Focus Media Holding Ltd. (NASDAQ:FMCN) has recently told investors that traditional, non-electric picture frames should be included in its LCD display count. But can we really do that? In good faith, can non-electric poster frames be sold to investors as liquid crystal displays? Or is Focus Media just trying to cover itself after being exposed?
Unfortunately, it is beginning to look like investors actually believe Focus Media's story, or perhaps the explanation is just too confusing?
Let's go back to the beginning and take another look:
- The company said that it had a network of about 180,000 LCD displays. (here)
- Muddy Waters Research said that the company told its own customers that it only had about 120,000. (here)
- The company offered an explanation (see below). If you reduce that explanation to its simplest terms, Focus Media has said that traditional poster frames have been counted as liquid crystal displays. This of course, would mean that Muddy Waters was right all along: the LCD count had been inflated. However, Focus Media set their explanation in such confusing terms that many investors still believe that the LCD count had been correct and that Muddy Waters Research had misunderstood the business.
Now, let's look at the company's explanation - and we might ask ourselves, Is the company offering clarity or is it throwing more dust in the air? (emphasis mine)
The LCD 1.0 picture frame devices are included in the Company's LCD display network device count because, when the Company developed its LCD display network in Tianjin, Kunming and Shijiazhuang, it encountered difficulties in installing LCD screens or LCD 2.0 digital screens due to a lack of adequate power sources or other technical limitations, and therefore opted to use some traditional picture frame devices in these areas. Since the LCD 1.0 picture frame devices in these three cities were developed by the Company's LCD display network division, the Company has consistently included such devices as part of its LCD display network device count since it first began installing them. (here and here)
How else can I read this? "Due to a lack of adequate power resources" Focus Media "opted to use some traditional picture frame devices." At this point using the word, "device," preserves just enough ambiguity to keep the confusion in place for those who read too quickly. I suppose we can call a chair a "device" if we wanted to, but why would we? A picture frame? As a cultural event, the modern use of the word "device" usually involves slightly higher technology, often electricity. (here)
Focus Media's LCD count came up short and now even this explanation comes up short. Once you file with the SEC, I suppose you can't just walk away when the numbers don't add up. You have to say something. But can LCD displays really be regular poster frames that don't require "power sources"?
… the 1.0 picture frame devices that are part of the LCD display network only display traditional fixed images. (here)
So then, many "devices" categorized as LCDs did not really have liquid crystal technology nor were they electronic machines at all; they were just shoved under the same category heading as the real LCD devices were. We just now realize that we don't have the assets we thought we had. Are we really supposed to close this gap by stretching the English language over it?
The word 'LCD' in the name of each type of device clarifies that the Company classifies it and includes it for device count purposes within its Focus Media LCD display network, and not in its Framedia poster frame network. (here)
But if so, wouldn't it be natural to distinguish the two as the "Focus Media Network" and the "Framedia Network"? When Focus Media says, "LCD network" and "Poster frame network," how could I possibly guess that we are not dividing the assets according to...well, LCDs and poster frames? I mean, as they actually outlined them in their SEC filing:
The following is a summary description of the networks we operate:
· our LCD display network, which refers to our network of flat-panel digital displays …
· our poster frame network, which refers to our network of traditional and digital advertising poster frames …. (here)
Notwithstanding the "explanation", investors have less assets than they paid for. How much less? There are two surprises in the new "LCD" count. The first one is easy. One does not have to be the sharpest kid in kindergarten to see that a non-electric, traditional picture frame is not an LCD display. That takes about 30,000 out of our LCD count. There is no way around this one.
The second surprise for investors was that some of the LCD displays were digital picture screens - about 32,000 of them. Do they count or not? Are we off by 30,000 or 62,000? Well, they're electric at least. But then again, all of this started because the company itself did not include these in the LCD count supplied to its own customers. (see Muddy Waters link above) Why not? And if they did not belong to the LCD category in their own media kit, why would they be appropriate as LCDs in the press release filed with the SEC? (here) Oh well, to each his own I guess. No matter which side we choose, however ‒ subtracting 30,000 or 62,000 from the Pre-Muddy Waters LCD count ‒ "credibility" is not even a choice here; it's lost. We just can't avoid the fact that prior communications had been misleading.
Ironically, Muddy Waters Research accused Focus Media of inflating and misrepresenting their LCD count and then Focus Media's response was to hire an "audit committee" to prove just that: the number of devices which used liquid crystal display technology was significantly short of 180,000. How can we avoid the conclusion that the prior LCD counts had been inflated? (here, here and here)
It is really difficult to stay grounded when trying to understand FMCN's explanation. Can we accept what they say without declaring financial idealism? An "LCD" does not have to be an LCD; it can be a state of mind ‒ or at least it can be whatever is represented above it in the form of a category heading…can't it? Non-electric picture frames originating at a geographical location named "LCD Division" are "LCD devices" then? Why not? Wouldn't we all like an investment in XYZ Electronics Co. even more if pencils were not only in the computer inventory but called "Computers" ‒ and not without some justification: after all, can't we do arithmetic with a pencil? Perhaps the pencils and the real computers were made by the same corporate division? How much would the stock be worth if everyone would just…believe?
I suppose that if a dealership by the name of "Ferrari Vehicles" said that it had ten Ferrari vehicles, and if we calculated that each was worth a million then we would calculate ten million dollars in value. If we bought stock in the company, we'd feel the weight of our investment. Then of course we find out that three of the vehicles were actually bicycles and not Ferraris...but that would be OK because they are all at the "Ferrari dealership," see, so they are all Ferrari vehicles. It's all explainable, and we'd rather have a good explanation than the assets we paid for…right?
Of course, if they had mentioned in plain language the item itself and clearly distinguished it from the category heading, then there might not have been any confusion at all. If the dealership had said something like "The total number of Ferrari vehicles at the Ferrari Vehicle Dealership was ten." I mean, if they had broken it down that clearly there would have been no problem…right? We would have known there were indeed ten because if there had only been seven they would have written, "The total number of Ferrari vehicles at the Ferrari Vehicle Dealership was seven." That would have been clear enough to avoid any confusion.
Oh, but wait a minute…that is how FMCN said it, "the total installed base of LCD displays in our LCD display network was 178,382 nationwide..." (here)
The "LCD displays in our LCD display network" is a very clear expression. "LCD display network" is our category heading and within that heading we are itemizing a special type of display, one that uses liquid crystal technology.
But then, at least FMCN was "consistent", weren't they? And that counts for something, doesn't it?
...the Company has consistently included such devices as part of its LCD display network device count since it first began installing them. (here)
But when I consistently include a dozen pencils in my inventory of computers, do I therefore have integrity or am I a repeat offender?
(For further reading, here is an analogy of FMCN's explanation: Understanding Focus Media's LCD Count Scandal.)
Disclosure: I am short FMCN.