Tech Back? Nope, Just Part of Earnings Gaming

Many people, both in the high tech industry and those just watching it, have been grasping at any good news from some of the big names as an excuse to say that good times are here again. I’ve said that, so far as I could see, tech isn’t close to being back to “normal”, and maybe that’s a good thing. The idea of a bubble being the cure for a deflated former one is like taking a shot of vodka to cure a hangover. All you do is postpone the inevitable. And now the Associated Press has an interesting business analysis showing to what degree corporations are gaming the earnings-expectations game. And that’s exactly what’s been going on in the top realms of tech.

According to data from Thomson Reuters that AP quotes, 65 percent of earnings reports have beaten estimates over the last two years, and in last year’s throws of economic doldrums, the beat to miss ration was still two to one. Over four-fifths of the top 199 S&P 500 companies beat analyst expectations last quarter.

It’s not a recent situation. Apparently, over the last 15 years, 61 percent of earning reports of the S&P 500 have done better than analyst expectations, with 18 percent meeting expectations and only 21 percent doing worse. Were things on the up-and-up, you might expect a more balanced distribution among the three possibilities. In fact, if management teams were providing “real” estimates, I’d think the bulk of cases would fall into the “met expectations” category.

Gaming earnings expectations is a trivial affair. It’s just a matter of understating what goes out to analysts and investors by enough that it will make how a company expects to do look good in comparison, but not by so much that it seems overly suspicious. This hinges on the fact that corporations report results quarterly and analysts are heavily dependent on the guidance that the company offer.

Tech is a big game player, according to the AP story — at least the two examples they give are both from the sector.

Apple Inc. is notorious for lowballing its outlooks. The computer maker topped analysts’ estimates on Monday for the 27th quarter in a row. It has not come up short on earnings day since the first quarter of 2001. Apple declined to comment on the trend.Then there’s Cisco Systems Inc. , which once beat forecasts by exactly 1 cent per share for 13 straight quarters, from 1998-2001. Coming within a penny so many times during that period merely shows the company was “conservative and transparent in communicating quarterly business conditions to investors,” according to spokesman Terry Alberstein.

But let’s take this out of the investment arena for a moment. This type of game affects employee morale (particularly when the short term gains from gaming catch up with the company) as well as how corporations need to do competitive analysis and strategic planning. To say nothing of trying to decide whether things are again on the rise or a result of the expectations game.

Image via stock.xchng user sabercat, site standard license.