Thursday, May 03, 2007

To Omaha!


NotMakingThisUp is in transit to attend the Berkshire Hathaway annual meeting.

Please check back over the weekend for a report from Omaha.


Jeff Matthews
I Am Not Making This Up!

Tuesday, May 01, 2007

The Patrick Awards, Q1


Earnings season is winding down, and that means it’s time for the Patrick Awards.

Through the Patrick Awards, Not Making This Up recognizes those among Wall Street’s Finest and Corporate America's Titans alike for whatever strikes us worthy of recognition—positive or negative—coming out of the dozens of conference calls we monitor each quarter.

As regular readers know, the fact these awards are called the “Patricks” owes itself to Patrick Byrne, the CEO of Overstock.com, whose conference calls are the most routinely bizarre in the business.

Lest you think I am making that up, Byrne’s commentaries have involved dead cows on the highway conspiring to delay his company's projects, dead Popes conspiring to slow his company's sales growth, and even unidentified “Sith Lords” conspiring to ruin his company’s credibility among investors—as if Byrne needed help in that regard.

(Don't take such phantasmagorical flights of fancy as an indicator that Byrne is merely a kind of amusing-if-off-kilter public figure: this is a man who, after all, suggested to listeners of a Christian Financial radio program that if they would Google 'ecstasy Israeli mafia' they would "find articles that basically the Israeli mob...is thought to control 75% of the ecstasy trade in the U.S." As Not Making This Up pointed out in "Conspiracy of the Jews? Part II" on December 23, 2005, Googling precisely those three words in that order brought up URLs leading to, among other sites, an Al Jazeera web site with all the anti-Semitic kind of stuff you'd expect from Al Jazeera; a Lyndon LaRouche web site claiming the 9/11 attacks were part of an Israeli conspiracy against the U.S. government; and, most sickeningly, the web-site of a Holocaust-denying historian.)

Nevertheless, Byrne's conference calls are the stuff of legend, and with apologies to those “Patricks” among our readers who are reasonable, intelligent, clear-headed and thoughtful individuals who happen to share his given name, let’s get to the first installment of this quarter’s Patricks.

All quotes are courtesy of the indispensable StreetEvents.com.


The 'Did He Really Ask That?' Award

Every conference call has its share of silly questions mixed in with the good ones.


Usually this takes the form of an analyst trying to “build his model”—that is, plug in all the nit-picky line-items that go into the Excel spreadsheets by which Wall Street’s Finest determine the penny-per-share earnings estimates which somehow, magically, all happen to amount to basically the same number, give or take a penny.

The fact that quarterly earnings numbers all cluster around a single number occurs despite the fact that all businesses are living, breathing organisms run by living, breathing human beings and are subject to the completely unpredictable behavior of consumers, commodity prices, weather, and economic forces far beyond the comprehension of any mere spreadsheet.

Nevertheless, build their models they must, and so on nearly every call, one of Wall Street’s Finest always manages to break the tempo of a call by asking not about the state of a company's sales force turnover, or the impact of commodity price fluctuations, or anything meaningful, but by asking a "housekeeping" question, about the tax rate, or the share count, or some other silly bean-counterish issue that could easily be taken care of with the investor relations guy in an email follow-up.

Less frequently, however, an analyst asks a question so beyond the pale that all participants, management included, do a double-take and wonder if they heard the question correctly.

And this quarter the ‘Did He Really Ask That’ Award? goes to James Belless of D.A. Davidson and Company for his question during an Ambassadors Group call, regarding the possible use of cash payments to attract a sitting Supreme Court justice to speak to a group of students.

The company in question offers educational travel programs.


Chadwick Byrd – Ambassadors Group, Inc - CFO

Jim, the improvements range from everything from maybe an additional item of clothing or backpack that's sent to a student in advance of when they travel, to hiring a special guest speaker…. For example, last week our students actually met with Justice Scalia in one of the programs in Washington D.C., which is quite an honor to meet with a Supreme Court Justice.

James Belless – D.A. Davidson and Company – Analyst


To meet with a Supreme Court Justice, do you have to pay any fee or increase cost to get him involved in front of your students? [Emphasis added.]

Chadwick Byrd – Ambassadors Group, Inc - CFO

No, but you have to reroute the program and do some special things that incur costs. You're not paying the Supreme Court Justice to show up, obviously. That wouldn't look too good for anyone.


Obviously.

A variation of the previous type of question is one that merely embarrasses the other listeners on the call in a sort of collective cringe. And, since the Brits have a neat phrase for precisely that sensation (they call it "cringe-making"), we are naming our next award as follows:


The Most Cringe-Making Analyst Question Award

When an analyst asks management why Wall Street’s Finest—himself included—missed the speed and magnitude of that company's sudden return to profitability, despite the fact that the company has 70% gross margins and had recently won a legal victory giving it a virtual monopoly over a wildly popular consumer product category…well, that’s a cringe-making moment provided by Spencer Nam of Summer Street.


The company in question is Align Technology, maker of Invisalign invisible braces.


Spencer Nam – Summer Street – Analyst

....The street basically missed -- in terms of the 2007 guidance -- street is basically off by about 20 million. And some of the estimates for 2008 are essentially turning into 2007 management guidance. Where did we miss the trend? Is that just our lack of understanding how you guys managed cycle times or is it did we just not quite understand the pent up demand that was being raised at the grass roots level?

Tom Prescott – Align Technology – President and CEO


Boy, I don't know how to answer that question, Spencer, other than to say we're just -- we've had so many things going on. I can certainly understand why the modeling for our business has been difficult. And we've tried to do everything we can to give full visibility to a broad range of data with our new approach. You're going to have to answer that question about why the view was different from what we see evolving here.


Perhaps Spencer would like the company to email their own internal earnings models in advance, and write the copy for his reports in the future?



We’ll resume this quarter’s Patricks in our next installment.

Jeff Matthews
I Am Not Making This Up

© 2007 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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.