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VeriSign reports $37.5 million in revenue from barter deals

By sfischer in Op-Ed
Fri Mar 22, 2002 at 08:59:20 PM EST
Tags: Technology (all tags)
Technology

In an article (subscription required) today The Wall Street Journal On-line states that VeriSign, Inc. recorded $37.5 million in revenue in 2001 or 3.8% of VeriSign's total revenue of $983.6 million from barter deals. [editor's note, by rusty] ZDNet has a Reuters article with the same info.

Investors were not impressed and shares tumbled 9.3%, or $2.71, to $26.42 on the Nasdaq Stock Market.

Why is this a problem? Shouldn't technology sharing and distribution among diverse companies via reciprocal arrangements be a boon to the industry?


In its annual 10-K filing, VeriSign, Inc. announced that they "derived approximately 3.8% of our total revenues in 2001 from reciprocal arrangements." While reciprocal arrangements are common within the technology industry, VeriSign stated: "We derived no revenues from customers from reciprocal arrangements in 2000 and 1999" implying a new willingness to accept goods and services rather than cold, hard cash.

As an investor, I might find this new revenue stream disconcerting, an implied diversion from basic business fundamentals of managing costs and increasing revenue in order to increase profit, but a cursory reading of the 10-K suggests that this may not be the case. Actual costs of doing business relative to amount of revenue produced actually improved year to year. They did warn that "past revenue growth may not be indicative of future operating results" and that they "may not be able to sustain the revenue growth we have experienced in the past." These reportings and investor reactions are one of the hazards of functioning as a publicly traded company rather than as privately held.

I submit that VeriSign and other technology companies are doing very well indeed and that if there was more of these reciprocal exchange of products and services (bartering) it might be a better world. The prevalent focus on investor equity and growth is an important part of our daily lives. It's reported on in the media daily and a company's, industry's or the stock markets' health affects every aspect of our lives. Should it have such a direct effect when the process of doing business, generating work and income, continues strongly whether or not bartering is a part of that activity or not.

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Related Links
o ZDNet
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o Also by sfischer


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VeriSign reports $37.5 million in revenue from barter deals | 30 comments (27 topical, 3 editorial, 0 hidden)
Why this is a problem (4.66 / 9) (#1)
by wiredog on Thu Mar 21, 2002 at 08:58:00 AM EST

The Enron Effect. Enron made all sorts of "profits" from these barter deals. Then it turned out that, guess what, barter doesn't pay the non-barter bills (payroll and such.) Now, any company that has a business model that looks remotely like Enron's gets hammered.

Peoples Front To Reunite Gondwanaland: "Stop the Laurasian Separatist Movement!"
You are exactly right (4.00 / 3) (#2)
by sfischer on Thu Mar 21, 2002 at 09:05:51 AM EST

The Enron effect is exactly why VeriSign's stock took such a hit. But if those investors had actually bothered to look a the 10-K, they'd have seen improved cash flow. Barter as a way to generate false income (and correspondingly profit) is a bad thing and needs to be caught, stopped and punished. But a company should NOT be punished for using barter as a way to reduce costs. I don't believe it's just a reporting problem. I would just like to see companies (and investors) focused more on doing what is right than greed.

-swf

[ Parent ]

Investors (4.00 / 5) (#3)
by wiredog on Thu Mar 21, 2002 at 09:15:24 AM EST

If you can make sense of one of those company reporting statements, without spending all day doing it, more power to you. I find it easier to figure out someone else's uncommented C code, myself. And that's the problem investors have. Most of us don't have the time to learn how to read these things, and read them. We have full time jobs, and lives. So we skim through those statements and look for various flags. Barter deals are a big one. Capacity trading, without booking real revenue, is what killed Global Crossing, btw.

