An accounting revenue recognition adjustment can have a devastating effect on a company’s stock price. Why investors need to know that their financial statements are prepared according to generally accepted accounting principles.
It’s simply amazing what an impact an accounting revenue recognition adjustment can have on a company’s stock price. Take the recent example of MicroStrategy, Inc. Their stock has ranged from $7 per share to $333 per share in the last year. In late March they saw a hugh price drop when they changed how their revenue is booked. The stock fell from the $300 per share range to under $100 in just a few days.
Who is MicroStrategy?
Founded in 1989 by Michael Saylor as a consulting company, the firm focused on customized decision support applications. In 1996 they began a focus on delivering decision support across the web by web enabling their analysis tools. In 1998 the company went public with the last six months seeing the big upswing in stock.
According to MicroStrategy’s mission they “want everyone in the world to have the right information at the right time, in order to gain insight, security, and to make better decisions.” They help enable this with various software solutions.
The company is one of the fastest-growing software developers around. Every year for the past four years, it has nearly doubled its revenues, reaching $205 million in 1999 (according to initial financial statements). And at last count, its workforce had reached 1,779.
MicroStrategy, which is one of the largest vendors of decision-support software, enables some of the world’s largest organizations to produce sophisticated, detailed reports on any part of their operation. More than 900 companies rely on its data-mining products. The software is sophisticated enough to navigate the ongoing explosion of virtual warehouses of information and to analyze terabytes of data. National and international retailers manage their inventories better because they know which products are selling where. Insurance companies reduce fraud because they can identify irregularities hidden deep within their own data. And dotcoms and e-business units can personalize services because they can profile shoppers.
Business intelligence is nothing new. But what’s different about this form of intelligence is its immediacy. Instead of constantly monitoring the situation, you receive only the relevant info. That’s the whole concept behind MicroStrategy’s Strategy.com: When a set of predefined conditions occurs, its software sends an automated alert to your pager, fax machine, or cell-phone, so you can respond instantly just pressing a button.
Answers to questions like how fast products were selling used to take a team of analysts days or weeks to answer, assuming the information could be calculated. Now a store manager just clicks on a Web site and generates a robust report within seconds.
The degree of customization is even greater online. The more information customers provide in their profiles, the more personal the shopping experience becomes for them.
What went wrong?
In December ’99 the SEC issued new guidelines intended to clarify existing accounting principles on how companies should count revenue. But even after the guidelines were issued, MicroStrategy reported fourth-quarter and year-end results using its old accounting methods.
In March, auditors advised MicroStrategy to change the way it counted revenue from a series of complex deals with other companies. The auditing firm, PricewaterhouseCoopers, had worked with MicroStrategy for the past two years on the reporting of its quarterly results.
Where the company originally counted large payments up front on multiyear deals, it will instead spread the revenue over a longer period as per SEC and accounting guidelines.
Revenue for 1999, previously pegged at $205.3 million, is being restated to about $150-$155 million. That reduction, changed a previously announced 1999 profit of $12.6 million to a loss of about $34 million to $40.3 million. The 1998 financial are also being adjusted.
Here come the lawyers
With the revenue recognition change the firm is faced with numerous lawsuits. The suits claim that top executives at MicroStrategy had sold substantial amounts of their personal holdings of MicroStrategy stock just prior to the revenue recognition changes. The suits claim that the company’s financial statements had been purposefully or recklessly misstated. In just the past few weeks BusinessWire has more announcements of legal action than anything else including suits initiated by at least fifteen different attorneys.
Moral of this story
Securities regulators have complained recently that many companies inflate their financial success to meet investor expectations, with newer companies using aggressive accounting techniques to boost revenue because they have little or no profits.
In response to the SEC’s December guidelines, at least 32 companies have changed the way they measure revenue. With all that rides on public perception, it’s a difficult line to follow. But when all else is said and done, investors need to be secure in the knowledge that the way the financial statements are prepared meet generally accepted accounting principles. Without some base comfort zone, stock prices will take a beating.
Mike Budiac () is President and CEO of Find Accounting Software ( )