After the tech crash earlier this decade, the business press took some well-justified lumps for accepting corporate spin instead of thoroughly scrubbing earnings numbers.
Tech companies wanted reporters and stock analysts to emphasize certain numbers and ignore others—to look at revenue if there was no net income; Web site visits or something else if there was no revenue; and so on. Corporate spin won, and we saw what happened. Who remembers Webvan?
Today, a sobered and more sophisticated business press looks harder at quarterly earnings, the bricks and mortar of all business reporting.
But, the job is still thankless, tedious, and, unfortunately, easy to get exactly wrong.
Take Verizon’s latest quarter.
How, you might ask, are Verizon’s cell phone and broadband businesses doing? A reasonable question. Let’s try to answer it.
The New York Times published a piece October 30, under the headline “Cellphone Growth Strong at Verizon.” It starts out:
Verizon Communications reported better-than-expected third-quarter profit yesterday, driven by strong wireless subscriber growth….
The Wall Street Journal agrees:
Verizon Wireless added 1.6 million net new subscribers for the quarter, on pace with the first two quarters of the year.
Okay, so Verizon Wireless is doing well. The AP and The Financial Times basically agree.
But Investor’s Business Daily says the opposite. An October 30 piece that aired on CNNMoney.com says:
Verizon Communications’ third-quarter earnings beat estimates by a penny, as FIOS TV gained, but broadband and wireless subscriber growth slowed. [The Audit’s emphasis]
Wait a minute. Is wireless subscriber growth “strong” or has it “slowed?” Who’s right? It’s Investor’s Business Daily.
The Times piece (and the others that frame the wireless numbers in Verizon’s favor) simply looks at the number of new subscribers added in the third quarter: 1.6 million, bringing the total to 63.7 million.
But the IBD examines the numbers from two additional angles and sees big problems:
The carrier added 1.65 million new customers in the quarter, which is 14% fewer than it added in third-quarter 2006.
IDB here is looking not only at the raw number of new subscribers, but at the rate at which new subscribers are signing up—in a year-over-year comparison. This is important information.
In the third quarter of 2006, Verizon added 1.9 million new subscribers. It was growing faster then. That’s why IBD uses the “14% fewer” figure.
And, looking at the second quarter of this year, Verizon added only 1.3 million, as opposed to 1.8 million in the 2006 second quarter.
In the fourth quarter of 2006, the company added 2.3 million. That is the benchmark for the current quarter. We’ll see how the company does this Christmas.
So the Journal erred in looking at quarter-to-quarter subscription rates. In fact, Verizon’s wireless growth rate has been down all year if one is looking at the number of new subscribers compared to the corresponding quarter a year earlier, which is how the company lists the figures.
A general rule: it’s better to look year-over-year, to eliminate seasonal fluctuations, rather than quarter-to-quarter, unless there’s a compelling reason to do so. Also, looking at acceleration and deceleration of growth can be revealing and useful to readers.
In search of some earnings clarity, we put in a call to Jonathan Weil. He was The Wall Street Journal’s accounting reporter from late 2000 until early 2006 and is now a columnist for Bloomberg News. Weil is reluctant to offer any hard-and-fast rules, noting that the choice on what numbers to use “really is a judgment call.” But he offers some observations and guidelines.
A reporter looking to track a company’s performance will generally compare present earnings to those of a year earlier, Weil says. On the other hand, if a business is fast growing, “sequential growth might be more important.” The same is true of a business that experiences a decline after a long period of growth.
And here’s a good rule: “You should never rely on the tone of the company’s press release to set the tone of the story,” Weil says. Unless, that is, a reporter thinks the company is trying to mislead the public with “egregious” spin, in which case, says Weil, that slant is a story in itself.
So a good earnings article requires an informed, skeptical reporter to make that “judgment call.” And these days, there is good news on the earnings-reporting front. Some reporters still accept a company line, says Weil, but now the press isn’t “falling for it institutionally.”
Weil says reporters learned from the 2000-2001 tech bubble-burst, and points to recent coverage of General Motors Corp.’s quarterly earnings, in which Bloomberg, the Journal, the Times, and others got an important story right. Weil says that while GM encouraged reporters to disregard a loss, calling it a “special non-cash charge,” the news outlets properly emphasized the charge’s dire implications for the company’s financial condition.
But still, reader beware.
Weil pointed to coverage of News Corp.’s most recent quarterly earnings, which produced dueling headlines: “News Corporation Profits Rise,” according to Reuters via The New York Times ; “News Corp. Posts Lower Profit,” according to the Journal.
The Journal, Weil says, by looking at net income, rather than at other metrics emphasized by News Corp.