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Technology Stocks : Wind River going up, up, up! -- Ignore unavailable to you. Want to Upgrade?

To: Jerry Asher who wrote (4182)	1/30/1999 6:01:00 PM
From: F. Foos	Read Replies (1) \| Respond to of 10309

WIND uses the accounting category "Deferred Revenue" to designate pre-paid revenue, that the company has received, but that is for services which will be rendered over a period of time. For example, a customer may pre-pay for a two-year service contract. It would be misleading to book all of the pre-payment as revenue in the current quarterly income statement when services will be provided over a two year period. Under GAAP, the pre-payment is recorded on the balance sheet as "deferred revenue" in the current liabilities category. The term of the contract runs through 8 quarters in this example. For each of 8 quarterly periods, 1/8 of the pre-payment is reported as revenue on the income statement and the remaining unused balance is held as a current liability "deferred revenue", on the balance sheet. If the customer paid $200 for a two-year service contract, each quarter the revenue would be reported on the income statement and balance sheet as follows: --- Income -- Current Liability Q - Revenue -- Deferred Revenue Q1__ $25 __________ $175 Q2___ 25 ___________ 150 Q3___ 25 ___________ 125 Q4___ 25 ___________ 100 Q5___ 25 ____________ 75 Q6___ 25 ____________ 50 Q7___ 25 ____________ 25 Q8___ 25 _____________ 0 I hope that this clarifies the accounting rational behind "Deferred Revenue". Frank

To: Jerry Asher who wrote (4182)	1/31/1999 9:12:00 AM
From: Mark Brophy	Read Replies (1) \| Respond to of 10309

Deferred revenue was used last year. In post 3232 last May, Richard Karpel made the following note after listening to the conference call in a quarter when Wind River dipped into the cookie jar for $1.2m (deferred revenue had decreased from $15.0m to $13.8m): Ron hemmed and hawed when asked about the decline in deferred revenue, but if I remember correctly, he blamed it on an unnamed Japanese company. I had the impression that the company either cancelled orders, or defaulted on money owed to WIND. The hemming and hawing makes it clear that he knew he wasn't supposed to say, "well, I dipped into the cookie jar to make the numbers this quarter". Instead, he made the plausible explanation that Frank Foos stated in post 3234: Either Ron Abelmann and/or Dick Kraber said that the main reason for the decrease in deferred revenue was that their distributor in Japan had not made pre-payments this quarter. This doesn't indicate order cancellations or defaults. Japanese corporations finish their fiscal year on 31 March. To close out their books for the year, a Japanese company would probably delay making pre-payments until the new year. I would guess that this the reason for the decrease in deferred revenues during the quarter. At any rate, it didn't matter because the deferred revenue went back up the next quarter and Frank's explanation appears correct. The precise regularity of the earnings numbers suggests fudging, but it's not that important. Or, as Upside noted: But deferring revenues, as some software companies do, constitutes a different form of revenue management. Microsoft Corp., for example, defers revenue from its Windows and Office suites. As of Sept. 30, 1998, the company had more than $3 billion in deferred revenue from Windows, Office 97 and other software products. Theoretically, that revenue can be booked, as needed, to smooth out financial performance in the future, seemingly undermining the value of quarterly reports. Still, the SEC seems more concerned with companies that are aggressive in booking revenue than with those that defer it. "To tell the truth, it seems that accelerated revenue recognition [is examined more closely] than deferred revenue recognition," says SEC accountant Ron Baer. The "big bath" that Wind River took last year and the huge stock options are much more important.