As the playoffs shake out, each team's performance is there for the world to see. On Monday, armchair analysts everywhere picked apart mistakes made by the defenses in the NFL wild-card-round losses last weekend.
The performance of public companies also gets a good deal of Monday-morning quarterbacking. But their stock prices are based as much on future performance, which can be much harder to predict. Earnings reports are all we really have to go on.
Earnings season will get going in just over a week, and we'll all be reading between the lines in the income statements for clues as to how individual stocks will fare over the coming year.
Given the market uncertainty, some companies may deliver full-year forecast ranges wide enough to steer a ship through. Some may say they can't give quarterly guidance. But there are other ways of reading between the lines.
An important number to look for at some companies is the deferred revenue total from the balance sheet. Not all companies defer revenue -- just ones that deliver their services or products over time.
A decade ago, companies that were more concerned about making their targets than reporting the actual numbers could dip into deferred revenue prematurely. That isn't easy to pull off now due to tighter restrictions on when upfront payments can be recognized as revenue.
In recent years, some companies have deliberately shifted their business practices to enable them to defer more revenue -- what some call their annuity business. The practice smoothes out sales over the course of a year or two and makes guidance easier to meet.
That's not a bad thing: It legitimately makes revenue more predictable.
Deferred revenue gives you a window into a company's future performance. Many software companies used to sell products outright, recognizing all the revenue up front. That gave them unpredictable sales reports -- some quarters up, others down.
Now, most software companies that provide consulting and support services are required to spread out the revenue over the course of the contract. The payments get categorized on the balance sheet as deferred revenue, usually on two lines -- short-term and long-term.
saw this requirement as a potential boon in lean years and have built huge businesses on maintenance or support contracts. At Oracle, upgrade benefits discourage users from dropping support even long after the software is paid for.
Even companies that aren't known for selling software have deferred revenue.
third-quarter 2008 deferred revenue total of $230.4 million was up 35% year over year. While that's a drop in the bucket for the Internet search site -- analysts expect $4.16 billion in revenue for the fourth quarter -- it's a sign that Google was intent on growing its annuity business in September.
While most analyses of deferred revenue compare it to the same quarter of the prior year, it's also useful to look at where it stands next to the prior quarter. For example, software firm
83% jump in deferred revenue year over year in September was only half the story. It was up just 8% from June -- showing the company's growth momentum had already peaked and was winding down.
Other places to look for key indicators of business in the pipeline are bookings and signings, sometimes discussed on conference calls. This type of revenue may not be paid upfront. Bookings can be important enough in this economic climate to prompt an early press release by companies.
On Monday, tech company
raised its bookings estimate 13% for the quarter ended last week, which pushed the stock up about 2% yesterday. But the effect is supposed to last. The company commented that the uptick in bookings illustrates the visibility FEI has into the performance it expects for the first half of 2009.
And each quarter,
reports its level of signings year over year in its services business in enough detail to give a good picture of which services will be up and which will be down.
As of September, signings of basic long-term jobs outsourcing were down 19%, while signings for higher-margin services and consulting business were up 14%. But because basic outsourcing is a bigger chunk of revenue, total services signings were down between 4% and 5% year over year.
So as divisional rounds and earnings season get under way, keep one eye on the balance sheet's deferred revenue line.
Lenny Dykstra manages Nails on the Numbers, a subscription service sold by TheStreet.com. Dykstra is 93-0 in his options picks. Click here for a free trial to Nails on the Numbers. Dykstra writes regularly about options trades for TheStreet.com
At the time of publication, Dykstra had no positions in stocks mentioned.
Nicknamed 'Nails' for his tough style of play, Lenny is a former Major League Baseball player for the 1986 World Champions, New York Mets and the 1993 National League Champions, Philadelphia Phillies. A three time All-Star as a ballplayer, Lenny now serves as president for several privately held businesses in Southern California. He is the founder of The Players Club; it has been his desire to give back to the sport that gave him early successes in life by teaching athletes how to invest and protect their incomes. He currently manages his own portfolio and writes an investment strategy column for TheStreet.com, and is featured regularly on CNBC and other cable news shows. Lenny was selected as OverTime Magazine's 2006-2007 "Entrepreneur of the Year."