Sometimes when I read a company's earnings release, I don't know whether to laugh or cry. I can only imagine the effort that goes into this quarterly ritual of boiling down three months of hard work making sales, paying bills, and tallying up profits into a couple of charts and a few hundred minutely crafted, carefully spun words. When all that effort culminates in the literary equivalent of sweeping dirt under a carpet and hoping no one notices the lumps, it's hard to decide whether that constitutes tragedy or farce.
Take, for example, the Q2 2005 earnings report that for-profit educator LaureateEducation (NASDAQ:LAUR) released last week. When I read the opening paragraphs, then looked at the financial statements they purported to describe, I have to admit it -- I chuckled. But after seeing Wall Street's reaction to the numbers, it became clear that investors were not finding this report at all funny.
Let me explain. If you skipped the financial statements and focused solely on how Laureate's PR department spun them, this is how the quarter went:
- Compared with Q2 2004, revenues grew 38%.
- Operating income grew 52%.
- Total student enrollment increased 29%.
- Profits per diluted share from continuing operations came in at $0.43.
- Nothing more to see here. Just a brilliant quarter. Now, please move along.
OK. That last bit wasn't stated explicitly, but the intent was clear. Investors were not supposed to ask about net profits under generally accepted accounting principles. Nor were they to inquire why the company detailed its double-digit percentage increases in revenues and operating income, but neglected to provide a year-ago profits number for comparison. Clearly, there was something fishy here.
What's more, there was a distinct smell of stale fish emanating from the financial statements. Upon inspecting those, you could see that:
- Net income declined 5% year over year, and net income per diluted share fell even further -- down 12%.
- Even the profits number that Laureate asked investors to focus on -- earnings from continuing operations, which was a bit higher than the net figure -- suffered a decline, dropping 7% (16% on a per-share basis).
- The reason that per-share profits declined so much more than did firm-wide income was that Laureate continued diluting its outside shareholders -- just as we described last year -- with its weighted average share count rising 8% over the past year.
Top all that off with Laureate's failure to provide either a balance sheet or a cash flow statement with its earnings release, and investors can be forgiven for wondering if the bad news described above was even the end of it. With that other shoe still waiting to drop, after seeing Laureate suffer a 6% decline in share price on Thursday, I'd say the company still got off easy.
For more information on Laureate, before and after its name change, read:
Fool contributor Rich Smith has no interest, long or short, in Laureate.
