GAAP versus The Street: Two Cases of Conflicting Quarterly Earnings I: Intel Corporation (Nasdaq: INTC) On October 12, 1999, INTC announced results for the third fiscal quarter of 1999. A copy of the press release containing the announcement is attached as Exhibit 1. The analyst tracking services reported the following earnings surprise information for the quarter: Consensus Forecast of EPS of $0.57 and Actual EPS of $0.55 While each of the tracking services reported actual EPS at $0.55, INTC’s fiscal 1999 third quarter Form 10‐Q indicates that EPS for the quarter, computed according to GAAP, was $0.42. Questions 1. How much did INTC’s report as the third quarter EPS computed according to GAAP? 2. Identify the reason(s) for the difference between the actual EPS numbers reported by the analyst tracking services and the EPS number computed according to GAAP. 3. Which of the alternative EPS numbers do you think best represents the performance of the company for the quarter? Explain your answer. II: eBay.com, Inc (Nasdaq: EBAY) Go to www.ebay.com and find the investor relations link (it is under “About eBay”). Find the most recent press release announcing their quarterly financial results. You may also see a 10‐Q or 10‐K filing, but look for the press release that generally precedes this filing. Questions 3. Read the press release and see if you can determine EBAY’s GAAP EPS for the quarter. 4. See if you can determine the consensus “The Street’s” EPS number for the same quarter from finance.yahoo.com. 5. Identify the reason(s) for the difference between the actual EPS numbers reported by the analyst tracking services and the EPS number computed according to GAAP. 6. Which of the alternative EPS numbers do you think best represents the performance of the company for the quarter? Explain your answer. Exhibit 1 Intel Third Quarter Revenue $7.3 Billion, Up 9% Earnings excluding acquisition-related costs* $0.55 per share, up 22% EPS $0.42, down 5% SANTA CLARA, Calif., October 12, 1999 - Intel Corporation announced third quarter revenue of $7.3 billion, up 9 percent from third quarter 1998 revenue of $6.7 billion. Third quarter revenue includes post-acquisition revenue of companies acquired in the third quarter. Third quarter revenue was up 9 percent from second quarter 1999 revenue which was also $6.7 billion. The company said that shipments of microprocessors, chipsets, and flash memory all grew substantially to new records during the quarter. Net income excluding acquisition-related costs was $1.9 billion in the third quarter, up 21 percent from the third quarter of 1998 and up 7 percent sequentially. Third quarter earnings excluding acquisition-related costs were $0.55 per share, an increase of 22 percent from $0.45 in the third quarter of 1998, and up 6 percent sequentially. Including acquisition-related costs in accordance with generally accepted accounting principles, net income was $1.5 billion, down 6 percent from third quarter 1998 and down 17 percent sequentially. Earnings per share were $0.42, down 5 percent from $0.44 in the third quarter of 1998 and down 18 percent sequentially. Acquisition-related costs in the third quarter consisted of $333 million in one-time charges for purchased in-process research and development and $121 million of amortization of goodwill and other acquisition-related intangibles. Effective with this earnings release, the amortization of goodwill and other acquisition-related intangibles is shown separately and prior periods’ amounts are reclassified to be consistent with the current basis of presentation. These costs were formerly included in cost of sales. During the quarter Intel acquired four companies: Dialogic Corporation; Level One Communications; Softcom Microsystems, Inc.; and NetBoost Corporation. These acquisitions were valued at over $3 billion in total and significantly strengthen Intel’s networking and communications product offerings. Substantially all of acquisition-related costs for the third quarter are related to these four acquisitions. During the quarter, the company paid its quarterly cash dividend of $0.03 per share. The dividend was paid on September 1, 1999, to stockholders of record on August 7, 1999. Intel has paid a regular quarterly cash dividend for seven years. During the quarter, the company repurchased a total of 12.8 million shares of common stock, at a cost of $911 million, under an ongoing program. Since the program began in 1990, the company has repurchased 647.4 million shares at a total cost of $17.3 billion. INTEL CORPORATION CONSOLIDATED SUMMARY INCOME STATEMENT DATA (In millions, except per share amounts) Three Months Ended Nine Months Ended Sep. 25, 1999 Sep. 26, 1998 Sep. 25, 1999 Sept. 26, 1998 NET REVENUE $ 7,328 $ 6,731 $ 21,177 $ 18,659 Cost of sales 3,026 3,176 8,660 8,928 Research and development 840 617 2,234 1,835 Marketing, general and administrative 952 766 2,767 2,148 Amortization of goodwill and other acquisition-related intangibles 121 16 170 40 Purchased in-process research and development 333 - 333 165 Operating costs and expenses 5,272 4,575 14,164 13,116 OPERATING INCOME 2,056 2,156 7,013 5,543 Interest and other 316 170 953 514 INCOME BEFORE TAXES 2,372 2,326 7,966 6,057 Income taxes 914 767 2,760 2,053 NET INCOME $ 1,458 $ 1,559 $ 5,206 $ 4,004 BASIC EARNINGS PER SHARE $ 0.44 $ 0.46 $ 1.57 $ 1.20 DILUTED EARNINGS PER SHARE $ 0.42 $ 0.44 $ 1.50 $ 1.13 COMMON SHARES OUTSTANDING 3,325 3,355 3,320 3,339 COMMON SHARES ASSUMING DILUTION 3,472 3,505 3,465 3,530 PRO FORMA INFORMATION EXCLUDING ACQUISTION-RELATED COSTS The following pro forma supplemental information excludes the effect of amortization of goodwill and other acquisition-related intangibles as well as in-process research and development. As these acquisition-related costs are substantially all non-deductible for income tax purposes, the only change to the tax provision in arriving at the pro forma net income is a small increase for the impact of deferred taxes related to the amortization of identifiable intangibles. This pro forma information is not prepared in accordance with generally accepted accounting principles. Three Months Ended Nine Months Ended Sep. 25, 1999 Sep. 26, 1998 Sep. 25, 1999 Sept. 26, 1998 Pro forma operating costs and expenses $ 4,818 $ 4,559 $ 13,661 $ 12,911 Pro forma operating income $ 2,510 $ 2,172 $ 7,516 $ 5,748 Net income excluding acquisition-related costs $ 1,904 $ 1,575 $ 5,701 $ 4,209 Basic earnings per share excluding acquisition-related costs $ 0.57 $ 0.47 $ 1.72 $ 1.26 Diluted earnings per share excluding acquisition-related costs $ 0.55 $ 0.45 $ 1.65 $ 1.19 *Acquisition-related costs consist of one-time write-offs of purchased in-process research and development and the ongoing amortization of goodwill and other acquisition-related intangibles. Other acquisition-related intangibles include, for example, the value of the acquired companies’ developed technology, trademarks and workforce-in-place. Earnings excluding acquisition-related costs differ from earnings presented according to generally accepted accounting principles because they exclude these costs.