By Technology Research GroupeBay's (EBAY) 10-K filing did little to change our bearish stance.Revenue growth is slowing(2% vs. 11% in 2008). Margins are getting pinched. Cost-containment measures arereadily apparent. Financial reporting remains far from conservative. Profits for 2009were inflated by a series of income-accelerating items. Without these non-operationalgains, net income would come in nearly 70% below reported levels. Recurringrestructuring charges, liberal use of discretionary expense accruals and weak revenuedeferrals round out a list of earnings management concerns. Providing guidance in proforma terms aggravates matters. Key takeaways can be summarized as follows:
- Normalizing expense capitalization, valuation allowances (as a percentage of assetbalance), NOL utilization, restructuring reserves, one-time gains and deferredrevenue would pull EPS down to 56 cents for the year (vs. $1.83 as reported).
- Return on equity falls to 5.4% (vs. 17.3% as reported) in sustainable operatingterms.
- Cash flow is up only 1% for the year and highly uncorrelated with net income.
- Expense accruals jumped to $982 million (27% of current liabilities) from $785 million (17.4%) in 2008; usage conservative in absolute terms; direction of changeworth noting; magnifies cash flow deceleration. .
- Consensus estimate for 2010 falls by 23% when measured on a fully expensedbasis (GAAP estimate = $1.28 per share, pro forma = $1.67 per share).
- Pro forma estimates overstate profitability and understate valuation multiples.