Anatomy of HP’s Earnings Surprise
Hewlett-Packard caught Wall Street off guard by essentially giving a sneak preview into its second-quarter earnings 75 minutes before the markets opened. The announcement, the result of an errant email, caught a lot of attention. But just as interesting, I thought, was the way it all unfolded.
H-P was supposed to deliver its earnings a week from tomorrow, but an unnamed employee emailed financial information from the quarter to clients to an unnamed recipient. It must have been to someone who could easily have shared the info – a reporter, an analyst or a well-connected investor – because H-P hustled to release “guidance” before the markets formally opened.
H-P did the right thing, of course, and it’s hard to think of how a company could have reacted better. But the incident reveals two interesting aspects about how companies have come to handle financial information and how the markets are able to react immediately.
Let’s take the market’s reaction first. H-P’s announcement rolled across Business Wire’s feed at 8:45 a.m., EST (when even Om was still asleep.)
H-P said its latest quarter’s revenue would be between $25.50 billion and $25.55 billion and EPS of 69 or 70 cents a share. That’s basically revenue 3.9% above the mean forecasts of analysts, and EPS that is four or five cents higher than the 65 cent estimate – a fairly substantial surprise. It also said EPS in the current quarter would be two to four cents higher than the 61-cent estimate the Street had guessed.
The chart below, using Google Finance’s nifty pre-market charts, shows what happened next. Within a minute, there were 128,600 shares traded in pre-market trading. That is, investors who saw the release had one minute to re-value the stock based on the unexpected numbers.
By 8:46, the stock had shot up 2.7% to $44.92 a share. That’s not a huge percentage gain per se, but for a stock as large as H-P’s, it meant $3.2 billion injected into its market cap in one minute.
After the stock opened, sell orders more than made up for buying demand at first, but throughout the day, as investors had a chance to digest the new numbers, the stock recovered to $45.01, or only nine cents higher than the initial valuation accorded to H-P’s stock only moments after its announcement was revealed.
That’s a pretty nice example of quick thinking on someone’s part.
The other aspect that H-P’s action illuminates is just how ridiculous the ritual has grown surrounding the quarterly earnings report. This is hardly unique to H-P, but part of the culture of Wall Street. H-P insisted on using the term “guidance” but they have essentially announced most of the key numbers everyone was waiting for.
Couldn’t H-P have just delivered its actual announcement a week early? Maybe not, if all of the details haven’t been confirmed. Even so, it’s going to look very silly next Wednesday when H-P goes through the old sclerotic ritual – the tedious conference call and its perfunctory chants (“We are encouraged by these financials,” “Great quarter, guys,” etc.) – where executives, analysts and reporters act their parts even though they know now the play’s happy ending.
It feels a little archaic that, in an era of realtime information and ever-improving financial-management software, companies still adhere to the decades-old practice of announcing financials once a quarter. In 2007, the market can adapt to a big surprise in one minute, yet companies are disclosing financials as if it were still 1957.
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Kevin, HP had it on good authority (on tape actually) that a reporter got ahold of the numbers and was going to press, thats why they rushed out the numbers.
Just joking (maybe.)
Companies roll out their numbers as they have in the past in part because the rules of the market require it.
RT: Yes, the last thing H-P needs is another run-in with regulators. This kind of thing isn’t that unusual, I mostly found it amusing that it wouldn’t in any way hinder the usual quarterly kabuki show that surrounds earnings reports.
Kevin, I really don’t get the point you are trying to make when you say “…companies still adhere to the decades-old practice of announcing financials once a quarter”. Are you suggesting that companies should be releasing financial statements more often? If so, I’m not sure you realize what kind of efforts it takes for MOST cos to consolidate their financial information from various MIS systems they run, have them validated internally and release them in a presentable format. In my previous workplace, I used to be located within the finance and accounting dept(though thankfully I didn’t work in their team), and boy did they dread those days when they were releasing the quarterly results. Late nights and working weekends were the norm and those folks used to breathe a huge sigh of relief after the release of results.
Of course, some of this may be attributable to some bad MIS systems and internal processes in this particular co, but then, how many cos have their processes in place anyway?
I do not understand this that one of THE largest company takes days to declare quarterly result? Why cant all the companies at least the ones which claims to computerize other companies declare the result very next day when quarter ends? So for Q1 results should be out on 1st April! If they cant do this that means that they are not fully digital or they are cooking numbers or preparing speeches to glorify their numbers irrespective of its direction!
mystiq_elephant, All I can say is that you are expecting Utopia here. I have worked as an IT consultant in the past, and trust me, when you saw some of the systems in even the most reputed companies, you’d be shocked. Forget accounting systems, which cos anyway brush aside as secondary (or maybe even tertiary). Even such primary data as customer accounts, billing information, employee data etc, would all be scattered all over the place. In one company that I worked with, some purchase managers were actually maintaining their own personal excel files for some purchasing decisions they were in charge of! They felt that the current MIS they were using was too cumbersome and lacking on certain features for them to be using.
Having a single view of the entire organization at any point in time is the holy grail for every CIO, but the fact is, we are not anywhere near that currently.
Arun, you speak from reality which is good, but you miss the idea that companies report as often as they are forced to. If they only had to report once a year, their systems would be even worse. If on the other hand they were forced to keep open books, they would upgrade their systems and personnel accordingly. If public companies were forced to keep open books, a lot of this nonsense by the likes of Nortel and others would be avoided. Yes, it would cost individual companies a great deal in the short term, but would actually save them money in the long-term and meanwhile inject billions into the greater economy.
Arun, you clearly have a lot more experience than I do in assembling all the data for a financial report, so I may be completely off here. But there are too many examples of companies that have used technology to organize data that on the face of it seemed impossible to organize: Google’s search algorithms come to mind, as do Bloomberg’s stock and bond analysis, and eBay’s auctions. All of them take thousands if not millions of data points and keep them fresh and relevant in real time.
I would be surprised if there were no technological solution to financial metrics. To Jesse’s point, the task is only as difficult as the company wants it to be. Yet I also think that the smarter companies must already be doing something like this already, monitoring their internal metrics on a daily basis, if not a real-time basis. Why can’t they do the same for their financial condition?
Kevin,
The examples of Google or eBay are not an apples to apples comparison with enterprise systems. Don’t forget that in the case of corporates, there have been various systems that have been built at various points in time (as against a Google which has the benifit of poring over data which has a single interface – the WWW). It needs no mention that in most large corporations, many of their mission critical systems still run on IBM mainframes. So, you just have so much stuff residing in various islands running disparate technologies ranging from legacy to cutting edge that getting a single point of view for all that data is not easy. It takes time and effort to collate all that, verify, reconcile, make adjustments and release it into public. Also, a lot of the stuff like verifying tax computations, reconciling of statements, adjustments if any etc are still done manually. And with the likes of SEC breathing down your neck, you surely don’t want to be goofing up on anything. Cos would rather adopt a “better safe than sorry” approach and take a day more rather than releasing financial information in a hurry and come out later and say “oops, sorry but there was an error..”. Just presenting the realities from the other side of the fence.
I’m not exactly sure which point you are trying to make. Is it this? The U.S. seems to be in the early stages of outsourcing capital formation to markets who have a less archaic – more rational approach to financial accountability. The London market requires a more thorough review of liquidity and systems — every six months. This would be an attractive option for many growth companies. I do not know the rules in Singapore but wouldn’t it be great if they involved caneing C-level officers who make misrepresentations?