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Msg. 06892 of 54959
(This msg. is a reply to 06891 by orda) |
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Hi orda, Well I was watching the cash flow and noticing it was doing a little better than I might have expected, given Wave's results. Now I know why. When they issue stock to employees, they are putting the cost of doing so through the P&L. I kinda knew this and it is the GAAP policy, but I never really connected the numbers in the P&L with the adjustment in the cash flow report. I was just skipping over the non-GAAP numbers in the quarterly report showing the stock-based compensation and then turning to the cash flow report and thinking - wonder what that adjustment thingie is exactly. And it turns out the stock-based compensation essentially is the adjustment. What this means is that the P&L is a worse proxy for Wave's cash flow than I had realised. Most folks are going to accept the P&L report as if it is some kind of mathematical truth. They will panic because they see a large loss. But it matters what the substance of the costs is. Can Wave afford them? What is Wave's intention in accruing them? Do they result in cash costs or are they recorded because accounting conventions say they must be? I reshape the P&L in accordance with my own sense of the utility of the accounting policies and bearing in mind what decisions Wave is making about its future. Are costs matched against income in the correct period? Is Wave making sensible, affordable decisions? Things like that. So, for example, R&D is expensed in the current period but it is an investment in Wave's future: it's driven by choice and Wave's decisions about expanding its opportunity. So I think of R&D costs as asset-like. Expenses are drawn now to create future streams of revenue. Again, I ask myself things like, can Wave's cash flow support these costs? But otherwise, I don't really associate them with the current income statement. Stock-based compensation is like a private currency issued by the company to its employees. The company issues new shares out of thin air. Shareholders pay the price for their issuance. But this price is paid in the form of dilution of the stock. It isn't a cost which the company pays in cash. [As an aside, the convention of expensing the stock entirely ignores the reason why the company is issuing it: it is intended to make employees more productive than they would otherwise be, so while the issuance of stock is recorded as a cost, it is intended to have a benign effect that will flow through the income statement over several years]. Add the costs of stock-based compensation to assumptions about cash costs and you return over a million each quarter to the bank. Remove stock-based compensation from the P&L and the loss for the year is halved to a bit more than $5m. Remove one-off acquisition costs as well and the loss for the year is in the $4-4.5m range. Not a whole hill of beans. Especially if orders begin to flow. Meanwhile Wave has invested $14-14-5m in R&D. If it hadn't chosen to do so, it would have made the profit everyone desires. But as I've said on numerous occasions, I'd rather they invest in the future than build a cash pile. Things are not nearly as bleak as some people suggest. I think some folks will be slightly surprised by the cash in the bank at year-end. $1 1/2m of the $4.2m ex-Safend Wave loss in Q4 is not cash-related. Of the remaining $2.7m, up to half represents one-off acquisition costs. So what's left is an issue of maybe $1 1/2m of losses in the quarter. $1m of that is due to weaker sales than I anticipated. So now I'm thinking about $1/2m in additional costs in Q4. Time to panic? |
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