Dot-Coms Paint It Black While Bleeding Red Ink

This week, when E*Trade Group, Inc. reported a $27 million loss (US$) in its fiscal fourth quarter, both the press and company officials spun this negative development into positive news.

One headline read: “E*Trade Widens Quarterly Loss But Adds New Accounts.”

The lead of a second story read: “E*Trade reported a smaller-than-expected loss.”

The Menlo Park, California-based E*Trade even had its CFO add to the spin by telling reporters that E*Trade spent only $198 to acquire each new customer this quarter, down from the $424 the company spent just a year ago.

Isn’t that impressive?

Everything Is Beautiful

Nowhere in any of the accounts could I find the answer to one rather pertinent question: When — if ever — can E*Trade stockholders expect the red ink to turn black?

I know it’s unfashionable to ask such impolite questions, and if it seems that I’m picking on E*Trade, I’m really not. However, not a day goes by where I don’t try to make sense out of the latest quarterly financial report from some dot-com company, and I’m always frustrated by the lack of straightforwardness.

For instance, if you want to immediately know whether a company has lost a lot of money in a particular quarter, a sure hint is if the first three paragraphs of the report keep reiterating how revenue is skyrocketing.

Usually, buried somewhere on the last page — it must be disclosed by law — I always find that while insertcompanyhere.com’s revenue doubled, it also tripled its losses.

The Most Popular Restaurant

I believe that what many of these dot-coms are experiencing is a phenomenon that I first encountered when I was a child. I remember when a new restaurant opened up in my neighborhood and the food was so good that people lined up around the block just to eat there.

This love-in went on for several years, until two men showed up at the restaurant and padlocked its doors — shutting it down forever. All the patrons were in a state of shock until they found out that the owner — while he had plenty of business — was spending more than he was taking in, which forced him to file for bankruptcy.

Cute Accounting Tricks

Now, I’m not saying that bankruptcy will be the fate of E*Trade or any other dot-com with plenty of business but no profits. However, I am saying that people — and especially E*Trade’s stockholders — have every right to be concerned and ask for straight answers.

When you read as many 10-Q forms as I do, you learn to read between the lines. Some high-tech dot-coms have been known to soften their losses by attributing millions to “in-process Research and Development.”

Additionally, accounting experts point out that instead of taking 30 or 40 years to write off massive amounts of goodwill, many dot-coms are instead charging it all off in a much shorter time span.

Give It To Me Straight

Aside from accounting and spin control, the current frenzy surrounding the Internet and e-commerce can also be blamed on some analysts and members of the press. It should be their job to cut through the fluff and give it to us straight.

I don’t know about you, but if I read one more press release that equates tremendous losses with success, I think I’ll use it to start my fireplace.

What do you think? Let’s talk about it.