Minor Annoyances. Some nits are:
- Taking weeks to even alert shareholders that the call would be held on October 10, as opposed to the more recent normal schedule of a year-end earnings call in September.
- Never disabusing services who make their living publishing earnings dates of their erroneous guesses.
- Starting the call without the slides posted either on the website or on the SEC's EDGAR server.
- Speakers hurrying through complicated material with the wrong slide being presented.
- Blithely lumping stock plans and convertible notes together and devoting one whole sentence of their call to this event, which caused almost 10% dilution. No breakdown was provided.
- No road map was provided to an apparent wide miss from the guidance provided at the August 9 analyst day that Elpida was on schedule to generate $500mm in cash flow per quarter.
- News services and analysts needed a microscope to determine that the quarter at $0.29 actually exceeded consensus estimates of $0.25. The resulting confusion has lopped a mere $2 billion off of Micron's equity capitalization.
Major Affront. These nits pale by comparison to the company not providing a consolidating proforma on the Elpida acquisition, which closed on July 31. The principal deliverable in the proforma, when we eventually see it, will be a detailed explanation of how the Elpida purchase price was allocated. This in turn is based on a fair market value appraisal as of the July 31 closing date. Hopefully the proforma will also yield more detail on how Elpida is doing as a separate entity. Shareholders are more than a year out of date on detailed numbers for Elpida since the last, and only, proforma issued in February used numbers from the fall of 2012. That proforma was based on unaudited numbers with no appraisal, thereby proving that neither an audit nor an appraisal are needed for a proforma. It should have been issued at the August 9 analyst meeting. The company advised during the October 10th call that the proforma would be filed "next week."
Bear in mind that all the work necessary to have issued a proforma was completed before this earnings call. The appraisal and the allocations had to be complete to present the modest detail provided at the October 10 earnings call. Some more practiced than I in SEC filings were pretty darn sure the proforma would be out in time for shareholders and analysts to look at it and ask questions during the earnings call.
I had the following exchange with SA's poster and author "Retired Securities Attorney," who I generally think knows his stuff. In response (see his comments in an article by SA's Russ Fischer) to my fear that we wouldn't see a proforma by the earnings call on October 10th, he wrote:
>>Well they could hold back the detailed consolidating proforma...
Not if any single detail is necessary to not mislead someone reading the other statements. And all of them probably would be. Their attorney will strongly advise them against such a potentially suicidal course of action.
He even offered me fancy odds on a bet, which I was dumb enough not to take. For watchers expecting an amended 8-K, which will update the Elpida acquisition 8-K, and which MUST contain a detailed proforma, that filing MUST be issued by October 17th. If it isn't, this will risk delisting, and will be an automatic violation of the Sarbanes-Oxley Act. This is our own little equivalent on busting the national debt ceiling. We don't want to do either. Here's a little piece about filings, which includes this admonition I hope management will heed:
As it relates to Form 8-Ks however, SEC guidance makes clear that the failure to file a Form 8‐K may be considered prima facie evidence of a lack of sufficient disclosure controls under the Sarbanes-Oxley Act.
I have no idea why management wants to sit on the detailed proforma for another week, apparently until the last possible date. They obviously have it "in the can" as they needed it to come up with year-end earnings. The only thing I can come up with is that they don't want to take detailed questions on it. Putting it out before the October 10th earnings call might have forced them to face some tricky questions on judgment calls about the allocations, and about how analysts and shareholders should tie the current results back to guidance issued not even two months previously.
Why does it matter? The lack of a concise picture on the Elpida acquisition has caused mass confusion amongst the financial press and Wall St. analysts. I believe it is this confusion, and not the underlying health of the business, that scissored about $2 billion in market cap off of Micron's stock price on Friday.
I received many analyst reports on October 11 and two of them crystallize the confusion the company has created. Wells Fargo's Wong and Jefferies' Bajikar & Lipacis are good analysts at two good firms. They regularly attend the earnings calls rather than just putting a more junior associate on the call, as some of their competitors are prone to do. If you ain't on the call, you ain't feeling the vibes, which weren't pretty on the October 10th call.
Here's a chart of some of their key estimates and opinions:
|FY14 Rev est||13,900||16,298|
I understand that diversity of opinion is what creates buying opportunities but this is a ridiculous dispersion of estimates. It reflects badly on Kipp Bedard (VP Investor Relations) and Ron Foster (CFO). It reflects badly on the company's decision not to supply more granular guidance and failure to correct apparent miss-guidance, as we now appear to have been supplied on analyst day with regard to Elpida.
I disagree strongly with SA's aforementioned Retired Securities Attorney on what he feels is the unimportance of Wall St. analysts:
Dissing the analysts won't affect that at all. When they go looking for capital, for the Investment Banks it will be all about the profit to be made in doing the deal. They will care less about their analysts, who are just liability interfering mouthpieces.
When Micron goes looking for billions to build a 3D and/or a 450mm fab, having the analysts in the company's corner will be a key asset. I've seen analysts have an outsized seat at the capital raising process before and after Sarbanes-Oxley. The company has been treating analysts with the mushroom treatment, keeping them in the dark and throwing the smelly stuff on top, and this is not helping. Perhaps Retired Securities Attorney is not yet done building his options position; but at some point he, like the rest of us, will want to sell and/or exercise and we will all wish we had better informed analysts and a management capable of communicating.
What would I like to see?
- A conference call after the proforma and/or 8-K are filed.
- A change out of the disastrously ineffective IR team.
- A change out of CFO Ron Foster who has continued to destroy shareholder value: his disastrous hedging has cost us $250mm, he has an inability to get filings out on a timely basis, and he has an inability to describe basic corporate finance events like the convertible dilution in a concise fashion, etc.
- Conference call materials distributed well in advance of conference calls.
- Variance analysis from previously provided guidance.
- Better guidance such as Sandisk (SNDK) is able to provide. They operate in our same industry, and don't flinch like Micron's management at providing EPS ranges, volume estimates, and sanity checks on revenue.
- Tools such as Sandisk has provided on its website like "convertible bond dilution calculator."
I am worried about Micron's management. Specifically, I am concerned about their lack of friendliness toward and transparency with shareholders. But I still believe the company is undervalued and the Elpida transaction was brilliant. My misgivings about management were outweighed by my continued belief in the company's undervaluation; I increased my position in Friday's sell-off.
Micron is mistreating two important stakeholder groups: shareholders and analysts. For reasons I can't determine, their attitude toward shareholders is moving from unfriendly to hostile. One theory is they want the stock down to repurchase convertibles -- but there's no evidence they are repurchasing. Management works for the shareholders. They ought to think how their treatment and communication feels to their owners. It feels lousy.