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Technology Stocks : IFMX - Investment Discussion -- Ignore unavailable to you. Want to Upgrade?

To: Lou who wrote (9455)	2/13/1998 10:10:00 AM
From: frank doolittle	Read Replies (1) \| Respond to of 14631

Lou: Mark Finger can answer that, and give a much more understandable accounting. No disregard to the CFO.

To: Lou who wrote (9455)	2/13/1998 10:45:00 AM
From: Mark Finger	Read Replies (1) \| Respond to of 14631

Lou, to your reposter: I understand that you have a lot more experience financially, but I would like to point out some other things about the "deferred" income. The real point is that $30M was recognized in Q4 vs. only about $15M in Q3. The basis of my argument rests on IFMX's customer mix. First, this revenue (as I understand it) is the amount of product shipped into the "channel", but not yet moved to end-users, but cash has actually been received for it. As it is shipped to end users, it is then recognized. First, the "channel" consists of two groups--distributers and VAR's. The distributers are there really to service smaller VAR's, who are too small to be directly serviced by IFMX. These small VAR's are the people who move under $100K (or some other likely figure) of products (especially run-time engine licenses) per year. Since IFMX generally does not sell any of its products in a "retail" package (in contrast to MSFT), this means that virtually all product sold through the distributer channel is either embedded in an application or as part of a 3rd party development package. I agree with your analysis that all sales/package costs for these has already been recognized in previous quarters (for the distributer part of the channel). Where I will disagree with you is for the larger VAR's (like Baan, Peoplesoft, SAP, and many more). In many of these, there are significant costs in the quarter. First, the cost of goods is very low, because in many cases, the only part is a CD included in the 3rd party package, and most of the documentation will be reduced and embedded in the 3rd party doc (because they do not want the customer messing with the engine except as proper for the 3rd party product). In many of these sales, there will be a very significant expense in the current quarter, because in many of the larger sales, there is a IFMX salesperson working with the VAR salesperson; in these cases, the IFMX gets recognition for the amount of the IFMX portion of the sale, and appropriate commissions on it. Because of this arrangement, the major portion of the costs of such larger sales actually occur in the current quarter. If you read the financial PR release, it would appear that about 1/3 of the reported major sales were through such VAR channel partners, and would have impacted the costs. For this reason, I think that this portion of your analysis is partially faulty. Another point to make is that this entry in the balance sheet will not go to zero, but will settle at some equilibrium percentage of the overall sales. My guess is that it will probably be around 20-25% of total license sales, or around $100M for the current level of license sales. Finally, two reasons why the entry is so high (was previously $210M at end of Q3. First, in 1996, IFMX was "bartering" with customers to get equipment to set up the "superstores". I suspect that much of the bartered software was DW based licenses (since one of the big selling points of the superstores is the development and demonstration of DW's using the actual customers data), that means that this would have only started moving out of this account as the superstores came on line. This means that the revenue stream (under new accounting rules) would only have started in Q4 96, and only reach reasonable levels starting in Q2 97 when most of the stores were open. Second, Starting in Q4 96 and Q1 97, IFMX would have started stuffing the Universal Server (using the old name) VAR's with product, which would explain why there was little net drop from Dec 96 to Jun 97. You can now see the deployments of those sites with a lot of Q4 announcements. Basically, IUS(old name) was not really ready in the first 6 months of the year (even though Phil said that it was "generally available" in Q4 96). I do not know how many bug fix releases have been released since then, but I suspect that it is now relatively stable for most of the features of that original release. Comments? Mark