Peoples Front To Reunite Gondwanaland: "Stop the Laurasian Separatist Movement!"
[ Parent ]
Isn't that completely counter to capitalism? (4.50 / 4) (#19)
by Danse on Thu Mar 21, 2002 at 04:30:46 PM EST

I would just like to see companies (and investors) focused more on doing what is right than greed.

Everybody knows that capitalism is based on greed, not "doing what is right." Supposedly everyone acting for their own self-interest will bring about a desirable result for at least the majority.






An honest debate between Bush and Kerry
[ Parent ]
Not exactly (4.00 / 4) (#24)
by ariux on Fri Mar 22, 2002 at 03:23:15 AM EST

As some would have it, capitalism is a bold and clever attempt at organizing individual vices into social virtues, yielding social virtues that are less fragile in the face of human nature.

There's nothing in it that forbids individual virtues - it just tries to reclaim some of the inevitable vices, too.

From this point of view, if a social good fails to materialize, it indicates that the private or public institutions whose job it is to do the organizing part are faulty and need to be fixed.

[ Parent ]

Or.. (3.25 / 4) (#25)
by Danse on Fri Mar 22, 2002 at 04:22:22 AM EST

From this point of view, if a social good fails to materialize, it indicates that the private or public institutions whose job it is to do the organizing part are faulty and need to be fixed.

It could also mean that capitalism may not actually be all it's cracked up to be and we'll have to accept that it's just another system with its own inherent flaws.






An honest debate between Bush and Kerry
[ Parent ]
Well... (4.00 / 4) (#26)
by ariux on Fri Mar 22, 2002 at 04:24:13 AM EST

...I did say, "from this point of view."

[ Parent ]

Other problems shown in VeriSign's SEC filing. (3.80 / 5) (#4)
by haflinger on Thu Mar 21, 2002 at 09:25:58 AM EST

Quoting from the 10k filing:
We have purchased products and services from companies and participated in financings of companies with whom we have entered into separate contractual arrangements for the distribution and sale of our products and services. We derived approximately 3.8% of our total revenues in 2001 from reciprocal arrangements. Typically in these relationships, under separate agreements, we sell our products and services to a company and that company sells to us their products and services or we, under a separate agreement, participate with other investors in a private equity round financing of the company. We derived no revenues from customers from reciprocal arrangements in 2000 and 1999. We also derived approximately 6.5% in 2001, 2.8% in 2000 and 1.1% in 1999 of our total revenues from customers with whom we have participated in a private equity round of financing, including several of the VeriSign Affiliates, as well as various technology companies in a variety of related market areas. We may not be able to sustain the revenue growth we have experienced in recent periods if we do not continue to participate in business relationships of this nature. In addition, past revenue growth may not be indicative of future operating results.

We may not be able to sustain the revenue growth we have experienced in the past from our Web presence services, which depends in part upon our ability to renew domain name registrations.

In 2000, the demand for new domain name registrations in our Web presence business increased substantially as a result of our promotional programs, in which we accepted domain name registrations at significant discounts, and from registrations by entities who registered domain names with the hopes of reselling them. Many of those domain names have not been renewed as of their two-year anniversary date. Further, many of the entrepreneurial and start-up businesses, begun in 2000, have declined. The future success of our Web presence services business will depend, among other things, upon our customers' renewal of their domain name registrations and upon our ability to obtain new domain name registrations and to successfully market our value-added product and services to our domain mane registrants. Registrants may choose to renew their domain names with other registrars or they may choose not to renew and pay for renewal of their domain names. Since we deactivate and delete domain name registrations that are not paid for, our inability to obtain domain name registration renewals from our customers could have an adverse effect on our revenue growth and our business.

Our failure to achieve or sustain market acceptance of our signaling and intelligent network services at desired pricing levels could impact our ability to maintain profitability or positive cash flow.

