Capital Markets

SEC Probing IBM’s Earnings Guidance

Regulators may be reexamining how Big Blue's CFO, and other officials, handled the company's stock-option expensing announcement.
Stephen TaubJune 28, 2005

The Securities and Exchange Commission has launched an informal investigation into International Business Machine Corp.’ s first-quarter earnings disclosures. Company officials note that they received assurances from the regulator that the investigation is not an indication that IBM violated any securities laws.

A company filing revealed that the disclosures under investigation relate to the expensing of equity compensation. Although the documents did not provide any additional details about the probe, the investigation may relate to a controversy set off by the company in April.

On April 5, IBM announced that the financial results for the quarter ending March 31 would include, for the first time, an expense charge for the value of stock options. According to the announcement, the options expensing would cost 55 cents per share for all of 2004.

In a conference call with analysts on the same day, CFO Mark Loughridge suggested that the first-quarter option expense would cost 14 cents per share, said the Associated Press. Indeed, the wire service explained that Loughridge showed a chart to analysts that illustrated a 14 cents per share cost for the first quarter of 2004, and indicated that the 2005 first-quarter charge would be similar.

As a result of the CFO’ s announcement, analysts who follow IBM lowered earnings expectations by 14 cents a share, and put that figure into their official forecasts. However, on April 14, when IBM released its first-quarter results, the stock-options charge was just 10 cents per share.

In all, IBM reported 84 cents per share for the quarter, well under the 90 cents per share that analysts had been forecasting for the period. To be sure, analysts complained that IBM’ s earnings miss would have been even greater, asserting they were misled to believe the options-expense charge would be higher, noted the AP.

When asked if the company had intentionally misled analysts to make the earnings shortfall seem less substantial, IBM spokesman Ed Barbini would not comment. However, he did say that Loughridge had clearly noted that the stock-option expensing charge would be lower in 2005 than in 2004, reported the AP.

IBM is also being criticized because analysts believe that by April 5, the company would have had a more accurate assessment of its March quarterly results. “The handling of the options-expensing announcement and the subsequent negative earnings surprise have tarnished management’s credibility,” Chris Whitmore, an analyst with Deutsche Bank Securities, told Reuters. “I think that tarnish persists here today.”

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