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Reported Earnings Can Be Misleading > Reported Earnings Can Be Misleading - Pg. 139

Using the RPF Model for Investment and Business Strategy 139 profitability, accounting earnings can also significantly understate true financial performance. Equity analysts routinely attempt to adjust account- ing earnings to better understand true performance, while approaches like Economic Value Added are specifically focused on adjusting earnings and creating realistic measures of value creation. On January 25, 2011, I published "Making the Case for Valuation" (Appendix E). had been widely ridiculed as overvalued based on its P/E ratio of 234. The article made the case that reported earnings are not a good measure for sells access to its software as an online service. This is called a Software-as- a-Service or SaaS business. Customers purchase subscriptions to the service. Accounting rules, quite reasonably, force Salesforce to recognize this rev- enue on a monthly basis, so revenue is recognized as the service is delivered. The distortion comes on the cost side. While customers may only commit to short-term contracts, say one-year, in reality after an initial trial, customers usually continue to subscribe to the service for many years. The expected value of this relationship is referred to as customer lifetime value or LTV. If customer on average are expected to to subscribe to the service for 10 years, then a customer with annual revenue of $100,000 actually has an expected LTV of $1 million. (While Salesforce