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Technology Stocks : AUTOHOME, Inc -- Ignore unavailable to you. Want to Upgrade?

To: RTev who wrote (14952)	8/27/1999 6:02:00 AM
From: E. Davies	Read Replies (2) \| Respond to of 29970

A rather inane discussion about accounting, but who knows- someday this may come back to bite us: **** From briefing.com briefing.com:81/Scripts/PowerAnchor.asp?varArticleID=SB19990827002306rvgreen Briefing.com is conservative in our approach to analyzing accounting, and this has sometimes left us behind in the fever over some stocks. Excite, (XCIT) in particular, was always "creative" in reporting earnings, and, in fact, stepped over the line of acceptability on occasion. For example, on July 16, 1998, Excite reported earnings for their 98Q2. During that quarter, they paid a $58 million marketing fee to Netscape for a cobranded site project for a two year agreement. Excite tried to deduct all of this payment in a single quarter. Briefing.com blasted them for this at the time. We were later vindicated as the SEC made Excite restate their earnings the following quarter, and amortize the marketing expense rather than deduct it, just as we had said it should. But none of this chicanery with accounting really hurt Excite's stock, and @Home eventually bought them for $7.2 billion in stock. (The Excite/Netscape cobranding site has obviously been dropped, since AOL purchased Netscape, and @Home and AOL are now enemies. Netscape hasn't given any of the $58 million back, however.) The Excite@Home Merger @Home (ATHM) acquired Excite for $7.2 billion in stock earlier this year. Was it a good purchase? In the short run, it certainly was a good thing, because the Excite acquisition allowed @Home revenues to jump to over $100 million, on a pro-forma basis. Since Excite had done about $54 million the quarter prior to the acquisition (flat from the previous quarter), and @Home did $25 million, the "combined" rise in revenue was from about $79 to $100 million. With these kinds of revenues, Excite@Home still looks like it is on a good growth curve. It even looks almost profitable with an operational loss of just $(0.02) a share. But that reporting completely ignores the acquisition costs of Excite. And they are high. The goodwill deduction for the Excite acquisition is $153 million a quarter. And will be taken every quarter for ten years. It is extremely rare for a company to have goodwill deductions in expense of total revenues. To justify this cost, Excite will need to grow in revenues to at least cover this amount before the Excite acquisition can be considered accretive to earnings. To do this it needs to at least triple in size as quickly as possible. But since Excite revenue was flat from Q4 1998 to Q1 1999, when it was acquired, it is hard for us, or anyone, we expect, to project when Excite revenues will rise to more than $153 million a quarter. Is Excite@Home Profitable? Analyst estimates for @Home's earnings report, due out in the third week of October, are for 0.02 a share, which sure looks like profitability to most people who look at it. But those "profits" will be pro-forma profits, and will exclude the goodwill deductions for the Excite acquisition. Pro-forma results can only be reported for four quarters. After that, the Excite goodwill deduction will be moved up to the operational portion of Excite@Home's income statement. A year from now, you can expect Excite@Home to continue to report "profits" on an "operational basis" once the pro-forma results are no longer possible. But what happens if and when anyone starts to care about net income at Excite@Home? They can only hope it doesn't happen for a long time. Briefing.com Conclusions At Briefing.com, we are fully aware that few Excite@Home investors care much about this issue. All they want is for the stock to go up. (Of course, that's what we want for all of our stocks too.) For now, accounting issues at internet stocks have not been important. Tuesday's Heard on the Street column in the Wall Street Journal showed just far other companies go to present earnings in the best possible light, regardless of the accounting method. But when analyzing and trying to determine who will ultimately be the big names on the net, profitability will eventually matter. And when it does, @Home's huge goodwill deduction for the Excite network may well come back to haunt them. When will "net" income become important for net stocks? When revenue growth curves flatten. If you own Excite@Home stock, don't get too excited by any announcement that Excite@Home is profitable. Look at the growth curve. It must stay high. Of course, if Excite@Home can manage to get themselves acquired by someone else, before accounting issues become important, just as Excite managed to do, they may never have to worry about it. But that plan sounds a lot like the greater fool, which always works fine, until there aren't any more fools.