When companies change their revenue recognition policies, no matter the reason, bells should go off in investors' heads. It doesn't
mean there's a problem, but it can -- especially if it allows a company to become more aggressive by collecting more revenue up front.
Take the case of
Transaction Systems Architects
. It's one of the largest companies that provides software that banks use in their automatic teller machines. Until the end of last year, the company recognized the bulk of its revenue by accepting software licensing fees as a one-time payment, booked up front, for perpetual use. The rest of its customers paid on a monthly basis. (It's easier for many banks to go that route so they don't have to go through what can be a cumbersome internal approval process.)
Then, in the first fiscal quarter (ended Dec. 31) the company started offering a new type of contract to customers that created a new twist to its revenue recognition policy. Citing new accounting standards, it gave itself the flexibility to also sell a contract for a guaranteed term (say, four years). The customer pays monthly, but because there's a guaranteed term, the revenue is booked up front.
The advantage to the customer over the original monthly plan is that it probably gets a better price. The advantage to TSAI: It gets to book more revenue up front, and at the end of the contract the customer can continue to keep the software, by paying a monthly fee. (Even more money for TSAI.)
Here's the rub: Looking at the numbers, it would appear that software licensing revenue, especially in the second and third quarters, would've not only fallen off a cliff, but turned negative, if the company hadn't recognized up front an additional $14 million and $19 million, respectively, under the new program. "It's an easy conclusion to draw," says CFO Gregory Duman. "But what we try to explain to people is that the revenues that we accelerated as a result of that new accounting standard are revenues that we would've recognized anyway."
What's more, he adds, the company stands to get that extra pop at the end of the contract if the customer continues to pay a monthly fee. And "if you thought I was robbing my monthly
to book more revenues up front, wouldn't it be that my monthly was shrinking?" Duman asks. "It's not."
Maybe not, and maybe not yet. After all, the program is still new. But this type of change is all too familiar to short-sellers and accounting critics who've seen other companies try similar book-it-now ploys by changing their revenue recognition policies only to blow up when they can't keep adding new customers, under the new plan, at a fast enough pace. (Do
ring a bell? Pyxis has since been sold.) And what about that extra revenue when a contract ends and guaranteed-term customers start paying monthly? Given the short lifespan of software, thanks to leapfrogging technology, the skeptics think that's a stretch.
For a company trading at 22 times earnings, it had better not be.
To repeat what I posted on the
, at least to me, were very confusing. More like a giant garage sale, held in some barn, than a shopping mall. And I felt baited and switched. For example, when I searched for a TI-83 graphing calculator it switched me to Amazon auctions, where the price was great.
But I don't wanna bid! I wanna buy!
(Of course, I'm the same guy who wasn't a
fan early on, and now I can't live without it!)
Quakeophobia (confession: I'm a quakeophobe):
, responding to
yesterday's item on the potential impact of earthquakes in Silicon Valley, writes: "Your comments on a potential earthquake are interesting but not new. In
Reminiscences of a Stock Operator
, 'Larry Livingston,' a.k.a. Lawrence Livermore, talks about how he shorted the
and made $250,000. His timing coincided with the 1906 Earthquake."
And there was this, from
, who wrote: "Glad you brought up seismic seizure. My condo in Palm Springs is on the eastern edge of the fault. Will have great ocean view when the time comes." (Ah, but will the value go up or down?)
Finally, I had mentioned that when it comes to quakes
tried to ridicule me on last week's
show. "I didn't try to ridicule you," he wrote, "I ridiculed you."
As I told him: We'll see who has the last laugh. (I lived through the last big one, in 1989. No fun.)
Finally, setting the record straight:
Yesterday's item on Amazon said that Jeff Matthews was short Amazon stock. Wrong! As was the case when he wrote his piece
here a month ago, he holds out-of-the-money puts. No dummy he.
Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at
email@example.com. Greenberg also writes a monthly column for Fortune.
Mark Martinez assisted with the reporting of this column.
TheStreet.com has a revenue-sharing relationship with Amazon.com under which it receives a portion of the revenue from Amazon purchases by customers directed there from TSC.