America Online Just Can’t Please All The Accountants
Once maligned as too aggressive with its accounting for marketing expenses, America Online Inc. now may be too timid.
The nation’s biggest online service bowed to critics in October and took a $385 million pretax charge to change how it accounts for the cost of mailing computer disks that potential customers need to get online with AOL. Instead of deferring these marketing costs - a practice that inflated recent earnings - AOL now will expense them as they’re incurred.
Many Wall Street analysts and investors who had bashed the Dulles, Virginia, company lauded the move, saying AOL had stopped playing games. Others, including some accounting experts, say the company went overboard.
“AOL is probably being overly conservative now,” said Jack Ciesielski, an analyst at the Analyst’s Accounting Observer, a research service in Baltimore. If Ciesielski is right, AOL is needlessly understating its quarterly earnings.
Accounting has been an issue at AOL for a long time and is a big reason its stock now trades at about $36, far below the record high of $70 reached in April.
Like many companies that advertise with direct-mail flyers, catalogs, or in this case, computer disks, AOL capitalized those expenses. Capitalizing expenses means putting them on the balance sheet as an asset, then writing down that asset over a period of time. Doing this whisks those expenses out of the income statement, giving earnings a lift.
The practice is fine, as long as the marketing expenses can be linked directly to a source of revenue.
That’s easy for catalog retailers and other direct marketers. A person gets a catalog and either becomes a customer by placing an order or tosses the glossy tome in the trash.
Lots of companies use the accounting technique, including Lands’ End Inc., Lillian Vernon Corp., CUC International Inc.
The real trouble for AOL was that it was taking 24 months to write off its capitalized marketing expenses.
That was too slow, critics said, given that many AOL members weren’t staying with the service that long.
Some of the stocks that moved substantially or traded heavily Friday.
NYSE
BellSouth, unchanged at $37.75, Ameritech, up $1.75 to $58.37-1/2, Pacific Telesis Group, up 50 cents to $35.50, SBC Communications, up $1.12-1/2 to $50.87-1/2 and Alcatel Alsthom, down 12-1/2 cents to $16.12-1/2.
The telecommunications companies or their operating subsidiaries have agreed with Alcatel Alsthom, a Paris-based maker of telecom equipment, on multi-year contracts that will help the telecom companies speed affordable, high-speed data access services to customers.
NASDAQ
Arterial Vascular Engineering Inc., down $6.26-1/4 to $9.98.
The catheter maker said Thursday it expects to report second quarter revenues “slightly” lower than a year ago and earnings of between 14 cents and 16 cents a share, down from earnings of 25 cents a share a year ago, citing greater than expected expenses and increased pricing pressure on the company’s products. Bear Stearns & Co. and Cowen & Co. downgraded the stock.
Microsoft Corp., down $1.25 to $83.62-1/2.
Chairman Bill Gates and director and co-founder Paul Allen sold a combined 2.7 million shares of the company in November, before a Dec. 9 two-for-one stock split by the Redmond, Wash., software giant.
Boston Communications Group Inc., down $2.87-1/2 to $5.12-1/2.
The financial services firm expects to report a loss of one cent to two cents a share on expected revenues of $12 million to $12.5 million for the fourth quarter ending Dec. 31. The company, which had its initial public offering in June, said full-year 1996 revenues will be “substantially higher” than in 1995, and said the company “would be profitable for 1996.”