Red Ink Changes Dell's Tune on Investments
Sometimes it's profitable to change the rules when it suits you. So maybe you can't blame Dell (DELL) for giving its bottom line a boost.
Dell Thursday affirmed fiscal second-quarter sales and earnings targets, bumping its stock up 4.4%. Receiving less notice, however, was a plan to take a $700 million charge against earnings. About $200 million of that will go toward covering the cost of writing off the value of certain investments made by the company's venture capital arm, Dell Ventures, according to a company spokesman.
Does the charge matter? As a one-time, extraordinary event, it shouldn't. But it's not so simple in Dell's case. The company's decision to exclude the Dell Ventures losses from its earnings per share marks an about-face from its past practice of including the results of investment activity on its bottom line. Moreover, the move raises the question of how much investors are supposed to trust what companies say about their earnings.
Is Turnabout Fair Play?
Dell has been including its investment results in its earnings-per-share figures for several quarters. Not surprisingly, when the stock market was strong, those results were always gains. The effects of this strategy haven't been inconsequential: It was a larger-than-expected investment gain of $145 million that allowed Dell to meet its third-quarter earnings estimates back in November of 2000.
|Padding It Out |
Four quarters of earnings at Dell, with and without investment gains
|Figures are based on a 30% tax rate. |
Source: The company
Froot Loops"In general, I wish my companies excluded the investment gains and losses completely," said Lehman's Dan Niles. "It would just make it easier. Otherwise, you're including it one time and not including it the next, and I don't think it's quite apples to apples. Most investment professionals would like it if companies just left their venture capital stuff out of the P&L. Because that's not why we're buying these companies. We're buying them for the operational excellence and not for their investment acumen." (Lehman Brothers hasn't done recent underwriting for Dell.) So where would Dell's earnings be if the company hadn't changed its reporting standard? Earnings of 16 cents a share implies net income of about $440 million, assuming Dell's shares outstanding remain relatively constant from the prior quarter. A tax rate of 30%, pretty much where it's been in recent quarters, would make Dell's operating income about $630 million. Factoring out a loss of $200 million on investments brings that figure down to $430 million, and taxes bring that down to about $300 million. That works out to a meager 11 cents a share, 5 cents below expectations. Of course, there's nothing improper about Dell's treatment of the investment results. "So long as the accounting standards let you do that, it would be to Dell's disadvantage not to," says Niles. How do you like them oranges? It's something to think about when the company starts making year-over-year comparisons when it reports its results next month.
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