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January 31, 2002
Make-up tips from PeopleSoft: How to make your earnings prettier than they are
You are a new CEO at a enterprise software company thats heading South. You'd like to hear turn-around king mentioned in the same breath as your name. You have your developers re-write the product. However R&D costs money. You spin off a company called Momentum Business Applications with a one time charge of $250 million. Most analysts just gloss over the charge as part of re-structuring.
Momentum turns around and hires you to develop the new application. You bill Momentum for the cost of developing the software. On your profit and loss statement you're spending no money on development. When the software is developed you start selling it. You buy Momentum back.
Now traditionally for sales of $471 million (9 months ending Sept. 2001) you would have netted $151 million (with expenses for R&D). However, since Momentum absorbed your R&D costs you ride up to Wall Street with $279 million in earnings. apresente le genius. Your earnings growth is headed to the moon.
Peoplesoft's turnaround was covered by atleast two magazines.Forbes presented the story above in all its nasty detail. Business2 however was content playing blushing school girl to Conway's tale of rescue and romance.
To be fair, on Jan 28th Business 2 faithfully toed the fuzzy accounting line with regards to PeopleSoft.
Posted at January 31, 2002 07:59 PM