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PurchasePro Pounded Over Deferred Revenue Issue; CEO Unfazed

A report hurts the software maker's shares; questions persist over when licensing-resale fees can be chalked up.

Revenue questions continued to plague

PurchasePro.com

(PPRO)

Wednesday, as the Las Vegas-based business-to-business concern's stock fell even further than its sagging B2B peers.

PurchasePro ended down 16.6%, or $4.38, at $21.94 in regular trading Wednesday, after an analyst said there was risk associated with some of the $5.3 million in deferred revenue -- essentially sales that are still not complete -- which the company reported in its third quarter.

Tim Getz, an analyst at underwriter

Prudential Securities

, said PurchasePro may not be able to recognize all of that revenue this quarter, as he was expecting. Instead, $2 million still may end up in the deferred column when Dec. 31 comes around.

"We now believe that there is some risk" in recognizing those revenues, wrote Getz, whose report otherwise cheered the company's prospects. He rates PurchasePro a strong buy.

Since Oct. 17, when PurchasePro reported quarterly results, investors have

questioned the makeup of the company's numbers. A new strategy to charge upfront licensing fees for the electronic marketplaces that the company sets up led to a huge surge in one-time revenues, while recurring revenue -- more attractive because it keeps coming in long after a sale -- stayed flat.

During the third quarter, PurchasePro entered into reselling agreements with several companies, and sold 27 licenses for its Internet marketplace software to those resellers for a total of $5.3 million. But the company can't recognize that revenue until its partners place those licenses with actual customers.

From Getz's note, it looks as if

Sun Microsystems

(SUNW) - Get Sunworks, Inc. Report

, which bought 10 of the licenses, may not be rushing to get them out the door.

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"The Sun marketplaces may not be sold through this quarter and thus PPRO may not be able to recognize some or all of the $2 million of deferred revenues associated with Sun this quarter," Getz wrote. But he also said that shouldn't stop the company from meeting his revenue expectations of $31.5 million for the fourth quarter.

Typically, deferred revenue is money that has been paid to a company, but can't be recognized as top-line revenue because of unfulfilled obligations that it has to its customer. In this case, PurchasePro says it has no further obligations on those 27 licenses, but that it must satisfy its accountants that those licenses have been placed and won't be returned to it. And the only thing that can prove that, says Charles E. Johnson, the company's

colorful and

outspoken CEO, is time.

"That revenue will get recognized some day because it has to be, and it's the auditor's determination to decide when that happens," says Johnson. "But we won't take returns. As long as I'm at PurchasePro, there will be no returns. I know that for sure. They

the auditors may not know that for sure, but I do. Who else do you think can make that decision?"

Of course, Sun hasn't even sold the licenses yet, so whether they'll be returned seems premature. Of the 27 licenses that PurchasePro sold to its partners, Johnson said "several" already had been resold. He was unable to identify to whom, though.

And Johnson says it ultimately doesn't matter to him whether he

ever

gets to recognize the $2 million in revenue. Certainly, at least, he contends it won't keep his company from making its fourth-quarter revenue projections of $30 million to $32 million -- and also turning a profit.

"First and foremost, it doesn't matter, it's not going to make or break my quarter," Johnson said. "It's a gnat, in terms of significance. Let's say the deferred revenue stayed the same and I don't recognize any of it. We've still got the cash in the bank and I smoke the quarter, so what difference does it make?"

One difference it could make is whether PurchasePro in fact has all of the $5.3 million in deferred revenue in the first place. Since the company's Oct. 17 call with analysts, several analysts have questioned whether PurchasePro had collected in cash all of the deferred revenue it claimed on its balance sheet.

On Wednesday, Johnson couldn't guarantee that it had. But he made a distinction between deferred revenue that's paid upfront and recognized in increments over time as a project is completed, and deferred revenue that is already billed but can't be recognized because of the accountants' need to know that it won't be returned.

"To be honest with you, we've probably collected all of it," Johnson said. "I can't give you that 100% for sure, but my guess is that we've collected almost all of it."

Johnson said PurchasePro wasn't doing anything unusual with its numbers. Instead, the company was being conservative in its accounting, he said.

"I'm 99% sure that I get to recognize that revenue this quarter, but I'm not counting on it. It's not going to make a difference whether we make our numbers or not. We're taking the high road and going with the conservative accounting approach."

Nevertheless, that approach inspired investors to take the low road with PurchasePro's stock on Wednesday.