They better have earnings - AOL Motley Fool
Date: Fri, Jan 16, 1998 21:54 EST
From: Wlsphila
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There have been several posts recently, under this heading and others, that argue that TPRO must show Y2K earnings in the next earnings announcement. While I would love to see such earnings announced, and I agree that failure to announce such earnings will probably cause a downturn in stock price, I question whether such an event would in any way mean that TPRO has missed the Y2K boat.
I've been thinking lately about the TPRO customer base for Y2K services. For those companies, Y2K is purely a negative -- an expense with no associated revenue generation. That customer base thus has every motive to footdrag on solving the Y2K problem (delay the expense; delay the public announcement of the expense, etc.) In such a situation, I would not expect to see a major move of the customer base to spend on this issue until such time as an external factor forces them to do so.
I think such an external factor exists. No, it's not the mere pendency of 1-1-2000. That doesn't give us the "trigger" effect needed to move the customer base now. (To the contrary, the creeping nature of the problem, by itself, is more of a frog in hot water phenomenon.)
Nor, as some posts have recently suggested, is it the end of the fiscal year (thus arguably freeing up funds for such an expenditure).
In my (limited) experience, if management of a publicly held company becomes convinced of the need to expend funds near the end of a fiscal year, they get approval for such expenditures and account for them as an extraordinary expense in one year, rather than another. The end of fiscal year just doesn't dominate that kind of decision-making.
No, the external event that I have in mind is the pending government requirement that the publicly-held companies tell their stockholders where they stand on Y2K evaluation and remediation.
SEC Staff Legal Bulletin No. 5, issued on October 8, 1997, put companies on notice that they are required to report Y2K problems in their next Report 10k if the Y2K problem would materially affect their financial results. (That's the normal standard for 10k reporting; the news is a SEC opinion singleing the issue, and subsequent SEC pronouncements that it is devoting compliance staff to monitoring the issue.)
So, when does that reporting requirement kick in? Well, your 10k is due 3 months after your fiscal year ends. For those companies whose fiscal year ended in September, the 10k's are out this month -- but they have a reasonable argument that the SEC's guidance came too late (October) to apply the 10k for the year ending Sept., 1997 -- so that group of companies may not feel the pressure to report.
But those companies whose fiscal year ends in December will report in March -- and they will most certainly feel that pressure to report. (Brian Lane, director of the SEC's Division of Corporate Finance, testified before Congress in October that he expects "most" companies to fall in this March reporting category.)
So I assume that the customer base will by-and-large begin to feel the pressure to publicly report Y2K evaluation and compliance beginning with March, 1998 reports, and intensifying thereafter. If that's true, then I assume further that we'll see a huge range of responses in those SEC reports, from "we don't have any computers, dummy" to "we looked, and there's no problem," to "we are just starting to look" to "we looked,we saw, we hired an expert."
In the Oct. 1997 to March 1998 timeframe, TPRO is looking to get its share of the customers who make the last of these statements. Fair enough, and we all hope that TM's optimism as to those customer signings, and the associated earnings, turns out to be right.
But my point is that the customer base that will be required to fall into the last group -- "we hired an expert" -- almost certainly must increase in size a very large amount beginning around March 1998 -- because that is when the SEC requirements will force management to come to grips with the problem, because their shareholders will force them to do so once the issue has been reported to them.
So, while I hope that TPRO has Y2K earnings in its next earnings report -- and I expect the stock price to suffer if they are not there -- I expect the Y2K customer base to expand substantially AFTER that point. Then, if TPRO is what we think it is, it will get its share of that increasing customer base, and Y2K earnings will go up substantially in those months.
As a final thought, as public disclosure of Y2K liability becomes normal in SEC filings, there will be less pressure to withhold announcement of contract signings. This will allow TPRO and other Y2K stocks to move on news between EPS announcements, as we all saw with the Bristol-Myers contract in December.
March, 1998, IMHO will be the floodgate date for Y2K remediation stocks.
Longboating TPRO,
wlsphila |
