Earnings shortfalls

No wonder so many RBOCs and other old-line service providers go the route of the tracking stock to cleanse the stench of the incumbent from their growth operations.

Spend time listening to the earnings calls of carriers and vendors and something becomes apparent: Analysts and journalists can be pushovers, and they rarely treat all companies equally.

While the chief financial officers of established companies sweat blood to hit or exceed analysts' expectations for operating profit, executives at so-called "growth" companies talk up nonfinancial metrics such as fiber optic route miles completed, voice and data lines installed and average revenue per subscriber. All are good measurements of the quarterly progress of business, to be sure, but more often than not, they're trotted out to distract the media and analysts from that large number in parentheses lurking at the bottom of the income statement: net loss. And we fall for it.

If you doubt that young companies try to hide bottom-line results, just look at CLEC Allegiance's earnings release from 1999's fourth quarter. In a seven-page release that details everything from the increase in the number of lines in service and the number of CO co-location sites to the number of switches in operation in certain cities, nowhere does it mention that the company posted a quarterly net loss of $60 million on revenue of only $39 million.

The earnings report led to a slight dip in the stock's share price, but for the most part Wall Street analysts and investors took it in stride. Compare that reaction with what happens when a Lucent or an AT&T or a BellSouth misses analysts' estimates by a few pennies. Out come the prophets of doom and the stock dives.

No wonder so many RBOCs and other old-line service providers go the route of the tracking stock to cleanse the stench of the incumbent from their growth operations. These providers figure that if they dress those money-losing businesses like cuddly spin-offs, Wall Street will treat them with kid gloves. It usually works.

There are some gray areas, though. As the RBOCs' voice businesses slow, for example, Wall Street embraces data and wireless revenue growth as a measure of those companies' futures and doesn't expect these segments to see an immediate return on the hefty investments being made. However, for the most part, Wall Street applies a double standard during earnings season - one for the mainstream behemoths, one for the upstarts.

"What?" you ask. "You're defending the old monopolists - the same companies that stifled innovations for decades? And now that deregulation has allowed entrepreneurial outfits to flourish, you would immediately hold them to the financial standards of huge corporations?" No, of course not.

It makes sense to give companies such as Allegiance a rookie's chance and let them spend their IPO proceeds on network buildouts that one day could produce enormous future returns. I'm merely the voice at the back of room whispering, "Watch your backs." In other words, Wall Street and the media won't let the ride last forever - if we get a chance, we'll turn on you quicker than a pack of Chihuahuas.

Here's a forward-looking statement: When the stock market turns south, as it eventually will, growth will become harder. Capital will become more expensive and stock as merger currency will plummet in value. That's when we'll start to ask the tough questions of you naive youngsters clutching your growth metrics and crying that being cashflow positive makes your company a solid investment.

Sorry, kids, but in the end all business is about profits. Maybe not today, maybe not tomorrow, but one day you will be held accountable for all those capital expenditures. I suggest you start preparing now.