Putting on a Happier Profit Face
By EDWARD WYATT
NYTimes
Shareholders of Go2Net Inc., a network of Web sites that includes
the Silicon Investor bulletin boards, the Metacrawler search
service and the Haggle auction site, might have thought they were
imagining things when they saw the company's most recent earnings
announcement.
"Go2Net Reports Profitable Second Quarter," the headline announced,
while a second line touted "Pro Forma Net Income of $.07 Per Share."
A profitable Internet company? Hardly. Only well into the April 21 news
release would a reader find that Go2Net actually lost $52 million, or
$4.07 a diluted share, in its second quarter, which ended March 31.
And only after reading far, far down does one come across an
astounding disclaimer about the financial statements: "They do not
purport to be financial statements prepared in accordance with Generally
Accepted Accounting Principles."
Financial analysts and investors say they have never seen anything like
what Go2Net and other Internet companies are doing: being as loose
with their financial reporting as some investors are about buying the
stocks.
"I call them IAAP -- Inter-nut Accepted Accounting Principles," said
Michael Murphy, an investor in Half Moon Bay, Calif., who specializes in
technology companies and, with his Overpriced Stock Service
publication, in shorting stocks, or betting that their prices will decline.
"It's an attempt to go around traditional accounting standards with the
hope that everyone buys into it," Murphy said. "And the investment
banks that forecast earnings buy into it, because they are not going to kill
the golden goose."
Russell C. Horowitz, chief executive of Go2Net, said the company "is
following standard protocols for reporting, both for Internet companies
and for other industries." In addition, he said, "the Wall Street analysts do
their models this way. In the absence of that, I think people would have
an unbelievably hard time understanding what is going on under the
hood."
What the companies are doing is not illegal, as long as they use standard
accounting in their reports to the Securities and Exchange Commission.
Indeed, Wall Street has long looked differently at the financial results of
cable television, cellular phone and outdoor advertising companies.
Those companies, which must make huge infrastructure investments, also
incur big expenses to deduct the deteriorating value of their assets from
revenues. To clear the picture, analysts examine earnings before
deducting those charges.
Internet companies, however, rarely have those fixed investments. Their
amortization charges usually are writing off high-priced acquisitions of
other Internet companies.
"I think that is a good way of looking at it in most cases," said Henry
Blodget, who follows Internet companies at Merrill Lynch. "But in some,
it is being abused."
Consider Excite Inc., which operates a popular Web portal. Its news
release on April 15, announcing first-quarter earnings, reported that "on a
pro forma basis," the company earned a net profit of $2.5 million, or 4
cents a share.
Pro forma results usually are reported to show the results of a company's
continiung business, independent of some major event like a merger or
divestiture.
But in Excite's case, the pro forma results excluded $7.5 million of costs
related to its joint marketing venture with Netscape Communications, as
well as acquisition-related expenses of $2.4 million. As Excite noted in its
release, on the basis of Generally Accepted Accounting Principles, or
GAAP, the company lost $7.4 million in the quarter.
"Basically, Excite reported earnings before marketing expenses," Blodget
said.
Excite declined to comment on Friday.
Jack T. Ciesielski, publisher of the Analyst's Accounting Observer, an
accounting research newsletter in Baltimore, put the broader issue this
way: "Now companies seem to use 'pro forma' as meaning 'without the
things that we don't like.' "
Murphy said Cnet Inc., which operates several Internet news and
entertainment sites, topped its April 21 first-quarter earnings
announcement with the headline, "Proforma EPS Equals $0.09."
The pro forma number excludes the expenses related to Cnet's recent
acquisition of Winfiles.com -- a recurring item, because it will be
stretched over several years -- and the one-time gain on a sale of stock.
Doog Woodrum, chief financial officer for CNET, said, "I think we
report earnings in a way that we hope provides investors with the best
way to analyze our company."
The pro forma numbers that some companies announce in their news
releases do not show up in their reports to the SEC. Go2Net's most
recent quarterly report did not include any mention of the 7 cents a share
that the company put in the headline of its news release.
"That's because the 10-Q is filed in accordance with SEC guidelines,
which require GAAP accounting," Horowitz said.
Or, as Ciesielski, the accounting expert, noted, while regulatory filings
must follow precise accounting rules, "press releases are still essentially
free speech."
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