Defending the bottom line

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There is no shortage of other examples in which special charges were taken. Internet portal company Excite tried to exclude $56.8 million as a one-time charge incurred in a marketing partnership with Netscape Communications' Netcenter.

"We believe our accounting treatment was prudent," said Greg Kalben, vice president of investor relations for Excite. "The majority of analysts didn't have an issue with the our treatment of our transaction, just a few vocal ones."

Kalben added that the company was surprised that the accounting treatment "had snowballed into such an issue, especially since our outside auditors, Ernst & Young, had approved the transaction."

Still, some analysts and accountants argue that marketing charges should be included in operating earnings because they are operating expenses.

Online auctioneer Onsale also recently wanted to pass off a marketing charge as a one-time cost, a payment to Cendant related to a partnership with Resort Condominums International. "It is true, especially within the financial community, that a marketing charge is usually ongoing," an Onsale spokesman said. "But in this case, we just had a one-time charge that was really a set-up cost to get the site up and running."

This year, Netscape changed the date that closed its fiscal year, a shift that allowed it to separate January from its newly defined second quarter. But during that month, the company incurred a sizable loss of $54.2 million; for the second quarter, it posted net profits of $8,000

The accounting changes made it difficult for analysts to determine Netscape's overall financial health. The company said it was headed toward a recovery, but financial site Briefing.com called the shift the "worst attempt in concealing a lousy quarter in recent memory."

"Certainly I would be wary of a company after an accounting dance," said Marc Usem, who follows Netscape for Salomon Smith Barney but made it clear that he was not referring to the company in his comments. "It should say to people that we need to take a good hard look at the quarter."

Added Simons: "This kind of thing doesn't usually happen with old technology companies such as Microsoft, Intel, Oracle, and Cisco...It goes on mainly with Internet stocks."

One reason: Because the industry is relatively new, interpretations of accounting standards used by more mature industries do not always apply.

"It's very different from a brick-and-mortar company," said Terry McCrary, vice president of research at Waldron and Company. "It's ground that hasn't been as trodden, so you are going to have more fuzziness."

To be on the safe side, he said, "my general feeling is that the more information a company represents the better it is. If you want to present data on a pro-forma basis, that's fine as long as it is clear and no one is being misled. Of course, misleading is in the eye of the beholder."

Unlike more mature technology industries such as software, chipmaking, and cable, the fledgling Internet sector still does not have one rigorous set of criteria that analysts examine consistently.

"In 'old tech,' there are well-established metrics and methodology for what companies report and how," Simons said. "With Internet stocks, there are few such standards. This leaves companies with a lot of flexibility in managing expectations. Information and presentation can more easily be selected and modified to suit the situation and desired message."

Indeed, the current financial landscape can often be painted in vast hues of gray.

"There's a broad spectrum for valuing companies on tangible metrics like earnings or cash flow vs. wild speculation based on no fundamentals," said Michael Graham, an Internet analyst at Raymond James. "Somewhere in the middle is where Internet stocks lie at the moment." 

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