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Technology Stocks : Hyperion Solutions (HYSL) - An Analytical Gorilla? -- Ignore unavailable to you. Want to Upgrade?

To: Turs who wrote (97)	8/25/1998 7:25:00 PM
From: Reginald Middleton	Read Replies (2) \| Respond to of 471

I prepared a long explanation to show the errors in your assertions and assumptions. Unfortunately the browser crashed before I got to post it and I do not feel in replicating the detail - then guess what? I ended up typing too much again. I am going to bring this debate to an end with this rather lengthy post since my input does not seem to be appreciated and some of use are less than polite. To make a long story short; <It's one thing if HYSL spends R&D in 1998 on the next version of Essbase, expenses it in '98, then reports the revenue in '99 and beyond without any further R&D being spent at all. That would make R&D look almost like a one-time expense to be ignored in '98 and expensed artificially to inflate future earnings. However, EVERY SINGLE YEAR AFTER, Hyperion subsequently spends more R&D dollars for the development of other products, as well as the NEXT version of Essbase, expensing all of it. Essentially, whatever R&D from Essabase that would have been carried into '99 (through capitalizing it) but is not, it is replaced by the full expensing of the current year's R&D. On an ONGOING basis, expensing ends up having the same effect as capitalization.> This is untrue. Capitalization attempts to match cash outflows with cash inflows. Therefore if HYSL spent 10 million in 1998 (capitalized for three years) and 1 million every year thereafter with revenues of 5 million (and expenses of 1 million), increasing by 100% each year for three years then dropping back to 5 million, the economic practitioner would see that the R&D was well worth the money for it would show a profit in every year. Using your accounting method, the 10 million R&D pop would produce a loss in 1998, and would fail to compare the future cashflows with the appropriate charge that created them. This is purely an excercise in accounting theory, since cash flows - aka, the spendable money in bank - would actually increase in direct contravention to accounting earnings. Any subsequent R&D expenses should be capitalized in the same method and added to the appropriate capitalized R&D account. This is the driving force behind the valuation of companies such as yahoo, AMZN, MSFT and AOL. You see in the real world, your GAAP style accounting method refuses to recognize reality. That is why you should always count money instead of earnings. <The problems with capitalizing are twofold: 1) when a firm that fully expenses begins to capitalize, which artificially inflates the bottom line> 1.) Firms that fully expense then capitalize don't artificially inflate the bottom line if the capitalization is done realistically (GAAP currently does not allow expensing of R&D). The fact of the matter is that it doesn't matter if a firm captializes or not, the investor, practitioner, or analyst that analyzes a company must be able to develop an economic framework independant of unrealistic accounting practices such as expensing investments. Why don't you think the government allows you to expense your investments such as your IRA or pension? 1.5) Firms that swtich from full expensing to responsible capitalization are more forthcoming with thier numbers, but are actually worth less to those who know enough to follow the cash flows. Expensing R&D allows for extreme tax shields. Foregoing those tax shields by capitalizing actually reduces the value of the company by reducing current and prospective cash flows. You see, this is another of many examples where cash money, which is economic reality diverges from the picture presented by accrual accounting earnings. <and 2) when any company capitalizes, because there is so much leeway involved in determining how much to capitalize, when a product is feasible, etc. With expensing, there are no questions and no ability to manipulate.> Aww, come on now. The GAAP framework is rife these "leeways". It is very unrealistic to narrow in on just capitalization. How about inventory valuation, amortization of goodwill, amortization of intangibles, depreciation schedules, depreciation methods, treatment of deferred taxes, deferred revenues, inventory reserves, revaluation reserves, etc??? They are literally hundreds of loopholes. This is the biggest problem in using earnings to value a company. <As far as deferred revenue goes, while you can make a similar argument to the R&D capitalization as far as manipulation goes (drawing from it when needed), it's hard to argue against the "strength" of earnings from a company pushing its revenue into future quarters and years (which of course has to be justified by needing to eet some future obligation).> Yes you can when the vast majority of investors don't have a clue on how to value a deferred revenue reserve on an ongoing basis or measure its contribution to profits and losses. To show significant it can be, MSFT's deferred revenue reserve should be somewhere on the order or 4-8 times the annual revenue of HYSL. When does this cache contrbute to the losses or profits of MSFT. You will never know if you study the accounting earnigns. <Look Reg, I don't think everyone wants to read your generic interpretations of the accounting issues of investing. If you want to cite something specific, cool. But lets try to keep these posts from getting too academic.> Hopefully I have shown you in this post that my interpretations are much less generic and academic than yours.