How Exchange Applications Fits Into MicroStrategy's Tangled Web

Could this be the classic 'you help me, I help you' way of doing business? Also, positive comments on Qualcomm and a visit to Chump City.
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Thursday Thud:

With Wednesday's 23% rebound in its stock, the trouble at

MicroStrategy

(MSTR) - Get Report

is a distant memory and all is well with the world. Or is it? Earlier this week, MicroStrategy got nailed for recognizing revenue too quickly.

But go back and look at a deal MicroStrategy did with

Exchange Applications

(EXAP)

-- the one that was announced

after

the last quarter closed but was included as part of that quarter.

This was the $65 million "strategic alliance" between MicroStrategy and Exchange. It was mentioned by accounting sleuth Howard Schilit and by

Forbes

. (Unfortunately, it hadn't been on my radar.) I especially liked the Forbes story, because it highlighted several of these last-minute, back-scratching deals between MicroStrategy and several companies.

Perhaps the most telling line came from MicroStrategy CEO Michael Saylor, who was quoted as saying, "My job is to manage the business in such a way that nobody's disappointed. I have lots of levers at my disposal."

"Lots of levers at my disposal?"

Since when does "lots of levers" have anything to do with running a business? Relying on "lots of levers" can never be good because it suggests a company will do whatever it takes to get revenue. Doing whatever it takes -- deals for the sake of deals -- is never good --

Never, I tell ya!

Such a practice often leads to deals that shouldn't have been done.

Is that the case with the MicroStrategy/Exchange deal, which called for each company to sell software to the other? Hard to say, but this much is known: It was a last-minute deal (or so it would appear considering the timing of the announcement

after

the quarter ended). And had it not been done, neither company would've made analyst earnings estimates. Both, in fact, would've posted losses. (Nothing like those "levers" to save the day!)

As part of the deal, Exchange recorded $4.5 million in revenue from MicroStrategy. In turn, MicroStrategy, according to

Forbes

, recorded $14 million from Exchange (out of an initial payment of $30 million).

Where's the rest? Reliable rumblings are that MicroStrategy has said that an additional $11.5 million or so will be recognized in future quarters. That leaves $4.5 million -- the amount, coincidentally, MicroStrategy owes Exchange -- unaccounted for. Where did that $4.5 million go? Could it be that rather than take the cost of buying software from Exchange as a hit to expenses, MicroStrategy somehow understated the actual revenue from Exchange? (In other words, did it come straight off the top line rather than the bottom line?)

MicroStrategy declined comment. Exchange, meanwhile, insists it wouldn't have lost money if it hadn't received the $4.5 million order from MicroStrategy. An Exchange spokeswoman would only say what her company said at the time of the deal: That with the $4.5 million it now has "good revenue visibility" in the first quarter. What does that have to do with not losing money in the fourth quarter? She suggested I talk to analysts who follow Exchange for an answer. (Sorry, as I

mentioned Wednesday, I have a standing rule: I only accept answers from the company; analysts are not the company, though, I'm sure in some cases that could be debated.)

P.S.: Too much obfuscation and complication is always a red flag. (It often means more shoes to fall.)

Speaking of which: Lost in the swirl of MicroStrategy news late Tuesday -- amid a flurry of announced class-action lawsuit filings -- was a press release clarifying the company's original press release stating why it had to restate revenues.

At first, the company said the change was made ``to conform to the most recent statements of the Securities and Exchange Commission and the accounting profession regarding revenue recognition in the software industry, and to Statement of Position 97-2.''

At the same time, MicroStrategy said the change was ``the product of a recent detailed review of MicroStrategy's significant contracts and future business strategy and the related accounting under the revenue recognition rules, including the recently issued SEC Staff Accounting Bulletin 101.''

The revised statement: "The principal reason for the Company's decision to revise its 1998 and 1999 reported revenues and operating results was the need to do so under existing accounting principles articulated in Statement of Position 97-2. The Company's previously reported revenues and operating results were not revised principally to conform with Staff Accounting Bulletin 101 in advance of its required implementation by March 31, 2000."

In other words, the company's lawyers can't even get it straight.

Sometimes things get so complicated, they pull the wrong lever!

Stay tuned.

Short Positions:

Qualcomm alert:

One of this column's best sources, who

originally mentioned positive news at

Qualcomm

(QCOM) - Get Report

when it was still in the double digits, says he believes the company is in store for good news again. This time, his research shows that Qualcomm has accelerated chip orders originally scheduled for the second quarter, from the foundry it uses at

IBM

(IBM) - Get Report

, and put them into the first quarter. Seems biz in Korea and Japan is unexpectedly strong. But there's a fairly long (16-week) lead time. So, if the biz follows through, he says, don't expect to see the uptick until the second quarter. Qualcomm declined comment.

Chump City:

Don't I look like the chump for writing about

Scient

(SCNT)

Wednesday, up 5 5/16;

Lernout & Hauspie

(LHSP)

, up 2 1/16, and

Rambus

(RMBS) - Get Report

, up 83 51/64.

In the end, though, fundamentals do win out.

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

herb@thestreet.com. Greenberg also writes a monthly column for Fortune.

Mark Martinez assisted with the reporting of this column.