The telecommunications industry is characterized by significant price competition. Competition and industry consolidation in our telecommunications services could result in significant pricing pressure and an erosion in our market share. Pricing pressure from competition could cause large reductions in the selling price of our services. For example, our competitors may provide customers with reduced communications costs for Internet access or private network services, reducing the overall cost of services and significantly increasing pricing pressures on us. We may not be able to offset the effects of any price reductions by increasing the number of our customers, generating higher revenues from enhanced services or reducing our costs. We believe that the business of providing network connectivity and related network services will likely see increased consolidation in the future. Consolidation could decrease selling prices and increase competition in these industries, which could erode our market share, revenues and operating margins.

Issues arising from implementing agreements with ICANN and the Department of Commerce could harm our domain name registration business.

Translation: We're not a monopoly any more. This may hurt our bottom line.

Interestingly, the accounting practices needed for this kind of barter trade appear to have been already in place in 2000. From one of their 2000 SEC filings:

The Company recognizes revenue in accordance with SOP 97-2, "Software Revenue Recognition," as modified by SOP 98-9. SOP 97-2, as modified, generally requires revenue earned on software arrangements involving multiple elements such as software products, upgrades, enhancements, post contract customer support, or PCS, installation, training, etc. to be allocated to each element based on the relative fair values of the elements. The fair value of an element must be based on evidence that is specific to the vendor. If evidence of fair value does not exist for all elements of a license agreement and PCS is the only undelivered element, then all revenue for the license arrangement is recognized ratably over the term of the agreement. If evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred, and the remaining portion of the arrangement fee is recognized as revenue.

Revenues from authentication services consist of fees for the issuance of digital certificates, fees for digital certificate service provisioning, fees for technology and business process licensing to affiliates and fees for consulting, implementation, training, support and maintenance services. Each of these sources of revenue has different revenue recognition methods. Revenues from the sale or renewal of digital certificates are deferred and recognized ratably over the life of the digital certificate, generally 12 months. Revenues from the sale of OnSite managed services are deferred and recognized ratably over the term of the license, generally 12 months.

Revenues from the licensing of digital certificate technology and business process technology are sold in arrangements involving multiple elements including PCS, training and other services. PCS can be renewed annually for an additional fee. We use the PCS renewal rate as evidence of fair value of PCS. The Company establishes evidence of fair value for training and other services through the price charged when the same element is sold separately. Since we have established evidence of fair value for all undelivered elements of the arrangement, revenue is recognized under the residual method. The fair value of PCS is recognized over the PCS term, training and other service revenue is recognized when delivered and the remaining portion of the arrangement fee is recognized after the execution of a license agreement and the delivery of the product to the customer, provided that there are no uncertainties surrounding the product acceptance, fees are fixed and determinable, collectibility is probable, and the Company has no remaining obligations other than the delivery of PCS.

Revenues from consulting and training services are recognized using the percentage-of-completion method for fixed-fee development arrangements or as the services are provided for time-and-materials arrangements.

Revenues from payment services primarily consist of a set-up fee and a monthly service fee for the transaction processing services. In accordance with the SEC Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," revenues from the set-up fee are deferred and recognized ratably over the period that the fees are earned. Revenues from the service fees are recognized ratably over the periods in which the services are provided. Advance customer deposits received are deferred and allocated ratably to revenue over the periods the services are provided.

Domain name registration revenues consist primarily of registration fees charged to customers and registrars for domain name registration services. Revenues from the sale or renewal of domain name registration services are deferred and recognized ratably over the registration term, generally two years. Domain name registration revenues consist primarily of registration fees charged to customers and registrars for domain name registration services. We defer revenues from the sale or renewal of domain name registration services and recognize these revenues ratably over the registration term.

The important part here is the "fair value" phrase. It means they're already determining the value of their services as being something seperate from the cash value that they get for them. That's actually a pretty common accounting practice; I suspect it's in GAAP.

