Friday, January 13, 2006
Fighting Joe and the SEC Get Tough
During the call, IBM Chief Financial Officer Mark Loughridge told analysts to "update" their models to reflect the new expense for the just-elapsed first quarter. A chart distributed with the call suggested that analysts lower their earnings-per-share estimates to 90 cents from $1.04, a drop of 14 cents. They did just that.
Thus today’s Wall Street Journal describes how IBM guided the barking seals I otherwise refer to as Wall Street’s Finest to lower their expectations for IBM’s first quarter 2005 earnings in a “hastily arranged conference call” last April, shortly before IBM actually reported those earnings.
When the earnings came out nine days later, however, IBM reported only $0.84 of earnings, net of $0.10 worth of options and stock-based compensation that IBM had successfully trained the barking seals to consider “non-recurring”—as though compensation for the human beings who run the company isn’t an actual expense and won’t recur.
Hence, $1.04 of expected earnings had mutated into $0.84 of actual earnings: a big miss.
Somewhat surprisingly, even the best-trained among Wall Street’s Finest recognized a failure to score, despite IBM’s last-minute attempt to move the goal-posts without anyone noticing.
“A Material Miss…and Acknowledgement of Weaker Revenue Growth,” one post-earnings headline read. “Not Great, but not Terrible Either,” ran another, while “IBM: Pass the Alka-Seltzer, Please,” was perhaps the most artistic way to express disappointment with IBM while demonstrating empathy with clients who don’t like to hear bad things about the stocks they own.
IBM’s share price dropped more than ten bucks in the days following the Alka-Seltzer episode, which, I gather, is the subject of the SEC Wells Notice to IBM. Quotes the Journal article:
Securities lawyers unconnected with the case have said that IBM may have been obligated during the options conference call to give investors more detail about the shortfall in the quarter, which had ended days before. Under securities law, they say, companies have some latitude to determine whether to announce known shortfalls early -- but if they don't, they generally can't put out other earnings-related news.
I’m no expert on SEC-related disclosure issues. At the time it happened, however, it seemed obvious to me and most everybody else who follows the company that IBM had thrown some dust in the air to obscure a basic earnings miss. After all, $0.84 looks a lot worse to analysts expecting $1.04 than it does to analysts expecting $0.90.
That’s my opinion based purely on an admittedly cynical view of the earnings-management practices of public companies developed in 25 years of quarterly-earnings reports. It is not based on any particular knowledge of what was going on or not going on inside IBM.
But why is the SEC doing this Wells-Notice stuff now? Looking at the calendar, I see that it is mid-January 2006, almost a year since IBM tried to finesse numbers lower under the screen of “non-recurring” type compensation expenses. To its credit, the SEC's recent action was in fact preceded by an “informal” investigation begun last June—but that was seven months ago.
Which means the poor shlubs who owned IBM stock prior to that first quarter earnings report and held onto it in the wake of management’s pre-earnings conference call in which numbers were taken down without really being taken down, but then sold their stock at a loss in the days following the actual earnings miss, are long gone.
Which means all this Wells-Notice stuff is, in my opinion, irrelevant, and once again the SEC, having noticed a draft coming from the direction of a barn door through which a horse has vanished and made its way across the country-side to the other side of the mountain, has decided to investigate just how the heck that door was left open and what can be done to secure the door.
Surely there are companies that have mishandled their public disclosure obligations more recently than last April.
But, then again, if Joe Biden—remember, the Senator who ran for President with a plagiarized speech?—can get outraged about what a guy might or might not have done twenty years ago in college, I guess whatever it was IBM might or might not have done nine months ago probably seems like it’s worth wasting time on.
“I didn't even like Princeton,” Biden told Alito on Tuesday. “I mean, I really didn't like Princeton. I was an Irish Catholic kid who thought it had not changed like you concluded it had.”—Associated Press.
Tough stuff, Senator! You and the SEC go boy!
I Am Not Making This Up
© 2005 Jeff Matthews
The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.
Posted by Jeff Matthews at 9:14 AM