The U.S. Securities and Exchange Commission (SEC) is suing AT&T for providing non-public information to 20 different analytics companies to lower estimates of revenue before earnings, according to a press release. This allowed AT&T to “exceed” expectations for the quarter when information sharing occurred, turning what might have been some nasty headlines in the financial press into a victory.
According to the SEC’s complaint (PDF), AT&T was told in March 2016 that its quarterly results would fall short of estimates due in part to “a sharper than expected drop in smartphone sales”. As you may remember, we used to live in a world where operators like AT&T subsidized part of the cost of their smartphone, but then AT&T had passed this cost on to the customer – which meant that far fewer customers updated them every one or two years old .
This quarter would be AT&T’s worst for smartphone updates: a record low of just 5 percent, according to the complaint. As a result, AT&T expected its consolidated gross revenue to “drop more than $ 1 billion below the consensus estimate”.
Here’s what happened next, from the complaint:
Afraid of a loss of revenue at the end of the quarter, the Chief Financial Officer of AT&T instructed the AT&T IR Department to “work with analysts who still have very high equipment revenue”.
In turn, the Investor Relations Director (“IR Director”) instructed Womack, Evans and Black to speak to analysts in particular, one by one, about their estimates in order to “bring analysts down” – this that is, induce analysts to reduce their individual estimates. The goal was to induce enough analysts to lower their estimates so that the consensus revenue estimate would fall to the level that AT&T expected to report to the public – that is, AT&T would have lost no revenue, which would have been the company’s third consecutive quarter. Ms.
In their calls, the three IR executives “intentionally disclosed relevant non-public information about AT&T’s results to date,” the SEC claims. Of the 20 analyst companies listed in the complaint, all reduced their revenue estimates – and many took the 5% number from AT&T directly. The SEC suggests that AT&T executives hid the fact that these numbers were not the kind that should be shared, so analysts may not be aware that they should not have access to that information.
Executives sent emails to each other the day before the first quarter earnings of 2016 in relief, shows the complaint. The company’s CFO until apparently said the CEO that two updates from analysts “can do this for us”, with the CEO responding: “Great”.
This is AT&T eagerly pushing analysts to lower estimates so that a single quarter of profits don’t make bad headlines, even if the results are bad. And it goes to the top, according to the SEC.
Just another reminder of what CEOs really care about in particular. pic.twitter.com/qxbMNvVsYQ– Dave Benoit (@DaveCBenoit) March 5, 2021
AT&T ended up reporting revenue of $ 40.535 billion in the first quarter of 2016, barely exceeding the consensus analysts’ revised estimates by less than $ 100 million, according to the complaint.
The company contested the SEC’s allegations in a statement, claiming that “there was no disclosure of material non-public information”.
“The information discussed during the March and April 2016 talks concerned the widely publicized phasing out of subsidy programs for new smartphone purchases and the impact of this trend on smartphone update rates and equipment revenue,” said the company.
“AT&T not only publicly disclosed this trend on several occasions before the analyst called in question, but AT&T also made it clear that the drop in phone sales had no material impact on its profits,” he continued. “Analysts and news media have often written about this trend and investors understood that AT & T’s main business was selling connectivity (ie wireless service plans), not devices, and that smartphone sales were irrelevant to profits. from the company.”