Read Homestore.com’s press releases and things look pretty good for the Westlake Village-based Internet real estate services company.
It reported revenues of $129 million in the second quarter, up from $72 million in the like period a year ago.
“Few companies in today’s environment are generating that kind of top-line growth,” said Homestore.com Chief Executive Stuart Wolff.
But once you get past the top line, things get murkier.
Homestore.com is AOL’s exclusive provider of apartment and residential real estate listings in an era when home sales are one of the few industries that still have a healthy pulse. It survived a Justice Department investigation into anti-competitive practices, and federal officials cleared its $730 million acquisition of rival Move.com from Cendant Corp., owner of franchises like Century 21 and Coldwell Banker.
But depending on how you’re counting, the second quarter results either generated a net income of $14.5 million, about 13 cents a share or a net loss of $72 million, about 31 cents a share.
Pro forma reporting
The $72 million net loss (down from a loss of $98.2 million in the same quarter a year earlier) is derived using generally accepted accounting principles (GAAP). The $14.5 million profit is Homestore.com’s pro forma earnings after $86.5 million in charges are excluded.
While any number of items are considered pro forma expenses these days, in Homestore.com’s case it means stock-based charges, amortization of intangible assets, acquisition-related charges and write-downs on investments.
Wolff would not address pro-forma numbers during the brief interview. Several hours later, Gary Gerdemann, a spokesman for the company, e-mailed a note to the Business Journal that said: “I’m sorry to report that I can’t make anyone else available for an interview on this matter, but I do appreciate your interest in Homestore.”
Homestore.com is not the only company these days reporting pro forma earnings. And $86.5 million is not even close to the largest gap between the two kinds of figures being reported. In its most recent quarter, Qualcomm Inc. reported pro forma earnings of $174.3 million and a GAAP net loss of $274.7 million, a difference of $449 million.
“It’s the way it is at this point,” said Shawn Milne, an analyst with Wit SoundView. “Look at a hundred other tech companies, it’s the same thing. I would suggest you look at cash flow. That’s the most important thing.”
With so many tech companies reporting pro forma earnings that paint a far more optimistic picture than GAAP results do, analysts have begun paying more attention to other elements of earnings reports.
At the end of the second quarter, Homestore.com’s balance sheet reported $175.6 million in cash on hand. It also reported $90 million as restricted cash in the form of a letter of credit AOL is holding.
Among the $86.5 million in charges Homestore.com reported is $9.3 million it amortizes each quarter for the marketing deal it struck with AOL in April 2000. In return for the exclusive five-year agreement, Homestore.com gave AOL $20 million in cash and 3.9 million shares of stock.
Budget deal
It also guaranteed AOL higher stock prices at certain future points than it is now trading at. For instance, if Homestore.com is not trading at $65.64 by July 2003, it must pay AOL the difference for 60 percent of those 3.9 million shares.
Last week, it was around $17.
The letter of credit reflected in the $90 million of restricted cash on its balance sheet is AOL’s guarantee.
Homestore.com has a similar agreement with Budget Truck Group. It gave Budget 1.1 million shares in February 2000 (valued at the time at $70 million) in return for a marketing campaign that includes Homestore’s logo on the sides of 45,000 Budget and Ryder rental trucks. Those shares must be worth $64.50 by March 2002 or Homestore.com owes the difference. But Homestore reportedly has questioned whether Budget is moving quickly enough to get the logo on the trucks.
In a report he prepared on Homestore.com, Henry Blodget of Merrill Lynch said that while using equity to pay for operating expenses like marketing is certainly appropriate, reporting it as pro forma expenses makes it difficult to analyze the company’s value.
“This is not a disclosure issue,” Blodget said. “It is, however, a valuation issue.”
