I guess that's what you call "service." Last week, while previewing the May 2 earnings release for digital antipiracy firm Macrovision (NASDAQ:MVSN), I ran down the list of bad news for the company's shareholders, concluding: "Let's hope tomorrow gives us something better to report."
The company promptly did just that.
First-quarter 2006 sales of $57 million exceeded consensus estimates by 7%, and topped the year-ago quarter's results by 11%. Pro forma profits of $0.25 per share were 14% better than last year, stunning the analysts, who had been predicting 28% fewer profits. The surge shocked one, Oppenheimer (NYSE:OPY), into upgrading the stock from "hold" to "buy."
Pretty impressive, huh?
I think so. But let's take a more Foolish look at the quarter from a few perspectives that Macrovision didn't emphasize. Under generally accepted accounting principles, for instance, first-quarter profits actually fell from $0.11 to $0.06 per share year over year. Gross margins declined from 84.8% one year ago to 79.4%. Operating margins slid 160 basis points, from 15% to 13.4%.
So the quarter wasn't good after all?
Not so fast. We've got one more way to look at things. Calculating free cash flow wasn't possible when the earnings release came out, because Macrovision neglected to provide a cash flow statement. That arrived on May 8, with the firm's 10-Q filing with the SEC. A Fool has to wonder why the firm didn't just provide it up front, since the news here is actually pretty good. Free cash flow (which I calculate for this firm as operating cash flow minus capital expenditures and payments for patents) grew to $17.3 million from last year's $13.7 million haul -- a 26% improvement. That's even better than the 14% improvement in pro forma profits that set Macrovision crowing and bowled over Oppenheimer last week.
So why all the fuss about the pro forma numbers?
At the risk of oversimplification: For a long time, the SEC let companies get away with pretending that stock options cost companies nothing. Now that expensing stock options is mandatory, companies are at pains to explain why their GAAP numbers this quarter look so much worse than the un-options-expensed profits they were reporting last year. Phrasing their financials in pro forma-speak lets them explain away the cost (in Macrovision's case, about $5 million worth) of their options programs.
Personally, I prefer to use one metric, consistently, to help keep my reference fixed when companies try to shift the goalposts. That metric is free cash flow, which I've used to value Macrovision since I first began watching the company two years ago. On a cash flow basis, Macrovision's Q1 2006 was much better than last year's first quarter -- no pro formas about it.
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Fool contributor Rich Smith does not own shares of either company named above.