Did people from the future send George Carlin back in time to save rusty and K5? - leviramsey
The media focused on two problems (4.00 / 1) (#5)
by sfischer on Thu Mar 21, 2002 at 09:35:29 AM EST

You're right. The 10-K does identify a number of concerns (some may call them problems). What bothers me is that the media is only reporting on two of them.
  1. The reporting of revenue based on reciprocal arrangements.
  2. The percentage of income from customers that VeriSign has an equity investment in.
Why aren't they focusing on the change of business environment and other corporate concerns?

Your (implied) point is well taken that VeriSign stock tanked for a number of reasons. I'm more concerned that good business concepts are being tainted by the greed of other companies' actions.

-swf

[ Parent ]

Well... (4.66 / 3) (#10)
by haflinger on Thu Mar 21, 2002 at 10:22:51 AM EST

Your concerns about the first point are reasonable, and justified. Reciprocal arrangements are a long-standing business practice, especially in service industries.

However, companies which have significant equity investments in the majority of their customers: that's a bad business plan. Either it means that you're buying out all your potential customers, which will attract antitrust attention, or it means that you're being required to buy up parts of your customers in order to keep them loyal, which indicates a long-term problem with competition.

My actual suspicion is that VeriSign stock tanked mostly because of the current Wall Street belief that no Internet-based company can conceivably turn a profit (as opposed to the belief of three years ago, when it was inconceivable that any of them could fail). I suggest the prevalance of this belief shows that stupidity is still well-established in the investor market.

The South Sea Bubble people's great-great-etc-grandchildren seem to be still buying stock.

And when some of the relatively bright investors spot an SEC filing from a Net company which shows some problems - any problems - and begin to sell, all the dumb rats start jumping ship, and the price tanks.

Did people from the future send George Carlin back in time to save rusty and K5? - leviramsey
[ Parent ]

Barter deals 101 (4.66 / 9) (#7)
by Betcour on Thu Mar 21, 2002 at 09:55:55 AM EST

Imagine company A. Company A is a one man operation. Company B is founded by another guy. Both have 0$ in revenue, and sell banners on their web site (with about 1 hit/month).

Company A sells its banner to B for 1 M$. Company B sells company A its banner for 1 M$ as well. Since both are the same amount, neither A nor B pays anything or earns anything, it's just two bills being exchanged. Yet at the end of the year both companies can claim a revenue of 1 M$. Cool ! It's now time to get into the stock market, raise massive amount of cash and for the two managers to sell their share for a good price...

Frankly barter deals are mostly a way of quickly inflating revenues. For the stockholders, they are secondary since stockholders are here to get a piece of the profits, and preferably in cold hard cash. Maybe if barters and "real" sales were displayed separatly it wouldbe ok, but that's it.

simplistic and pessimistic example (4.00 / 2) (#8)
by sfischer on Thu Mar 21, 2002 at 10:09:25 AM EST

You've described the abuse that does go on. I'm not saying it doesn't. Your example falls apart for a number of reasons.
  1. one-person companies are not generally publically held
  2. revenue is not the only thing to look at. What about cash flow? What about assets? What about business plan? What about customer references?

Yes, there have been and will be abuses of inflated income reporting due to barter transactions.

How can we encourage ethical bartering transactions and reporting?

-swf

[ Parent ]

Well, perhaps. But there's GAAP. (4.75 / 4) (#14)
by haflinger on Thu Mar 21, 2002 at 11:24:19 AM EST

The way VeriSign values its barter trades is by looking at how much it charges for the same services when it does sell them for cash.

It works like this: Suppose VeriSign sells 19 companies a service for $500,000. Company 20 comes along, with a service that VeriSign wants/needs. VeriSign trades Company 20 the $500,000 service in return for Company 20 providing VeriSign a service. This is how fair market value valuations work.

This is different from your example because in your example, Company A and B are not selling anybody else their services. There is, therefore, no basis for a fair market valuation, and so it has no value. GAAP.

Did people from the future send George Carlin back in time to save rusty and K5? - leviramsey
[ Parent ]

a matter of numbers (5.00 / 1) (#20)
by svampa on Thu Mar 21, 2002 at 05:19:38 PM EST

In the example, both companies have 100% incomes from each other

Is it very different if it's just 75%, or 50%?

