Big Techs Don't Find Compelling Reasons To Disclose All
04 Mar 16:26
By Karen Talley
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--While top technology companies were telling investors
that operations remained profitable in the first three quarter of 2001 - by
some $19.1 billion - they were couching things in a very different way to
federal securities regulators, saying the bottom had pretty much dropped out
and they had lost $82.3 billion.
That's a difference of $101.4 billion, or $1 billion per company - and it was
all perfectly legal.
The "headline numbers" issued in press releases were based on pro forma, or
operating, earnings that give a lot of leeway as to what charges and expenses
companies must report. The result: companies can post better-looking earnings
numbers. But the audited figures demanded by the Securities and Exchange
Commission are much stricter, requiring companies to lay out virtually every
expense, from write-offs to restructurings, from one-time items to consulting
services, and earnings are torpedoed accordingly.
That's the result of a new study that looks at companies that make up the
Nasdaq 100 Index, the biggest nonfinancial stocks that trade on the Nasdaq. The
study, by a certified public accountant who gave up the profession to devote
himself full-time to tracking the way companies present earnings, found that,
under pro forma reports, 74% of the Nasdaq 100 posted a profit over the first
three quarters of 2001. Under figures filed with the SEC, that percentage fell
to 53%.
In essence, the report found a severe gap between GAAP earnings - those
prepared according to generally accepted accounting principals and submitted to
the SEC in 10-K and 10-Q filings - and those issued weeks earlier to investors
who buy and sell stocks on pro forma renditions that are unaudited and often
criticized as less than comprehensive.
The report's author, John May, posts his findings on SmartStockInvestor.com.
Thebiggest pro forma purveyor over the first three quarters of 2001 was JDS
Uniphase Corp. (JDSU), which, May said, wrote off more than $50 billion of
goodwill tied to its acquisitions of SDL and E-Tek and reported to the SEC a
loss of $55.4 billion over the first three quarters, while reporting a pro
forma profit of $172.6 million to investors.
May, who said he arrived at his conclusions after reviewing the press
releases and 10-Q's issued by Nasdaq 100 companies over the first three
quarters, said it is possible that JDS Uniphase included the big write-off in
some part of its press release, but "the headline numbers and the numbers
retained by reporting services like Thomson Financial/First Call cited the
profit," he said.
Much of May's research focused on the five biggest Nasdaq 100 companies -
Microsoft Corp. (MSFT), Intel Corp. (INTC), Cisco Systems Inc. (CSCO), Oracle
Corp. (ORCL) and Dell Computer Corp. (DELL), which he said reported combined
real profits of $4.4 billion to the SEC, while disclosing earnings of $13.4
billion to shareholders via press releases containing pro forma earnings.
Singling out Oracle, May said it was the only company to report basically the
same earnings to the public and to the SEC - about $2 billion over the first
three quarters.
Cisco is another story, May said. The company reported losses to the SEC of
$3 billion, but posted pro forma profits of $700 million, which beat the
Street's estimates.
Companies losing money weren't the only ones to make extensive use of pro
forma reporting, May said. For instance, Microsoft reported earnings to the SEC
of $3.8 billion in the first three quarters of 2001, but headline figures
reported to shareholders were $7 billion - right in line with estimates, he
said.
Intel's pro forma profits of $2.6 billion were more than three times the $800
million of earnings it reported to the SEC. Recently announced fourth-quarter
results continue the tradition, May said, with the headline earnings per share
number of 15 cents allowing the chip maker to beat the Street estimate of 11
cents. But it appears the GAAP earnings that Intel will report to the SEC will
be 7 cents a share, May said. "If Intel's report is a harbinger of things to
come in the forth quarter, pro forma earnings for the Nasdaq 100 will once
again exceed GAAP earnings."
Still, some strategists say earnings quality is just fine. For example,
Edward Kerschner, chief investment strategist at UBS Warburg, said "the huge
write-offs of 2001 were not an attempt to mislead investors, and do not reflect
'business as usual' practices by firms trying to disguise weak earnings."
The write-offs reflect the recession and the collapse in asset values during
the tech boom, both of which aren't lasting phenomena, Kerschner said.
Tobias Levkovich, U.S. institutional equity strategist at Salomon Smith
Barney, adds that companies could have manipulated their earnings a lot better
if they were really out to hoodwink investors.
"While you might argue that companies, in their zeal to show constant
quarterly earnings per share growth, have played fast and loose with accounting
rules, that relationship cannot be supported," Levkovich said.
Still, expect some funky earnings reports in the future. In a note issued
earlier this year, Abby Joseph Cohen, chief investment strategist at Goldman
Sachs, said massive write-offs will cut 2002 earnings reported to the SEC by
15% to 20%. But the write-offs, which will be charged as special items, won't
appear in earnings reports issued to the public because they aren't listed on
an operating or pro forma level.
"Simply stated, many companies are writing off not only the kitchen sink but
the bathtub as well," Cohen wrote. The reason, partially, is changes that take
affect this year for the write-down of goodwill on an accelerated basis.
For instance, AOL/Time Warner plans a write-down that could reach $60 billion
to dispense with goodwill assets gone bad. Other telecom and technology
companies are likely candidates for write-downs, analysts say.
All of the debate begs the question, why maintain two different sets of
reporting numbers - those played up to the public and the no-nonsense version
given to the SEC? There are several reasons, but a main one is what reform
might do to stock prices.
Plain and simple, pro forma earnings can make a company look like it's doing
better than it actually is, so the stock can continue commanding a decent
price. Also, earnings reported to the SEC on an audited basis have the effect
of raising the Nasdaq 100's price/earnings ratio to 45, while pro forma numbers
give it a P/E of 29. Higher P/E's wouldn't sit well at a time when one of the
chief complaints of investment strategists is that P/E's are already lofty.
Still, some strategists like the idea of a spotlight being placed on the way
corporate earnings are prepared and reported, saying it might lead to reforms
that will benefit stock buyers.
"Standards could be tightened so that companies will have less ability to
'manage' earnings," said Barton Biggs, a senior investment strategist with
Morgan Stanley.
-By Karen Talley, Dow Jones Newswires; 201-938-5106;
karen.talley@dowjones.com
(END) DOW JONES NEWS 03-04-02
04:26 PM |
