Thomas Lee:
Companies’ new accounting categories often don’t tell investors much
Companies’ new accounting categories often don’t tell investors much.
For investors, reading corporate financial statements has always required mental toughness. But lately, wading through financial data from companies, especially technology firms, has become especially taxing.
Intel reports revenue from its “Internet of Things” business. IBM talks up revenue from its “strategic imperatives.” Apple lumps sales from the Apple Watch into a category known simply as “other.” Google recently reorganized itself into a complicated holding company called Alphabet. And industrial giant General Electric is trying so hard to retool itself as tech-focused that it’s started reporting software revenue.
Providing investors with more information is generally a good thing. But the swamp of numbers and vague categories can make it harder to evaluate the business and a company’s stock price.
“There’s so much going on that it’s is hard to imagine what all of this means,” said Hillary Sale,
a law professor who specializes in corporate governance at Washington University in St. Louis.
In general, companies must follow accounting rules established by regulators like the Securities and Exchange Commission and the Fair Accounting Standards Board when reporting financial results. But companies do have some discretion as long as the accounting truly reflects how they see and manage the business, said David Larcker, professor of accounting at Stanford University’s Graduate School of Business.
Sped up by Internet
As industries evolve and companies expand into new businesses, it’s perfectly natural for financial data to reflect those changes, Larcker said. But the Internet has really sped things up.
Take General Electric. The industrial conglomerate founded by Thomas Edison has long been associated with manufacturing and finance. Today, the company wants investors to see it as a technology giant that can help other businesses improve productivity.
“We are on the cusp of the digital industrial revolution,” GE Chairman and CEO Jeff Immelt said recently at a conference in San Francisco. Whereas the Internet has long been dominated by consumer technology, “as an industrial company, it’s our turn.”
Investors would once measure GE by how many lightbulbs and washing machines it sold. Now the company wants shareholders to look at its software sales. The company says its software revenue will jump 20 percent annually over the next five years to $15 billion from $6 billion today.
“I don’t consider GE as a software company, but we need to be in software in order to be successful,” Immelt said. “Five years ago, we didn’t know what the hell this was. Now it’s real.”
Santa Clara’s Intel dominated the business of providing chips to makers of personal computers. Now, with PC sales falling, the company is betting big on the Internet of Things, defined by the Pew Center as an “array of devices, appliances, vehicles, wearable material and sensorladen parts of the environment that connect to each other and feed data back and forth.”
Amorphous term
Intel wants to supply not only the chips that power the sensors but also the software that transmits the data back to the user and makes sense of it.
But what does that really tell us about Intel’s health? In the third quarter, Intel said revenue from its Internet of Things unit grew 10 percent to $581 million. But overall revenue fell slightly, to $14.5 billion.
The Internet of Things is also an amorphous term that means different things to different people. So I’m not sure how reporting revenue from an Internet of Things unit adds clarity to Intel’s numbers.
In some cases, companies want to show progress from new initiatives, especially if their core businesses are drying up. IBM, for example, said six-month revenue from “strategic imperatives” (cloud and analytics) jumped 20 percent from the same period in 2014. But IBM did not provide a total revenue figure for those imperatives.
Overall, IBM’s financial performance looks pretty bad. From January to June this year, total sales declined 12.7 percent to $40.4 billion.
Apple does not break out separate figures for its much-hyped Apple Watch, which launched in April, leading some analysts to believe initial sales of the device have been disappointing. Instead, the company places the device in its “other” category, which includes Apple TV and Beats Electronics. Not much visibility there.
Wall Street, however, generally praises Google’s reorganization into Alphabet. Under the new structure, Alphabet will report results from two operating segments: the core Google search business, along with YouTube and Google Maps, and everything else, including big projects like selfdriving cars, biotechnology and high-speed Internet.
Evaluation difficult
Analysts say the move will allow investors to gain a better understanding of search, which accounts for most of Google’s revenue and profits. But how much financial data will Alphabet release about the experimental stuff ? This also begs the question of how investors should evaluate the performance of products and services that won’t produce results for years.
Many of these changes clearly demonstrate companies’ desire to show investors their future plans, Sale said. But it’s fair to wonder if any of this information is really meaningful, she said.
In other words, the numbers might offer investors new clarity — or just confuse them even more.