New SEC Rules Knock Data Mining Highflier

FRAMINGHAM (03/27/2000) - Three months after their release, the U.S. Securities and Exchange Commission's new accounting guidelines have taken their toll on the share price of at least one new economy company.

Data mining firm MicroStrategy Inc. in Vienna, Virginia, saw its stock price plunge 62 percent on March 20, from $226 to $86.75 per share. The drop came after MicroStrategy's CEO lowered the firm's revenue statements for 1998 and 1999, in an effort to comply with the new SEC guidelines.

The announcement prompted several class-action lawsuits on behalf of investors.

The change reflects the firm's shift in the way it accounts for revenue from service contracts - recording them during the period of the contract rather than up front.

The company is expected to report a loss of $34 million to $40.3 million for last year, rather than a profit of $12.6 million. For 1998, the company's reported revenue could dip from $106 million to between $96 million and $101 million.

MicroStrategy "is fundamentally still the same company, but will [the news] hamper its ability to get new customers and execute? That's the $64,000 question," said Steve Abrahamson, an analyst at the Prudential Volpe Technology Group in San Francisco.

Other companies - and their auditors - may learn from MicroStrategy to be more conservative in how they account for multiyear contracts that include both software licenses and services, said Abrahamson. MicroStrategy uses the accounting services of New York-based PricewaterhouseCoopers.

The SEC's guidelines - which state that companies must have actually delivered a product or service before claiming revenue - really just reinforce existing accounting principles. But the SEC issued them after a review revealed that some new economy firms weren't following these guidelines.

Jon Moody, an analyst at BB&T Capital Markets in Richmond, Virginia, said he's confident of MicroStrategy's long-term outlook. The company simply "restated revenues based on timing," he said. "It doesn't affect the overall money coming into the company."

Apparently investors felt some renewed confidence in the firm as well. After sliding further last Tuesday, the stock edged up 16 points on Wednesday, closing at about $88 per share.

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