It’s finally time.
Within the next several weeks, many Orange County technology companies are set to report quarterly earnings under rules requiring them to include the costs of their stock options.
For years, technology companies opposed the change, arguing it would unfairly penalize their industry, which hands out more stock options than others.
They lost the battle.
Some Wall Street analysts already have started including the costs of options in projections for companies they follow.
But it looks as if a majority of analysts plan to continue viewing tech companies under the old rules, looking at results before the impact of stock expenses.
“The next 12 months will be very confusing,” said Kaushik Roy, a technology analyst with Susquehanna International Group LLP in Pennsylvania.
Wall Street is expected to start including options en masse, but it won’t be anytime soon.
“It’s company policy pretty much to look at earnings that include everything,” said Wendy Abramowitz, a technology analyst with Argus Research Group Inc. in New York. “That’s sort of the way we chose to do it. I’m noticing that so many other analysts are excluding stock compensation. It’s getting a little blurry.”
Tech companies have been expecting the shift. They’ve been reporting results with and without the costs of options.
More analysts have been paying attention to the results without options numbers,choosing, for now, to judge a company’s financial health minus options.
Among eight Orange County technology companies, estimates for six exclude stock options, according to numbers from New York-based Thomson Financial/First Call. They include:
Irvine-based chipmaker Broadcom Corp.
Aliso Viejo software maker Quest Soft-ware Inc.
Costa Mesa-based software maker File-Net Corp.
Aliso Viejo storage network device maker QLogic Corp.
Costa Mesa-based storage network de-vice maker Emulex Corp.
Newport Beach-based chipmaker Mind-speed Technologies Inc.
Companies with estimates including options:
Santa Ana-based electronics distributor Ingram Micro Inc.
Lake Forest-based disk drive maker We-stern Digital Corp.
Thomson Financial tracks estimates with and without stock options costs, said John Butters, an analyst with the company.
Thomson Financial issues primary estimates based on what a majority of analysts use for a stock, he said.
“We don’t want to make a judgment,” Butters said.
Daniel Amir, an analyst with W. R. Hambrecht & Co. in San Francisco, said he doesn’t include the costs of options in his estimates. It’s going to be a couple of years before expensing stock options becomes the norm on Wall Street, he said.
“Most people are not expensing,” Amir said.
Analysts eventually could come around, Thomson’s Butters said.
Take Microsoft Corp. and IBM Corp. Analysts who follow the tech bellwethers have switched to including options for the past few quarters, he said.
Still, Butters said he has no clear idea on when most analysts will switch to counting options.
“I don’t really have a solid answer,” he said. “We’re kind of seeing it as it goes.”
Broadcom, which opposed the expensing stock options, could see a big impact if analysts included options expenses in their estimates.
Broadcom typically focuses on numbers that don’t track options costs.
For the current quarter, analysts estimate the company will earn $183.5 million without stock options. With options, the company could earn $94 million.
Switching to options expensing would delay a profit turnaround at Mind-speed, which has been working to get to profitability by the middle of this year.
It would take Mindspeed “a long time” to get back to profitability with options in the mix, Amir said.
Quest could feel some pain as well. Its current quarterly earnings would be more than halved to about $5.96 million after accounting for options.
The business software maker expressed some concern about expensing options in a recent regulatory filing.
“The additional expense associated with stock options will be substantial and will materially reduce our operating margins, operating income, net income and net income per share,” Quest said. “These reductions in our operating results may result in a reduction to our stock price and market value, the magnitude of which cannot be determined.”
The impact on Ingram Micro doesn’t appear to be as great. Its earnings for the current quarter would be cut by about 9% to $56 million with options included.
Western Digital would have taken a 5% hit during this quarter.
The patchwork of standards could lead investors to look at other barometers for rating stocks.
Abramowitz said she’ll look at price to cash flow, among others.
Expensing options became a big deal after the scandals at Enron Corp. and other companies. Abramowitz said she disagrees with including them in earnings numbers.
“I see it as more of an accounting thing,” Abramowitz said. “I don’t think it reflects the health of the company.”
W. R. Hambrecht’s Amir agreed.
“It’s just a way to pay your employees,” he said.
