By Tatyana Shumsky
Adobe Systems Inc., which built its reputation on getting people
to buy its photo and video-editing software, says it will no longer
tell the public how many customers it has.
Roughly two-thirds of Adobe's revenue comes from online
subscriptions, which in recent years have eclipsed its sales of
software discs. But the company eliminated quarterly subscriber
numbers in favor of reporting "annualized recurring revenue," which
combines subscription fees with corporate contracts, as a
performance indicator.
"What I don't want, frankly, is to mislead investors with this
huge subscriber number," said Adobe finance chief Mark Garrett.
Adobe is just the latest company to change the way it defines
success. As they are forced to adjust to new delivery methods or
changing consumer tastes, corporate finance chiefs are
reconsidering what benchmarks they should share with investors.
"You ultimately have to be proactive in having the right data to
be able to show the ongoing health of an enterprise," said Ryan
Senter, a managing director at management consulting firm Protiviti
Inc.
Such moves can be risky. Investors tend to be skeptical of
changes in a company's financial reporting, and uncertainty can
drive down stock prices.
"It's usually a bad sign when companies pull back from
transparency," said Jim McDonald, chief investment strategist at
Northern Trust Corp., which manages $875 billion in assets.
In Adobe's case, reaction has been mixed. Subscriber growth in
recent quarters has fallen at the lower end of the range of
analysts' expectations. Still, what likely matters most to
investors is that the business is growing overall.
"Ultimately, you want more revenues and more earnings, and
whether it's achieved through units or revenue growth per unit is
not really that important," said Deutsche Bank equity analyst
Nandan Amladi, who follows Adobe.
Changes in the way a company discloses financial information can
also alarm regulators, even if it doesn't involve figures defined
by conventional accounting standards. The Securities and Exchange
Commission has expressed concern about the spread of such
customized benchmarks.
Still, investors often want more insight into a business than
required accounting can provide. This can leave shareholders
reliant on benchmarks that change at the company's discretion.
.
For years, analysts say, Valeant Pharmaceuticals International
Inc. used customized accounting measures such as "cash earnings per
share" to paint a more appealing picture of its business. Like many
companies, Valeant steered investors away from putting too much
stock in standard accounting figures.
"Management doesn't create [custom accounting] metrics to look
worse, they create them to look better, that's the case with
Valeant and with many others," said Dimitry Khmelnitsky, analyst
with Veritas Investment Research in Toronto.
Valeant declined to comment.
As Houghton Mifflin Harcourt Co. morphed from a traditional
textbook publisher to selling a combination of print and electronic
teaching materials, it also changed the way it accounts for those
sales.
Even though it collects cash upfront for books and online guides
that will be distributed over time, the company isn't allowed to
record those revenues until the final product is delivered to the
customer. But, to show investors that sales were improving, even if
the improvement wasn't fully reflected in the company's
disclosures, Houghton in 2014 began reporting the sums it actually
collected during a given period as "billings."
"We think about and manage this business according to this
billings number, "said finance chief Joseph Abbott. "Without this
tool, we couldn't have the ability to communicate the performance
of both what we have and what we expect for the year.."
Still, CFOs must be vigilant to avoid reporting customized
accounting measures that have become irrelevant. Sticking with an
outdated indicator can warp investors' view of a company's
performance.
McDonald's Corp. last year began reporting same-store sales on a
quarterly basis, rather than monthly. The quarterly data smoothed
out large swings in the monthly numbers, making it easier for
shareholders to see trends, said UBS equity analyst Keith
Siegner.
The shift allows "us to focus our attention and resources on
longer-term drivers of financial performance," McDonald's said in a
statement, adding that it also brought the company in line with
most competitors.
"Investors want clarity, consistency and relevancy in terms of
metrics, and I think that's what CFOs are generally striving for,"
said David Garfield, managing director with AlixPartners LLP, a
management consulting company. "If a change in strategy warrants a
change in metrics, you can't always know how that strategy is going
to evolve," he said.
(END) Dow Jones Newswires
March 28, 2016 20:30 ET (00:30 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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