Let's suppose I have a shop to sell PCs, I pay the carpenter with a PC, I pay the painter with a PC, I pay the furniture with a PC, I pay .... with a PC. I can claim that after in my first month open I've sold 100 pc. Do you want stocks from my shop?

The idea is not bad, as long as you say clear where those incomes come from, 100%, 25%, or 2%.



[ Parent ]
Yes. It is different. (4.50 / 2) (#22)
by haflinger on Thu Mar 21, 2002 at 11:28:18 PM EST

It's really different when the companies have, say, 4% of their income from each other.

But this gets back to one of my earlier points: that it's bad when a company has significant equity in most of its customers. Even if its customers are paying cash, you have to doubt under those conditions whether they're paying fair market value. What you want are lots of equal partners making relatively small deals. High rolling is exciting and makes for good movies, but not good business.

Did people from the future send George Carlin back in time to save rusty and K5? - leviramsey
[ Parent ]

Yay, GAAP (4.00 / 1) (#29)
by pietra on Sat Mar 23, 2002 at 06:50:35 PM EST

which hardly anyone seems to be following anymore. Anyone else notice some of the recent reports on Cisco's (Cisco's!) numbers-fudging regarding the costs incurred in stock payouts? Or Tyco? The new principles seem to be: the numbers don't really matter at all; let's just screw with them until we get something that looks good.

[ Parent ]
Business opportunity (4.66 / 18) (#11)
by wji on Thu Mar 21, 2002 at 10:42:01 AM EST

Hi. "5" comment ratings are worth $1 million. I will make a trade agreement with anyone responding to this comment for reciprocal "5" ratings.

This is the same as us both getting a million dollars.

In conclusion, the Powerpuff Girls are a reactionary, pseudo-feminist enterprise.

Yay! (4.33 / 3) (#12)
by theantix on Thu Mar 21, 2002 at 10:49:48 AM EST

I'm going to be a millionaire!

--
You sir, are worse than Hitler!
[ Parent ]
How about a 4 for a quarter mill? (3.66 / 3) (#13)
by Elkor on Thu Mar 21, 2002 at 10:50:43 AM EST

Sound fair?

Regards,
Elkor


"I won't tell you how to love God if you don't tell me how to love myself."
-Margo Eve
[ Parent ]
Taxes? (4.00 / 1) (#16)
by p0ppe on Thu Mar 21, 2002 at 01:14:40 PM EST

I know basically nothing about taxation, but shouldn't those transactions affect your tax?


"Democracy is three wolves and a sheep voting on what to have for dinner."
[ Parent ]
Geez, think about it! (none / 0) (#17)
by wji on Thu Mar 21, 2002 at 02:18:41 PM EST

Obviously, the million dollars in advertising spending (via a five rating) is tax detuctible, so that exactly balances out the million dollars I made. Don't go into business, you're too honest.

In conclusion, the Powerpuff Girls are a reactionary, pseudo-feminist enterprise.
[ Parent ]
Geez, think some more.... (none / 0) (#18)
by whojgalt on Thu Mar 21, 2002 at 02:47:13 PM EST

Since you are claiming revenue from this exchange, your internet access, K5 membership, computer purchase, etc, all may become a business expense, allowing you to actually post a loss which can offset other income. And that's for both people!

Now all we have to do is find a way to make equal trades for everything we now do for free...

