Investors Should Scrutinize Portal
Earnings
(07/24/98; 7:38 p.m. ET)
By Gabrielle Jonas, TechInvestor
Investors approach quarterly earnings of Internet
companies with blinders on -- especially those that
dabble in portal sites, according to one analyst.
Portal sites, among the hottest Internet stocks, are
all-purpose Web pages from which users can get onto
the Internet and take advantage of functions such as
e-mail, online shopping, and chat groups.
But investors may be eyeing their prospects with too
much optimism, partly because these companies are not
as forthright as they should be when it comes time to
report their quarterly earnings, according to Brian
Oakes, an analyst with Lehman Brothers.
"These companies put up numbers that the media picks
up and think are profitable," said Oakes. But when
stocks go up, no one's asking them the tough
questions."
Cnet and Excite are, in a sense, mirror images of each
other's dissembling, said Oakes. Where one tried to
disguise an ongoing loss as a one-time charge, the other
tried to disguise a one-time gain as part of operating
income, he said.
Shares of Cnet [CNWK] closed up 6 1/4 to 70 3/8, or
almost 10 percent, Thursday after the Internet company
smoked analyst estimates by 20 cents after market
close Wednesday.
Cnet didn't make clear enough in its earnings report that
$4.5 million was not part of continuing operations but
was a one-time gain for the sale of Vignette, in which
Cnet had an investment, Oakes said.
"The bottom line isn't as rosy as everyone is painting it
to be," Oakes said. "I would have reported as a loss of
28 cents. There's a one-time gain in there you're not
supposed to treat as continuing operations."
Telephone calls to Cnet's investor relations department
were not returned.
"But it seems to be a recurring pattern in the Internet
industry -- especially in the portal area because they
want to keep their stock price up and they know the
retail investor is listening," Oakes said. "But the
institutional investor should know better."
Abhishek Gami, an analyst with William Blair &
Company agreed. "Cnet talked about being profitable,
but the company was only profitable because of the sale
of Vignette," he said. "And yet, a lot of publications
picked up on that and wrote about Cnet's 'positive
earnings.'"
A week earlier, Excite [XCIT] erred in the opposite
direction of Cnet, Oakes said.
"Excite lost a lot but they were trying to write it off as a
one-time expense even though it had to do with the
Netscape partnership, which is ongoing for two years,"
Oakes said, referring to the Internet company's first
quarter earnings.
"Excite just bulked it up as a huge loss in the form of a
one-time charge, hoping Wall Street just ignores it,"
Oakes said. "Unlike a one-time charge, that loss will
hurt their earnings and keep them from being profitable
up ahead."
Greg Klaben, vice president for investor relations at
Excite, argued that Excite carefully considered which of
its expenses associated with the Netscape deal could
be recovered, and which in all likelihood couldn't. The
final bookkeeping upshot, Klaben defended as
"conservative."
"We looked at what we thought at the time we'd be
able to recoup from the Netscape partnership over the
course of the two years," Klaben said, "and with our
accountants' help, we took a conservative view in
taking a write-off of that size." The charge was
conservative, he said, "when considering setup and
hosting fees that Excite will probably never recoup."
Analyst Gami defended Excite's bookkeeping, and
unlike Oakes, doesn't consider it a version of Cnet's
bookkeeping hijinks.
Excite legitimately took into account its uncertainty it
will ever recover a portion of the total price in its deal
with Netscape. "There's no clear certainty how Internet
advertising will progress," Gami said. "We have no
guarantee that Netscape will be successful with the
portal site and be able to deliver on its portion of the
deal."
Besides, Gami said, Excite paid a lot for non-traffic
items such as branding and competitive lockout fees --
unrelated to any revenue Excite may rake in
later.Therefore, a charge was legitimate.
Oakes, for his part, said the losers from what he
considers to be nebulous reporting practices will not be
limited to investors in Excite and Cnet, said Oakes, but
investors in the entire sub-sector.
"This will eventually hurt the earnings quality of the
entire portal group," he said, "causing many of them to
be considered suspect."
Companies that are up-front with their earnings will also
suffer at the hands of such practices, Oakes said.
"Yahoo, which is very conservative in its accounting,
has to bear the brunt of what some of its competitors
are doing," he said. "But that shouldn't reflect on Yahoo
because it's very good at accounting correctly."
But Gami said Yahoo doesn't need to be creative in its
reporting practices.
"Yahoo is playing from a position of power, and
therefore can afford to be conservative in its
accounting," Gami said.
Questionable practices won't go unnoticed by the
Securities and Exchange Commission, Oakes said.
"It'll be interesting to see what Netscape does now that
Excite wrote off $56.8 million as a one-time charge,"
Oakes said. "We'll see if Netscape takes that same
amount and puts it into revenues" . |
