COMMENTARY -- A little carelessness went a long way to knock down i2 Technologies (Nasdaq: ITWO) today.
While the overall Nasdaq Composite Index recovered from an opening dip, i2 remained below its closing price Wednesday. Shares of the supply chain and B2B marketplace software vendor were down 7 percent as of late this morning.
The company reported fourth quarter results slightly ahead of analyst estimates. There were no major surprises, because i2 preannounced its results last week.
i2 also raised its revenue guidance for the first quarter and full year. And that outlook is where the company became slipshod -- someone in investor relations forgot to check the latest consensus estimates before preparing the company's forecast.
Before i2's bullish preannouncement nine days ago, analysts were predicting a profit of 5 cents per share or less for the company's March quarter.
But when i2 raised fourth quarter expectations, Wall Street research firms also took that as a green light to raise first quarter targets as well, bringing First Call consensus for the March period to 7 cents per share.
i2 didn't bother doublechecking those estimates going into yesterday's call. Thus, executives were under the mistaken impression that a first quarter forecast of 6 cents per share was above consensus estimates.
They didn't realize that the first quarter measuring stick had changed since last week.
Had i2 tried to give an accurate picture of what it really thought it would earn in the first quarter, this wouldn't be a problem. Unfortunately, that's not how the game is played -- companies look at analyst estimates and set their guidance accordingly.
Should it be the other way around? Of course, but that doesn't help your stock price. Investors want companies to underpromise and overdeliver, rather than providing a realistic outlook in the first place and then meeting it.
It's no secret that all publicly-traded companies kowtow to Wall Street expectations, even though most CEOs say they pay little attention to the market. The standard cliche: "If we do our job, the stock price will take care of itself."
This is true. But part of management's job is to manage estimates.
Prior to the recently-passed Regulation FD, the guidance game played out along these lines: Company X held its quarterly conference call, sometimes giving EPS forecasts, but usually only dropping hints of the future; after the call, Company X talked to research firms individually and provided a more detailed outlook; throughout the quarter, the CFO of Company X kept in touch with analysts and quietly gave them updates.
Thus, regardless of how operations were performing, Company X could assure itself of beating estimates by controlling analyst forecasts.
But the new rule of FD -- "Fair Disclosure" -- changed that. Publicly-traded companies now have to share all their information equally.
The results generally have been as expected. Almost all conference calls now include specific or somewhat-specific revenue and EPS targets, and the moment a company sees a reason to deviate from its original goals, it distributes a press release.
As many FD opponents warned, stocks have become more volatile, thanks to the new waves of preannouncements, warnings and monthly updates that used to be confined to those private chats with analysts and institutional shareholders.
Still, the new disclosure has made the game easier in many ways. Instead of spending valuable one-on-one time throughout the quarter with Wall Street observers, a CFO can fire out a statement in one broad shot.
Unfortunately, if the CFO doesn't get it right, Company X will feel some pain because that statement is now a public event.
Maybe it's a bit much to lay i2's decline today entirely at the feet of a mistaken EPS forecast, especially since everyone knows the company is going to beat that number anyway. You could argue -- and some analysts in their research notes today are arguing -- that i2 is fully valued at its current price. At the very least, there might be some profit-taking going on.
Other observers noted that although i2's revenue guidance was higher than consensus, the outlook boost wasn't as bullish as in the past.
But investors wouldn't know that, because i2 never gave out revenue guidance publicly until now. In any case, the door wasn't opened for doubt until i2 executives told investors to look for 6 cents per share in the first quarter.
You could see the dynamic in yesterday's afterhours action on the Island ECN: immediately after the fourth quarter report was released, but before the conference call started, i2 shares were trading around 55; right after the call -- which sounded very upbeat except for that first quarter EPS guidance -- ITWO was down to 49 or so.
Had i2 executives said "8 cents" instead of "6 cents", no one would have noticed any difference. The reality is that things look fine for i2.
But an insignificant misstep is all it takes to lose ground in an uncertain market. 22GO>