Disclaimer - I am not qualified to give tax advice... Not even close...

~~~~~~~~~~~~~~~~~
If you can't see it from the car, it's not really scenery.
Any code more than six months old was written by an idiot.
[ Parent ]

you own verisign stock? (2.50 / 2) (#21)
by autopr0n on Thu Mar 21, 2002 at 08:29:10 PM EST

You evil, evil person.


[autopr0n] got pr0n?
autopr0n.com is a categorically searchable database of porn links, updated every day (or so). no popups!
The problem is not barter itself (4.57 / 7) (#23)
by ariux on Fri Mar 22, 2002 at 02:51:18 AM EST

The problem is an accounting loophole in such transactions that lets you claim the received goods as revenue without admitting the owed goods as debt.

On the balance sheet, this translates into a (heavily used) way to manufacture gobs and gobs of money out of nothing - until one day it all catches up with you (and your shareholders, and your economic environment, and lots and lots of completely innocent people).

Now that Enron has broken investigators' fear of standing against popular opinion, the bankruptcies have begun. It may be quite a while before they end.

Worse than it looks (4.00 / 1) (#27)
by khallow on Fri Mar 22, 2002 at 10:39:57 AM EST

Verisign stated a loss of roughly $65 million in 2001. By using this particular accounting trick, they underreported their losses by more than a third. I was amused by the following comment from an analyst in this story:

Leehealey dismissed the significance of the acquisitions and sales disclosures. "The big surprise for me was that investors think there were surprises in there," said Leehealey. "Everything was honestly previously disclosed or in my mind immaterial."

I find it hard to believe that a stock analyst with any amount of experience could be surprised by investor ignorance.

Stating the obvious since 1969.

In God We Trust All Others Pay Cash (5.00 / 1) (#28)
by underscore on Sat Mar 23, 2002 at 01:42:29 AM EST

One of the major hurdles to using a business model that relies in part on barter is that appraising the asset is difficult and often accessing the information needed to appraise the assets is also difficult. Factoring in or out all that impinges on any one stock is a daunting task. No matter if an investor holds to diversification or the adage of putting all one's eggs in one basket then watching that basket very closely, any investor will take liquid assets and traditional sources of income over grey income from outside sources. Warren Buffet learnt from the masters and they advocated staying with the fundamentals, learning everything germane to the industry and the company then staying with the investment. Having been trained as a market analyst (no longer practise) I know first hand the burden of taking on analysis of esoteric assets. Although in the face of my negative rant there is room to advocate specializing in such companies and their assets.

cheers
a geek possessed of animal cunning
is a most fearsome adversary

Thud (none / 0) (#30)
by dollyknot on Sun Mar 24, 2002 at 09:30:33 AM EST

Things cost work not money, THUD.

Work is the expenditure of energy, to the benefit of others, that cannot be achieved by machinery and automation, THUD.

One man with a tractor and plough can plough approx. thirty times the acreage in a day, that one man with a horse and plough can , THUD.

A things value is inversely proportional to its scarcity, THUD.

Design it, build it, then deliver it, the rest is information.THUD

As the process of copying information gets cheaper, the information gets cheaper, THUD.

Some people make a living, by getting between producer and consumer and controlling supply, THUD.

Economics has become the science of increasing demand, whilst at the same time, trying to get two men to do three mens work, THUD.

Investing in public utilities, carries about as much risk, as wrestling with a dead sheep, THUD.

A train costs virtualy the same amount to run full, as empty, THUD.

Public utilities have fixed costs, therefore the concept of profit is meaningless, unless slavery is advocated,THUD.

The internet should be a global public utility funded by subscription, the Tobin tax would be a good mechanism and give Mr Tobin a nice epitaph.

The BBC works very nice without spam, THUD.

Economics is about resource management, not profit, THUD.

Economics graduates learn their economics at UNI, from other economics graduates, academic incest, THUD.

I learned my economics behind the wheel of a truck, THUD.

THUD

THUD

THUD

THUD

THUD

THUD

THUD

THUD

CRAAASSSSHH

......I think one of my wheels has fallen off.
They call it an elephant's trunk, whereas it is in fact an elephant's nose - a nose by any other name would smell as sweetly.

VeriSign reports $37.5 million in revenue from barter deals | 30 comments (27 topical, 3 editorial, 0 hidden)
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