Creative accounting compounds tech havoc

DISMAL OUTLOOK: Analysts say massaging numbers has made reading earnings reports from the tech sector more difficult. Now some companies report they will badly miss earnings expectations.

Saturday, July 8, 2000 Associated Press

SAN JOSE, Calif. - Creative accounting techniques are adding to the difficulty of evaluating the financial health of technology companies, analysts say. That isn't helping the sector, especially with second-quarter earnings reports around the corner.

Intel Corp.'s decision to include one-time investment gains in its upcoming results has confounded Wall Street insiders and caused investors to howl about the high-tech havoc. Meanwhile, business software companies Computer Associates International Inc. and BMC Software Inc. warned this week they will fall well short of analysts' expectations, pulling technology stocks lower. Competitor Compuware Corp. followed Friday with its own dismal outlook. "It's becoming harder to compare apples to apples in the high-tech industry," said analyst Robert Johnson at ABN Amro Inc. in Chicago. "It's just a massive problem for investors today in the technology field to compare company to company. Because of the intellectual capital nature of their products, there are so many questions and more room for flexibility on the reporting side than other industries."

But the ability to show constantly improving quarterly figures appears to be getting harder. More than half of the 300 U.S. firms that have released pre-earnings guidance to Wall Street have issued profit warnings for the three months ending June 30, according to First Call/Thomson Financial.

Analysts already had been expecting a comparison to last year to be difficult. Many companies went on a buying spree in last year when technology officers took advantage of corporate CEOs issuing blank checks for Y2K preparedness.

Meanwhile, spending on technology in Europe this year has not risen as fast as many had expected, Johnson noted. Wall Street has come to expect that technology companies will be conservative in their profit forecasts, using legal accounting maneuvers and other means to help match or beat estimates. The entire technology sector is expected to post 37 percent profit growth in the quarter.

Instead, investors returned from the Independence Day holiday weekend to warnings that Islandia, N.Y.-based Computer Associates and Houston, Tx.-based BMC Software will badly miss analysts' earnings expectations.

Investors responded by pounding shares of both companies on Wednesday, with Computer Associates plummeting 42 percent and BMC off 40 percent. The warning raised fears that other technology companies will also issue disappointing results when the earnings reporting season goes into full gear in the next several days.

The negative outlooks continued Friday, when Farmington Hills, Mich.-based Compuware said that poor sales of software would cause it to miss expectations. On the opposite end, Intel raised eyebrows late last month after the chipmaker announced it would include a total of $2.3 billion in investment gains in second-quarter results due July 18. Many companies traditionally exclude one-time gains from the sale of investments, but Intel's decision will allow it to report per-share profits doubled in the year-over-year period instead of posting a more modest increase.

"Although we've been including Intel's guidance on investment gains in our estimates, it just doesn't seem right to do so as the number gets to be this obscene," analyst Terry Ragsdale of J.P. Morgan Securities Inc. wrote in a June 21 report.

http://www.charleston.net/pub/archive/biz/bztechhav0708.htm

-- Martin Thompson (mthom1927@aol.com), July 10, 2000

Answers

I wonder what affect the new SEC accounting requirements will have on third quarter earnings statements. These went into force as of July 1, and the first earnings reports that will include them will be the third quarter reports, issued mostly in October--ironically, right before the election.

Could be real bad news for the stock market, and for Al Gore.

-- JackW (jpayne@webtv.net), July 10, 2000.