Kulicke&Soffa-KLIC: Most market-watchers are by now accustomed to many of the standard games that companies play by reporting "pro forma" earnings that exclude all sorts of one-time items, many of which are arguably not one-time. We'll save a review of those practices for another time, and focus instead on a less widely known or understood source of earnings confusion: the SEC's Staff Accounting Bulletin 101, or SAB 101. SAB 101 is an SEC mandate regarding revenue recognition.
Among its many components is a requirement that semi equipment cos have interpreted to mean that revenues can only be recognized after the product receives final customer sign-off based on the formal acceptance and integration of equipment in the fab. Over the past few quarters, semi equipment cos have been gradually adopting SAB 101. Prior to a company doing so, however, brokerage firm analysts have continued to forecast revenues and earnings on a pre-SAB 101 basis due to the tremendous uncertainty regarding the impact of SAB 101. Companies then typically report earnings both with and without SAB 101 so that investors can get a glimpse of performance on a historical basis and make comparisons to estimates.
A strange thing happened with KLIC, however. True to form, the company's first report with SAB 101 also included a pre-SAB 101 income statement. Pre-SAB 101 revenues and EPS were $98.8 mln and a pro forma loss of $0.32. Post-SAB 101 revenues and EPS were $117.8 mln and a loss of $0.18. Typically, the pre-SAB 101 numbers would be compared to estimates, so that the company would have missed the Multex consensus of a loss of $0.20 but come in slightly ahead of the $93.5 mln revenue consensus. Instead, most reports heard today compare the post-SAB EPS number of ($0.18) to the consensus, so that the company appears to have beaten by two cents, but compared the pre-SAB revenue number to estimates, as it was clearly the number for which the company had offered guidance. We initially reported this as well based on conversations with analysts, but now we believe that was wrong. A look back at the history of these estimates reveals that they were clearly made on the basis of pre-SAB 101 revenue guidance that the company offered back on July 24. Those pre-SAB 101 revenue estimates by definition produce pre-SAB 101 earnings estimates, which produced the ($0.20) consensus. In breaking down the income statement, it becomes clear that analysts underestimated gross margins, which fell to 27.2% in the Sep qtr from 31.7% in the prior qtr.
At least one brokerage firm that issued a note - Adams Harkness Hill - agreed with our interpretation and said KLIC's report of a loss of $0.32 was below its estimate of ($0.23). For KLIC, it's arguably the case that next quarter's guidance is more important than last quarter's EPS. But it's important to understand what's occurring with these earnings reports, and in KLIC's case it appears that the standard line that they beat by two cents is very misleading; they appear to have missed by twelve.
- Greg Jones, Briefing.com
Posting this for the info on the SAB 101 requirements. |
