Earnings Watch: Rambus earnings approach sparks confusion

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Rambus Inc. turned back the clock to report earnings Monday, but the chip maker’s attempt to help out analysts who are living in the past confused just about everyone else.

The problem with the Rambus RMBS, +1.24%  numbers was in the presentation, which the company attempted to offer “as they would have been presented under ASC 605,” old accounting rules that have been superseded by ASC 606. That approach led Rambus to report standard numbers under the new format, adjusted numbers under the new format, adjusted and unadjusted numbers under the old format, and last year’s numbers based on the old accounting rules.

ASC 605 was the revenue recognition standard that was in effect until ASC 606 went live Jan. 1 for most public companies. The new rules are supposed to improve comparability by eliminating industry-specific accounting for revenue under U.S. GAAP — generally accepted accounting principles, the standards for financial accounting and reporting all companies listed on U.S. exchanges must follow — and implementing a principles-based, single revenue recognition model across industries and across the globe.

The key numbers Rambus wanted investors to focus on were an adjusted profit of 21 cents a share and revenue of $98.8 million, calculated as if the new revenue standard had never happened, and which beat analysts’ average estimate of 20 cents a share on sales of $96.8 million. Actual results based on the current revenue rules, however, were a GAAP diluted net loss per share of 14 cents and an adjusted non-GAAP diluted net loss per share of 3 cents.

Read: SEC is once again ‘guiding’ companies on their use of non-GAAP numbers

Total revenue at Rambus in the second quarter under the new revenue standard, ASC 606, was much lower than analysts expected, $56.5 million, but that’s because many analysts covering the company are also nostalgic for the old rules. Their estimates are still being produced on the old revenue standard basis.

In its second-quarter earnings release Rambus also said it was presenting results under the old revenue reporting rules because an “ASC 605 presentation is required under the modified retrospective transition method that Rambus has chosen to adopt under ASC 606.”

Rambus reported that total revenue for the quarter ended June 30, 2018 under the old revenue standard would have been $98.8 million, 9% higher that last year in the same period, with GAAP diluted net income per share of $0.13 and a non-GAAP basis diluted net income per share of $0.21.

MarketWatch picked the wrong EPS number, the GAAP instead of adjusted number, and had to correct its report on the earnings, but fared much better than other news organizations. Zacks Investment Research reported the non-GAAP EPS results under the old revenue standard, 21 cents per share, which analysts were using and which beat the Zacks Consensus Estimate of 20 cents per share. That number also compared very favorably to non-GAAP earnings of 14 cents per share a year ago.

However, Zacks picked the wrong revenue number, $56.46 million for the quarter ended June 2018, incorrectly reporting a huge negative revenue surprise that missed the Zacks Consensus Estimate by 41.6% and compared unfavorably to year-ago revenues of $94.72 million.

AP repeated the Zacks story, reporting that the company had a GAAP loss of 14 cents but that earnings, “adjusted for one-time gains and costs, were 21 cents per share.” Those adjusted results exceeded Wall Street expectations, the AP report said, quoting an average estimate of three analysts surveyed by Zacks Investment Research of earnings of 20 cents per share.

Read: From a wrist slap to jail time: how the SEC deals with dodgy accounting

The AP story, picked up by CNBC, also repeated the lower revenue under the new standard of $56.5 million, saying it was surely going to fall short of “Street forecasts” such as the three analysts surveyed by Zacks which it says expected $96.6 million, a figure that was estimated under the old revenue standard.

Errors like this proliferate because the AP story was generated by Automated Insights using data from Zacks Investment Research. A Zacks spokesman told MarketWatch that it will correct the story since Zacks acknowledged sell side brokers were all using the ASC 605 non-GAAP figures for both revenue and EPS and so it should have reported the ASC 605 non-GAAP revenue as the result versus the ASC 606 GAAP revenue.

In its earnings release the company said reporting under the old standard is “required under the modified retrospective transition method that Rambus has chosen to adopt under ASC 606.” 

Rambus chief financial officer, Rahul Mathur, told MarketWatch in a phone interview on Tuesday, “As is required under the modified retrospective adoption approach, we plan to continue to provide information as if we were still under the previous accounting standard during the transition period in 2018. Our investors and analysts appreciate our additional disclosure that shows what our financials would have been under the previous accounting standard.”

Olga Usvyatsky, vice president of research for Audit Analytics, told MarketWatch, “Companies that use a modified method are required to present the impact of the standard on the current period.”

Rambus notes in its press release that this presentation “allows a more relevant comparability with prior results,” which were all reported under the previous revenue rules.

“Companies were warned,” Paul Chaney, the E. Bronson Ingram Professor of Accounting at Vanderbilt University, told MarketWatch, “that using the modified retrospective method would make comparability difficult.”

See also: Rambus stock dips after first earnings since CEO departure

Rambus’ auditor, PwC, wrote in a guide for clients in August 2017 that presentation of the results under the old rules is not required after the first year of implementation, in this case 2018, is over.

In its reconciliation of the nonstandard numbers to GAAP, Rambus’s earnings release identifies the metrics that present results as they would have been calculated under the old revenue standard as non-GAAP financial metrics.

Chaney told MarketWatch, “If they insist on presenting current results under the old revenue standard, their approach should follow the SEC’s non-GAAP guidelines. That includes making sure they don’t present the results adjusted to the prior standard more prominently that GAAP.”

Mathur told MarketWatch, “We have and will continue to show prominence to GAAP results.”

In May 2016 the SEC issued the initial set of guidelines on non-GAAP reporting because of a concern that more companies were using such numbers to potentially mislead their own shareholders.

See also: SEC says companies should brace for comment letters on new revenue rule

In its first quarter filing with the Securities and Exchange Commission, Rambus wrote it had adopted the new revenue recognition accounting standard as of January 1, 2018 using the modified retrospective method. At the beginning of the fiscal year, the company recognized the cumulative effect of applying the new revenue standard, a $626 million net reduction of the company’s accumulated deficit.

The company has an accumulated deficit in its shareholder equity account because of its history of losses and this adjustment had a material impact on its balance sheet. The disclosure in the second quarter filing also said, “The comparative information for prior periods has not been recasted and continues to be reported under the accounting standards in effect for those periods.”

Rambus’ auditor PwC also wrote that companies “will not need to restate prior periods to reflect adoption of the new revenue standard; therefore, the new disclosures for those prior periods are not required.”

Usvyatsky however, cautioned that,” analysts should remember that financial statements that are presented under the new revenue recognition guidance and ASC 606 numbers should be discussed at least as prominently.”