Off to San Diego

I am off to San Diego to see where my future lies...here?

Calling Dr. Kuhn

Is this the start of something new?

Company Earnings Manipulation

Jeff Matthews, a hedge fund manager who blogs at Jeff Matthews Is Not Making This Up notes in a recent post that IBM dramatically lowered their Q1 earnings per share (EPS) estimate last April to 90 cents from $1.04. In actually, IBM earned 84 cents that quarter, net of 10 cents worth of options and stock-based compensation. Shortly, thereafter the stock fell ten dollars.

Because public company executives are trained to do everything to keep Wall St. happy, which typically means delivering ever higher earnings with no surprises, is it any wonder that the EPS number is ripe for manipulation? Since companies have the power to create and destroy stock pretty much at will through new stock and option issuances and buybacks of existing shares respectively, the PER SHARE earnings number does not necessarily accurately forecast the outlook for a company.

For example, if Company X with 100 million outstanding shares earned $100 million this past quarter, you can figure out that the firm earned $1.00 per share. If the company forecasts its EPS will rise year over year (YoY) to $1.25 it can meet this in two ways. The better way would be to earn an additional $25 million over the existing $100 million of current earnings to get to $125 million for the quarter or $1.25 of earnings per share. The worse way would be to buyback 20 million shares, "retire" them, and off a new 80 million share base report that while gross earnings were unchanged at $100 million, the EPS number still rose to $1.25.

While the two outcomes may be for accounting purposes similar, the second result clearly indicates a worse off situation than the first result. This is because not only did the company report in the latter example that gross earnings were unchanged YoY despite the higher EPS number, the company drained its cash reserves buying back stock to keep the EPS forecast on target. Current stockholders shouldn't shrug off this development just because their current shares now are worth more as a percent of the company (the stock base reduced from 100 million to 80 million) because as Jeff Matthews points out the granting of restricted stock and options is hardly a non-reoccurring expense to a major corporation like IBM. There is every likelihood of future dilution due to new stock being issued and 80 million shares can expand back to 100 million shares so that the EPS is no longer $1.25 but shrinks back to $1.00 EPS. What once was heralded as a sign of growth now becomes a realization of stagnation.

Guy's Let the Good Times Roll

Former Apple evangelist and current VC at Garage, Guy Kawasaki has a blog, Let the Good Times Roll. I'm looking forward to how he dishes out advice on entrepreneurship and the VC business with the best of the VC bloggers like Fred Wilson and Paul Kedrosky.

Hespos and Jaffe

Tom Hespos is going to guest host on Across the Sound, a podcast started by Joseph Jaffe and Steve Rubel, who retired from the program due to his recent promotion at Cooper Katz. I'll be looking forward to his commentary as I know Tom is one of the brightest guys in marketing today, advocating new ideas on how to navigate within the interactive digital marketplace.

The online publishing conundrum

Fred Wilson, a venture capitalist, offers up a familiar complaint to anyone who is a heavy consumer of online content. Publishers too often inconvenience their audience by forcing upon them articles which needlessly span several pages in order to generate additional pageviews. This is done solely to raise the advertising to content ratio as each separate page viewed increases the number of ad impressions per user visit.

Their need to do this online shatters the offline notion that publishers can disregard how much content readers actually consume but still price ad space on the assumption that it will be viewed. Most readers don't read the contents of a publication cover to cover, yet advertisers pay based on the circulation numbers from the publisher. If a reader only reads a few articles, the ads that are not adjacent to those article pages won't be seen, much less inspected. Since online articles that are not clicked on don't generate pageviews, publishers have to come up with a way of creating extra ad impressions. Breaking the content up is one way to do that.

Unless publishers can find a way to raise their CPM rates, readers are stuck for the time being with this annoying practice because online, advertisers only pay for an actual impression, not an extrapolated guess about readership interest.

Fix on Free

What does AOL Instant Messenger, Google, and The New York Times (pre-TimesSelect) have in common? In order to generate significant early traffic and attention, the people behind these properties decided to offer their products for free to consumers. Even as they found success, the products remained free to use, both to keep their growth rates high as well as to stymie competitors who wanted to charge for their alternative offerings. As a result, they have become among the most prominent and well-trafficked properties online which most hip, technologically savvy consumers cannot do without.

What they have done is to addict consumers to the notion in order to gain their attention, information better be free. Now, for providers of information goods this is a conundrum. The production of the information certainly isn't costless, yet consumers expect it to be free. While the exact prescription may remain elusive, I predict the winners will be firms who keep consumers fixed on free.