SEC takes AT&T to court for illegally tricking analysts into lowering expectations

The United States Securities and Exchange Commission (SEC) is suing AT&T for providing non-public information to 20 different analyst firms to reduce estimates of earnings before earnings, according to a press release. This allowed AT&T to “beat” expectations for the quarter when the news sharing took place, turning what could have been nasty headlines in the financial press into a victory instead.

According to the SEC complaint (PDF), AT&T learned in March 2016 that its quarterly results would be lower than estimated in part due to a “bigger than expected drop in smartphone sales.” As you may remember, we lived in a world where carriers like AT&T subsidized part of the cost of your smartphone, but by that time AT&T had passed that cost on to the customer – which meant that much less. of customers were upgrading them every year or two. .

This was going to be AT&T’s worst quarter ever for smartphone upgrades: a record high of just 5%, according to the complaint. As a result, AT&T predicted that its consolidated gross sales “are expected to fall by more than $ 1 billion below the consensus estimate.”

Here’s what happened next, from the complaint:

Fearing a shortfall at the end of the quarter, AT & T’s CFO asked AT & T’s IR department to “put analysts who still have excessively high equipment revenues to work.”

In turn, the Director of Investor Relations (“IR Director”) asked Womack, Evans and Black to talk to analysts individually about their estimates in order to “bring the analysts down”, i.e. analysts reduce their individual estimates. The goal was to get enough analysts to lower their estimates so that the consensus revenue estimate fell to the level that AT&T expected to report to the public – that is, AT&T does not. would have no shortfall, which would have been the company’s third consecutive quarter. Miss.

In their appeals, the three IR executives “have intentionally disclosed material non-public information regarding AT&T’s results to date,” the SEC alleges. Of the 20 analyst firms listed in the complaint, all lowered their revenue estimates – and many took AT & T’s 5% figure directly. The SEC suggests AT&T executives have concealed the fact that these numbers weren’t meant to be shared, so analysts may not have known they shouldn’t have had access to this information.

Executives emailed each other the day before its first quarter 2016 results as relief, the complaint said. The chief financial officer of the company, even apparently said the CEO that two analysts update “can do it for us”, the CEO responding: “Good”.

AT&T ended up reporting revenue of $ 40.535 billion for the first quarter of 2016, barely exceeding revised consensus analysts’ estimates of less than $ 100 million, according to the complaint.

The company disputed the SEC’s claims in a statement, saying “there had been no disclosure of material non-public information.”

“The information discussed during these conversations in March and April 2016 concerned the phasing out of subsidy programs for new smartphone purchases and the impact of this trend on smartphone upgrade rates and equipment revenues.” , explains the company.

“Not only did AT&T publicly disclose this trend several times before the analyst called into question, but AT&T also made it clear that the decline in phone sales had no significant impact on its profits,” he said. he continued. “Analysts and the news media have written about this trend frequently, and investors have understood that AT & T’s core business is the sale of connectivity (i.e., service plans without wire), not devices, and that smartphone sales were irrelevant to the company’s bottom line. ”