Dotcom results - buyer beware

Dotcom financial results, especially in these financially troubled times, ought to be stamped ‘caveat emptor' - buyer beware.

First: the subsidiary creators. Problem - you're a dotcom with plenty of cash, raised in the euphoric days of dotcom yesteryear, but have yet to find a way of actually making money from your wretched business; shareholders are getting restless and you're beginning to feel the heat from reporting annual sales lower than the cost of the executive office furniture. Solution - establish an arm's length subsidiary, which, in its first transaction, pays you a fat license fee to use your “brand” in the booming market of Papua New Guinea. Investment costs go through your balance sheet, the license fee is registered as revenue. Bingo.

Second: time-warping. Problem - you're a go-getting dotcom, haemorrhaging money, of course, but at least have strong top-line growth to point to. Suddenly, you hit zero quarter-on-quarter growth which will put the kybosh on any analyst still singing your praises. Solution - put your year-end back by a month and report the results for a four-month quarter which now show an increase over that snivelling, boring old three-month quarter used by lesser companies.

Surfcontrol, the London and NASDAQ-listed provider of internet filtering software did just that. The company was due to report for the quarter to May 2001 with analysts looking for annual 50% top-line growth. Instead, in a move to “align the financial year of the company with the calendar year ” it reported turnover for the four months to June 2001, which weighed in at US$14.8m, up 33% from US$11.1m for the previous lousy-old three-month quarter. Pro-rata, the figure gives an estimate of US$11.1 for the 3-month period that should have been reported - zero growth on the previous three months. Exit analyst meeting, breathe a sigh of relief and try to work out what you're going to do next year. Lunar months perhaps? Months based on the rotation of Mars? Or should we wait for the first ever five-month quarter?

There are two other alternatives to such fractious reporting of uncomfortable quarterly results of course. The first, unfortunately not available to most dotcom companies, is to post results that are better than the previous ones. Failing that, you could follow the lead of computer games publisher Eidos and abandon the practise of reporting quarterly results altogether. This may fly in the face of conventional wisdom that the more you communicate with the market, the less likely they are to panic-sell your shares on the first hint of bad news, but it sure helps the management escape the tedious three-month post-results drubbing. For posterity, Eidos's last ever quarterly results showed sales of 12.2m, down 27% from the previous year, and an operating loss of 11.1m. Shares in the company dropped 4.7% to 192p.

As the saying goes, desperate times call for desperate measures, and this kind of obfuscation is likely to get worse in the coming months, tainting the whole sector. It's more essential now than ever before to read the small print.