Here is the reason for the stock dropping. Is this a buying opportunity or time to cut our losses????
Report About 'Aggressive' Accounting Hurt JetForm's Stock
By Scott Adams
TORONTO (Dow Jones)--It now appears that the drop in JetForm Corp.'s (FORMF) stock last week was due to a negative report from the Center for Financial Research & Analysis Inc., which cited "aggressive" accounting practices at the company.
Last Wednesday, JetForm shares lost 2 3/4 on Nasdaq to close at 14, on volume of 1.1 million shares. That day in Toronto, the stock dropped 4.20 to 21.75 on 207,419 shares.
Early Monday, the stock is trading at 14 13/64 on Nasdaq and at 22.00 in Toronto.
The Center's criticisms mainly revolve around JetForm's receivables and the methods by which it recognizes revenues. In response, JetForm was busy last week discussing and defending its accounting with shareholders.
"In our discussion with analysts nobody is surprised by the issues that (were) raised," JetForm chief financial officer Jeffrey McMullen told Dow Jones. "These are things we have continued to discuss in a proactive and forthright manner with analysts and shareholders for years."
Last Wednesday, analysts were confused about why JetForm was in freefall, and some linked the drop to a plunge in PeopleSoft Inc.'s (PSFT) stock on the same day due to concerns of a slowdown in the enterprise software industry. But others said there wasn't a link between the two company's problems.
Analysts also cited rumors that Moore Corp. (MCL), which owns 12% of JetForm, might be planning to sell its stake, but Moore spokesman Michael Barrett has since said that Moore currently has no such plans.
The Center, a well-known shop in Rockville, Md. run by Howard Schilit, issued a JetForm report dated Oct. 19. Four other small-cap stocks that it wrote about last week also lost ground last Wednesday. Schilit won't comment on his research.
The Center has several bones to pick with JetForm. First, it doesn't agree with JetForm using the percentage of completion accounting method for recognizing its consulting revenue. Under this method, JetForm recognizes its consulting revenue according to how much of the contract is completed. The Center would prefer JetForm to recognize consulting revenue as it is billed.
On JetForm Corp.'s (FORMF) balance sheet, its consulting receivables can be found under "work in process." This amounted to C$8.2 million in the first quarter ended July 31, a jump from C$6.3 million in the fourth quarter. Meanwhile, JetForm's revenues totaled C$32.6 million in the first quarter, roughly unchanged from the fourth quarter at C$32.5 million.
JetForm chief financial officer Jeff McMullen disagrees with the Center For Financial Research & Analysis Inc.'s argument about using percentage of completion, and insists that JetForm must use this method because of accounting rules.
"I'm not aware of anybody who doesn't use this method and our reading of the book suggests we are required to use this method," McMullen said. Ralph Garcea, an analyst with Scotia Capital Markets, backed this view up, saying percentage of completion is standard for software companies.
The Center also takes issue with JetForm's term receivables from software licensing, which increased in the first quarter from the fourth quarter. Short-term accounts receivable rose to C$12.3 million in the first quarter from C$10 million in the fourth quarter, while long-term accounts receivable increased to C$4 million from C$3.2 million. The Center criticizes JetForm for recognizing its license revenue up front, instead of in line with customer billing. It also says JetForm "appears to have grown more aggressive in its revenue recognition approach."
But McMullen said JetForm hasn't changed its accounting practices. "There are inferences made by CFRA that we have suddenly changed our approach to accounting to service or license revenue and we simply have not," he said.
JetForm's receivables can sometimes be volatile depending on how many long-term licensing deals it signs. McMullen said JetForm makes offers to large, dependable customers to allow them to spread payments out over perhaps one or two years in return for a larger contract that the customer was first willing to commit to.
He said this extended payment option is only offered to large, credit-solid companies, such as banks or government institutions. "We're not dealing with the guy at the corner store," McMullen said.
He pointed out that JetForm hasn't had any material bad debt problems since it went public. "We are quite comfortable with the quality of our receivables," McMullen said. About C$7 million out of C$30 million in quarterly revenues, or 20% or 25% of revenues in a quarter, are part of these extended payment contracts, he said.
The Center for Financial Research & Analysis Inc. also said JetForm Corp.'s (FORMF) receivables are "understated" because of the firm's policy of selling its receivables with recourse. This means JetForm sells its receivables on long-term contracts to an outside party. It would prefer that revenues recognized from this source be classified as a "loan collateralized by receivables."
This recourse allows JetForm to collect the cash for its long-term receivables up front, said Jeff McMullen, JetForm's chief financial officer. The only way JetForm would ever be responsible for these recourse receivables would be if JetForm's software was to suddenly fail for a customer somewhere down the road. JetForm has a facility in which it can have up to a maximum US$20 million of receivables in recourse at any one time, McMullen said.
Outside of receivables issues, the Center also points out a number of signs of deterioration at JetForm. It said JetForm's quarter-over-quarter revenue growth has slowed and that "unearned revenue" has fallen to C$9.1 million from C$9.4 million a year ago.
Scotia Capital Markets analyst Ralph Garcea said the slowdown in quarter-over-quarter growth is just seasonal.
The Center pointed to additional deteriorating indicators, such as operating cash flow shortfall and a decline in operating income to C$5.5 million in the first quarter, from C$6.2 million in the fourth quarter. Interest and other income in the first quarter rose to C$1.2 million, from a loss of C$280,000 in the fourth quarter because of funds from a special warrant financing.
The Center also criticizes some events in JetForm's history. It says JetForm took an "excessive" write-off for in-process research and development when it purchased rights to the form software group of Symantec Corp. in 1996. It also criticizes recent insider selling.
Overall, Garcea has reviewed JetForm's books and doesn't see any new problems. "We looked at JetForm and it satisfied SOP97-2 (U.S. accounting rules for software companies)," Garcea said. "They are slightly more aggressive than the average software company, but we feel confident with the revenue recognition policy," he said.
High-technology fund manager Duncan Stewart at Tera Capital Corp. said JetForm is obeying accounting regulations. But there is a risk with JetForm's accounting. "If a slowdown were to come...they have less cushion than a more conservative...firm might have," he said.
If JetForm's business slows, its earnings will take a double hit. Earnings will decline because of the drop-off in business and because JetForm will be paying for costs to complete contracts that it already recognized as revenue and earnings in previous quarters, Stewart said. |
