Pop open your preferred earnings web destination for comparing earnings estimates against actual results and you will find that DTS Inc. (DTSI), a company that provides digital audio technology, handily beat its expectations last quarter. A Reuters article immediately declared, “DTS posts higher Q2 profit, ups FY 2009 outlook.”
What Reuters did not report – what they did not have time to investigate and report – was that DTS executives were probably engaged in the business of misleading their investors, for the second straight quarter in a row.
On their Q2 call, DTS refused to give an actual settlement amount for a dispute with Zoran Corporation that was included in their GAAP figure, noting the terms of their settlement agreement. Zoran, on the other hand, did not seem as secretive. In Zoran Corporation's 10-Q filing, there is an 11 million expense, "in connection with settlement of various intellectual property disputes." They had not had this type of expense in their previous quarterly filings.
DTS on its earnings call refused to give non-GAAP numbers – which would have probably translated into a rather large miss, according to analysts – citing the settlement agreement they made with Zoran. That was despite the fact that on the previous quarter call, DTS had insisted that investors and analysts should focus on non-GAAP numbers, instead:
"We essentially have for the purposes of keeping everybody on an apples-to-apples kind of comparison basis, [the Zoran lawsuit has] been excluded - both the expenses as well as any potential financial recovery that might stem from it," said DTS' CEO Jon Kirchner.
The "apples-to-apples kind of comparison," suddenly disappeared in the next conference call. And now, for the second quarter in a row, DTS executives were asking their investors to focus on different numbers with the same excuse of the intellectual property dispute, except in Q4 they wanted the one-time settlement to be included, in Q1 they wanted it to be excluded, and in Q2 they wanted the settlement to be included – in each case conveniently focusing on the better looking numbers.
So in Q4 they insisted that investors and analysts should look at their GAAP numbers. In Q1 they told them to look at non-GAAP numbers. In Q2 they even refused to provide non-GAAP number comparisons and told investors and analysts that they must focus back on GAAP numbers. In each case, an “apples-to-apples kind of comparison,” would have presented a miss.
Despite significantly missing their own previous quarter guidance when excluding the settlement, CEO Kirchner also stated in the last call, “we are pleased with our performance.”
Massaging numbers are a delicate performance, indeed.
The SEC would better serve investors by not allowing a company to conveniently go back and forth with non-GAAP and GAAP figures in this way. It is clearly an abused system by companies that are below the radar.
