sbc - AR is Accounts Receivable. And here's why it's important (particularly now, for NMKT). When AR increases as a ratio to sales, it suggests (I emphasize "suggests") two things:
1. There's a collectibility issue
2. Fraudent revenue is being recorded
In the case of #2, here's what happens: If you want to record make believe revenues, your acccounting entry is like any other revenue entry: debit AR and credit Revenue. Problem is, that AR never gets collected (debit Cash and credit AR). So, the balance goes up..and up...and up...as long as fraudulent revenue is being booked. That's what happend to me at Clarent, and I ignored the signs.
The best way to assess this is to compare AR to revenue, using a ratio called "Days Sales Outstanding" (or DSO for short). DSO should be equivalent to 30 or 45 days of sales, or about your normal payment terms. That can flux...some legit companies can experience AR of 60 days.
So what's happening at NMKT? the AR DSO ratio is in a constant upward trajectory. It's gone from 39days as of Sept 30 2004 to 125 days as of Sept 30, 2005. That's sky high, to say the least. A DSO of 125 days is unheard of.
So, is this conclusive evidence that fraud is occuring? No. But, to call it a "red flag" is an enormous understatement. I believe that Phil has attributed his sky high DSO to Latin America contracts, but that does not square with the size of the Latin America business, or the constant upward spiral for the past 4 quarters (coinciding with rapid upward spiral in revenue promises), or the fact that 125 DSO is enormous.
If this is in fact revenue fraud, your investment in NMKT is done. I know that from experience, at Clarent (CLRN - now defunct)
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