The Semiconductor Companies Not Expensing R&D
A close look at R&D-related accounting at 19 of the big semis
In our last issue, we explained how accounting rules coupled with non-GAAP adjustments allow companies in technologically intensive industries to minimize their R&D-related expense and report higher profits and returns compared to some of their peers. We highly recommend that readers refer to last week's report, Who Isn’t Expensing Their R&D- Part One for a more detailed discussion, but here is a quick explanation of how buying technology via acquiring other companies, coupled with non-GAAP accounting, helps companies boost profits by minimizing their research and development expense:
A company can either develop a new technology in-house or obtain the intellectual property by acquiring another company that incurred all the associated expenses of doing so.
When the acquisition is made, an estimate of the value of the technology developed is split between goodwill and intangible assets. GAAP does not call for the amortization of goodwill so there is no expense booked there unless there is a write-off in the future.
While intangibles are amortized over their estimated useful life, virtually all tech companies add back this amortization to their non-GAAP earnings. Thus all expense associated with acquiring the R&D is never reflected in non-GAAP earnings which are nearly universally used by the Street to value companies and assess returns and profitability.
To top it off, stock compensation represents a meaningful part of the compensation for the R&D staff of most tech companies. But again, most tech firms add this expense back to their non-GAAP results.
We will be looking at how this phenomenon is impacting a few specific sub-industries in the tech and medical sectors over the next couple of weeks. This week, we will examine how accounting for research and development is impacting the earnings of 19 companies in the semiconductor group with market capitalizations north of $5 billion. We will then dig deeper into the results of five of those companies, showing examples of both ones being aggressive and ones being conservative.
Let’s get “behind the numbers.”