The MicroStrategy debacle may foreshadow a reckoning across the industryThe Dorian Gray EconomyMicroStrategy Inc. CEO Michael Saylor likes to compare his company to the Roman empire, but thanks to new accounting guidelines issued by the Securities and Exchange Commission (SEC), the barbarians arrived at his gate sooner than expected. Unfortunately, they’re only beginning their rounds. To recount events already reported in the business press, MicroStrategy shares lost more than 62 percent of their value — consigning $11 billion of market capitalization and $6 billion of Saylor’s personal fortune to oblivion — following a March announcement that it intends to restate 1998 and 1999 revenue and earnings in accord with the new SEC guidelines. Instead of $205.3 million in 1999 revenue, as it had previously reported, MicroStrategy now claims revenue approaching $155 million — erasing all 1999 profit, registering a significant year-end loss, and clouding what had been a picture of robust financial health. The company also expects the impact to reverberate in Q1 2000, during which it says revenue will fall short of analyst expectations.
Biting the BulletThe guidelines, which the SEC issued in a December 1999 bulletin and with which public companies must comply by June, are designed to forestall some of the “creative” accounting that pervades the new economy. While working with PricewaterhouseCoopers to lay the proper auditing groundwork for a follow-on offering of shares (now postponed), MicroStrategy decided to bite the bullet and put its accounting procedures in line with the SEC’s new expectations. Rather than immediately booking large amounts of revenue from a new contract involving software and services — its habit and custom — MicroStrategy will now defer all revenue from these complex deals across the contract’s lifetime. According to The Washington Post (March 22, 2000), analysts have questioned MicroStrategy’s aggressive accounting practices for some time. For example, the Center for Financial Research and Analysis warned its clients in November 1999 about the “two-way nature” of the NCR deal announced the previous September (to no effect on MicroStrategy’s stock price). Other analysts were also suspicious of its timing; MicroStrategy received payments in Q4 but booked them in Q3. Saylor called questions about the deal’s timing “irrelevant,” but his own CFO, Mark Lynch, has since acknowledged that the practice of translating complex, long-term deals into revenue value is a “very subjective” one. We have to wonder: How many other gangbuster companies have adopted a similarly “postmodern” view of accounting to keep investors happy?
Let’s Get RealMy point here is not to single out MicroStrategy; after all, the company did nothing illegal. Rather, it serves as an example of how the new economy’s veneer of indestructibility is starting to wear thin under intensified SEC scrutiny of overaggressive accounting and pie-in-the-sky promises. At least 63 other companies have already altered their accounting practices, and at current count, 66 others have warned investors that the new guidelines may lead to restatements. The fallout from MicroStrategy’s announcement singed the eyebrows of at least one competitor, Business Objects, whose share value deflated by 10 percent during the same period. Indeed, the Nasdaq suffered its third-worst loss ever on March 20, partially in response to a recent study from Pegasus Research International. The study, commissioned by Barron’s, predicts that at least 51 high-profile new economy companies, including CDNow, VerticalNet Inc., and Amazon.com, will run out of cash within a year at their current burn rates. Salomon Smith Barney and Merrill Lynch — eager to protect the golden goose — vehemently rejected the findings, and the market has since rebounded. But I’m not the only observer who still believes that many companies we take for granted are living a “Dorian Gray” existence — healthy and vigorous outside, but frail and sickly inside. We have but to look beneath the surface. |
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