Software Stock Falls 62% After Sales Revision

A leading e-commerce software company saw its stock dive 62% Monday after it slashed millions of dollars from its previously reported revenue, a step many Internet companies could be forced to take under an emerging crackdown on misleading accounting practices, experts said.

Virginia-based MicroStrategy Inc. revised its revenue statements dating back to 1998 as part of what the company called an effort to comply with new SEC guidelines.

The adjustment comes at a time when regulators express growing concern with the way technology companies maximize--some say inflate--the revenue figures they report, largely to keep their soaring stock prices aloft.

“We have seen an increase in people pushing the envelope of what is acceptable accounting,” said Chris Ullman, a spokesman for the SEC. “We have placed special emphasis on financial reporting of Internet companies. The rules are fine, it’s how they’re being interpreted in this new environment.”

While the accounting practices in question are not illegal, many experts regard them as misleading, and say they are reflected in the financial records even of such Internet giants as Yahoo Inc. and Priceline.com.

“I think we’re going to see more and more” revenue adjustments, said Brett Trueman, a professor of accounting at UC Berkeley’s Haas School of Business. “Internet companies’ revenues are being inflated by various techniques, and once it’s found out, these stocks could be in for a tremendous fall.”

Indeed, MicroStrategy’s stock plunged $140, closing at $86.75 in heavy trading on the Nasdaq market Monday, as the company lost $4.2 billion in total market value.

MicroStrategy’s revision stemmed from its practice of reporting revenue from service contracts up front, instead of spreading the revenue over the life of the contract.

Michael Saylor, chief executive of MicroStrategy, said the change reflects the fact that the company has gone from a software sales firm to one with more complex contractual relationships with its clients. He sought to distance his company from the financial reporting controversy surrounding other tech firms.

“In our case, all the revenue is good, the cash flow is real, it’s just a question of period,” he said. “In other cases, it’s a question of what is the revenue and how much of it should be counted.”

MicroStrategy said it expects to cut between $50 million and $55 million from the $205.3 million in revenue it reported for 1999. Revenue figures for 1998 will likely be trimmed by $5 million to $10 million.

The firm also postponed a secondary stock offering “to allow the market to adjust to this new set of accounting guidelines,” Saylor said.

Experts say Internet companies routinely depart from traditional accounting practices. Hundreds of Internet firms that rely on advertising revenue, for instance, swap ads with other Web sites in “barter” arrangement in which no cash changes hands, but the full value of the ads are reported as revenue.

E-commerce sites often offer deep discounts on products but record the transactions as if they were full-price sales, subtracting the discount later as a cost of marketing.

These were among the 20 “issues in accounting for Internet activities,” that SEC officials recently brought to the attention of the Financial Accounting Standards Board, a private group that oversees general accounting practices for public companies.

The SEC expressed its greatest concern with the way some Internet companies pad their revenue by recording the full sales price of goods and services that are actually supplied by others.

Priceline.com, for instance, reported revenue of $482 million last year, reflecting the total prices that customers paid for travel services purchased at its site. But the vast majority of that sum, $423 million, went straight to the airlines, hotels and rental car companies that supplied the services.

Brian Ek, a spokesman for Priceline, said the company is in full compliance with accounting rules, and pointed out that its business is very different from traditional travel agencies, that report only their commissions as revenue.

“We buy the tickets from the airlines, sell [them] to our customers and make the spread,” he said. “If a customer does not follow through on a ticket purchase, Priceline eats the cost.”

But Priceline doesn’t buy those items until a customer has already entered a bid with a credit card, and some experts say the company would paint a more accurate financial picture for investors by listing $59 million as its revenue last year, instead of $482 million.

Internet companies face greater pressure to boost revenue figures because few of them post actual profits and investors have relied on revenue projections in determining the value of a company’s stock.

“For these Internet companies, revenues can be significantly greater than the cash they are bringing in from operations,” Trueman said. “If investors aren’t aware of that, they’ll be in for a rude awakening.”