Paul L. Caron
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Thursday, June 11, 2015

WSJ: Tech Companies Woo Investors With Unconventional Financial Metrics, Inflating Their Valuations

Wall Street Journal, Tech Startups Woo Investors With Unconventional Financial Metrics — But Do Numbers Add Up? Critics Say the Practice Is Inflating Some Companies’ Valuations:

Hortonworks Inc. Chief Executive Rob Bearden forecast in March 2014 that the software firm would have a “strong $100 million run rate” by year-end. But the number looked a lot smaller after Hortonworks went public and then reported financial results: just $46 million in revenue last year.

It turns out that Mr. Bearden wasn’t talking about revenue, though he didn’t say so at the time. The Santa Clara, Calif., company now says the $100 million target was for “billings,” a gauge of future business that isn’t part of generally accepted accounting principles. Mr. Bearden declines to comment.

As young technology companies jostle for investors who will pour money into the firms as they try to make it big and strike it rich, some companies are using unconventional financial terms.

Instead of revenue, these privately held firms tout “bookings,” “annual recurring revenue” or other numbers that often far exceed actual revenue.

WSJ

The practice is perfectly legal and doesn’t violate securities rules because the companies haven’t sold shares in an initial public offering. Public companies can use “non-GAAP” financial terms but must explain them and disclose how they differ from measurements that follow strict accounting rules. ...

Skeptics claim that the practice is yet another sign that the tech sector is plagued with overconfidence and setting itself up for a fall. They say investors who go along with vague, unconventional financial terms are inflating valuations and leaving almost no room for error at fledgling technology companies.

Bill Gurley, a partner at venture-capital firm Benchmark in San Francisco, complained on his blog in February that many large investments in tech startups are sold based on a PowerPoint pitch. ...

The Wall Street Journal compared sales figures and projections made by 50 tech companies when they were private with financial results reported later for the same period. Fifteen of those firms, including Hortonworks, reported lower numbers. In at least six cases, the difference was caused by using more conservative accounting measurements when the companies went public.

The combined decline by the 15 companies was about $760 million, or 25% of their original sales or projections, according to the Journal’s analysis. The calculations included the 50 largest U.S.-listed IPOs since 2013 by venture-capital-backed tech companies, based on data from Thomson Reuters Corp. and the National Venture Capital Association.

https://taxprof.typepad.com/taxprof_blog/2015/06/wsj-tech-companies-woo-investors-with-unconventional-financial-metrics.html

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Comments

Hmm, I thought the SEC was going to crack down on "misleading statements," but maybe being off by over 50% isn't misleading?

Posted by: Dale Spradling | Jun 12, 2015 3:36:26 PM