then collating the data on a quarterly basis. Most hospitals and medical groups wished to participate as insurers began requiring the data. Some states (most notably NY) even made the data available to the public on a consumer oriented website.
The company looked great on paper. Then revenues and EPS plummeted one quarter and the CEO and CFO mysteriously resigned. It turned out they were booking the software upgrades (extremely pricey updates to the original version 1.0 software) as they were shipped, rather than waiting to see who would actually purchase them. Most realized that the original software version was perfectly adequate and mailed the package back. Other hospitals perhaps had not budgeted for continuing software upgrades costing several thousand dollars a piece.
In the end it was clearly that they had booked sales in this fashion just to make the numbers. I think the company has since been delisted.
This is perhaps an extreme example of "cooking the books" and I trust SanDisk's situation is more related to stocking shelves in anticipation of the holiday season and an overly accomodating practice for bill collection.
FWIW,
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