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By Ann Sullivan 04/23/01
 Ventro
reported $0 revenue for its fourth quarter of 2000. Yes, zero
- a figure that pretty well encapsulates the spectacular decline
of the business-to-business marketplace player whose shares
hit a high of $243.50 in February 2000 but fell to less than
$2 within the year.
It's easy to conclude that zero revenue equals an unhealthy
company, and Ventro will likely never earn its way onto our Network World 200
list of the top public network companies.
But not all financial reports are so easy to dissect. Annual
and quarterly securities filings, known as 10-Ks and 10-Qs, respectively, are
filled with mind-numbing figures and grandiose statements that often obscure
the most interesting content. Once in a while you'll find a real nugget, such
as the fact that a company is saddled with insolvent customers or overwhelmed
with inventory. But you have to know where to look.
 For starters, consider more than just year-over-year revenue
growth. Sequential quarterly growth can sometimes give a more accurate glimpse
of current market conditions. Cisco sales grew 55% between the second quarters
of 2000 and 2001. At that rigorous growth rate, the company would seemingly be
insulated from the economic slowdown crushing so many network vendors. Yet
Cisco fell short of earnings expectations for fiscal second-quarter 2001 by a
penny - its first miss in more than six years - and instituted layoffs as one
result.
So what gives? Read between the lines and you'll see that one
of Cisco's problems is its 3.5% revenue growth between its first ($6.52
billion) and second ($6.75 billion) quarters of fiscal 2001. That's quite a hit
for a company that posted 14%, 16.3% and 13.1% revenue growth in the three
prior quarters. In fact, sequential revenue growth hadn't dipped below 9% since
the first quarter of 1999.
Clearly, Cisco can't sustain the double-digit earnings growth
we've come to expect if it can't pull revenue growth out of the single digits.
But that's not going to happen any time soon. Last week, Cisco warned it
expects third-quarter revenue to be down about 30% from second-quarter revenue.
What's on the shelves?
Inventory, too, can tell an interesting story. While Cisco's
revenue grew 3.5%, inventory levels grew 29% between its first and second
quarters of 2001. These aren't percentages investors want to see, as the
numbers suggest Cisco isn't selling equipment as quickly as expected - a
suspicion confirmed last week when Cisco said it will take a $2.5 billion
charge for excess inventory.
Last fall, Nortel Networks found itself similarly stuck with
rising inventory. Nortel's third-quarter 2000 revenue fell 7% from the second
quarter, but inventory went up 21%. Nortel has since reversed the imbalance.
Financial statements released in January show Nortel's fourth-quarter 2000
revenue up 21% from the third quarter and inventory up 7%.
But Nortel is by no means out of the woods. In January, the
company briefly allayed investors' fears, saying for fiscal 2001 it still
expected to hit 30% growth in revenue and operating earnings from the year-ago
period. Then in February, Nortel unexpectedly downgraded growth expectations,
saying revenue would rise only 15% and operating earnings would rise 10% in
2001. And Nortel announced plans to lay off 10,000 employees. A month later,
Nortel lowered the bar again, downgrading earnings expectations for the first
quarter of 2001 and adding another 5,000 to the layoff number.
Incidentally, the surprise February downgrade didn't go over
well with investors. As a result, the company had to add a number of putative
class-action lawsuits to the risk factors listed in its annual report, filed in
March.
One company that wasn't surprised by Nortel's February
downgrade is Veritas Investment Research, a Toronto firm that sells research
reports to institutional investors. Veritas predicted Nortel's miss well before
February's bad news, calling into question the company's financial health based
on what it saw as unclear accounting practices. Veritas points out that for the
first nine months of 2000, Nortel reported "earnings from operations" of $1.48
billion. Yet, when calculating its earnings using U.S. generally accepted
accounting principles, Nortel had to report a "net income" loss of $2.06
billion for the same nine-month period. There's a huge disparity between these
two earnings numbers - a $3.54 billion difference.
These figures are so far apart because, as Veritas notes,
Nortel reports its "net earnings from operations applicable to common shares,"
a valuation that hit $574 million in third-quarter 2000. But factor in
acquisition-related costs, stock options and one-time gains, and you get a net
loss of $586 million.
Pay up, please
Another trouble sign is when receivables - money owed a
company - rise faster than sales.
Delinquent customers are one of the problems that derailed
Covad Communications, the DSL wholesaler that topped our 2000 list of
the fastest-growing network companies. Covad billed $78.1 million in its third-quarter
2000, but recorded only $66.7 million in revenue for the same period.
Outstanding customer payments caused the discrepancy.
Covad's trouble spilled into its fourth quarter, too. In
February, Covad warned it needed to delay reporting fourth-quarter and year-end
results because of accounting issues that may erase as much as $52 million in
2000 revenue. Not only that, but some revenue billed in the past will have to
be written off as uncollectible.
Loose-lending Lucent ran into bad debt, too, for telecom
start-ups it wooed with generous financing. Last fall, it was forced to set
aside larger-than-anticipated reserves for bad debt for those customers. Like
most companies, Lucent makes allowances for "doubtful accounts," but
low-balling nonpayment allowances can make revenue seem healthier than it turns
out to be. It's a risky practice at a time when companies are struggling.
Whitney Tilson, managing partner of Tilson Capital Partners,
calculated that instead of increasing allowances for nonpaying customers, as
would be prudent in tough times, Lucent was for the most part decreasing the
percentage of revenue set aside. That figure went from 3.98% in third-quarter
1999 to 3.16% in third-quarter 2000.
Revenue-juggling is part of the reason Lucent revised its
fiscal fourth-quarter 2000 revenue downward by $679 million in December, a
month after releasing its year-end financial statement. Now the Securities and
Exchange Commission is looking into Lucent's revenue-booking issues.
Figures on inventory, accounts receivable and
nonpayment allowances are all readily available in 10-Ks and
10-Qs. All you have to do is pick up a calculator, do the
math and compare quarter-to-quarter shuffles. You may learn
some interesting details about your vendor's financial health.
Related links
Situation looking bleak for Ventro
Despite Ventro's best efforts to revamp its marketplace software and services, the future appears to be dimming for the marketplace pioneer.
Network World, 02/26/01.
Nortel's woes worsen
Nortel Networks Thursday said that growth will slow considerably this year due to a 'more severe economic downturn' and that 10,000 employees will lose their jobs.
Network World, 02/15/01.
Covad shuts off service to two ISP resellers
Covad Communications is cracking down on reseller ISPs that owe the DSL wholesaler money.
Network World, 02/09/01.
Lucent shares tumble on report of SEC investigation
Shares of Lucent fell steadily Friday morning on the New York Stock Exchange after a report in The Wall Street
Journal.
Network World, 02/09/01.
Waiting for Cisco
The networking company will report earnings Tuesday after the bell. Investors are worried.
Network World , 02/05/01.
Layoff news
The latest layoff news from Network World.
Vendor profiles:
Cisco
Novell
Lucent
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