Sometimes the income statement is quicker than investors’ eyes.
Witness Netscape Communications Corp.’s (Nasdaq, NSCP) recent “better-than-expected” financial performance in its quarter that ended April 30. The Internet software pioneer surprised Wall Street by reporting a quarter in which it broke even, compared with the red ink analysts expected.
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Less trumpeted was how Netscape got there. While Netscape may well be progressing in its transformation into an Internet “portal,” how that’s happening is not obvious from reading its financials.
By changing its fiscal year, Netscape created one awful month that it used as a financial kitchen sink. It essentially threw everything bad into its “stub” period of January, leaving the good stuff for the next three months.
In other words, Netscape recorded as little revenue and as much expense as possible in a month that is clearly an aberration.
For example, revenues dwindled during January to $8.3 million from $14.8 million the year before. Operating expenses–including a $12 million write-off covering the expense of firing 400 employees–skyrocketed to $57 million, compared with $94 million for the whole first quarter in 1997.
Netscape has explanations for all its actions, as it must, according to the securities law.
Revenues were low because workers were focused on retraining. And it changed its fiscal year, it says, to take “into account the seasonal buying patterns” of its customers.
But its quarterly filing last week with the Securities and Exchange Commission muddies the waters of Netscape’s own reasoning. It didn’t provide a comparison for the quarter ended April 30 with the period ended April 30, 1997.
However, it does note that 1997’s first quarter is just as good a comparison with the new February-through-April quarter because each contains a “first month” and “second and third months.” In other words, big customers typically don’t buy at the beginning of a quarter, and they’re smart enough to figure out that a supplier has changed its fiscal year.
Then why bother?
Netscape says supplying comparisons would have been “unreasonably costly and burdensome” at a time it’s trying to control costs.
“That’s one of the silliest things I’ve ever heard,” said Howard M. Schilit, president of the institutional research firm Center for Financial Research and Analysis, in Rockville, Md. “(They) have the information. This is not a full-blown audit (they) have to go through.
“When there is a change, it almost always would be from a non-calendar year end to a calendar year end,” said Schilit, a former accounting professor and author of the 1993 book “Financial Shenanigans: How to Detect Accounting Gimmicks and Fraud in Financial Reports.”
“The burden is on them to provide investors the information they need to make apples-to-apples comparisons,” Schilit said.
Netscape also blamed higher expenses in the stub month on higher staffing costs. But that’s also the period in which it took the big charge covering layoffs of 13 percent of its work force. Netscape says many of the departing employees remained on the company’s payroll during January.
“The January `stub’ was ugly,” notes NationsBanc Montgomery Securities analyst David Readerman, in a note to clients. “The three-month period was more upbeat but still indicates that Netscape has more work ahead before this is a `turnaround.’ “