Broker, Trader, Lawyer, Spy - Eamon Javers [80]
“Mike, this is Hong,” said Lu. “We have, for the rest of the balance of the year; we’re expected to have 0.5 million handsets. And out of that, we are going to probably for the second half of the year, from a run rate wise, we expect to ship a little bit more than 3 million handsets. So I’ll probably say percentage of a number handsets we should be able to get some meaningful numbers. From a dollar amount, are still going to be relatively small because our handsets will be selling less than one half of what normal ASP’s that we are selling.”
“Right. Thank you.”
BIA’s analysts spotted a cluster of telltale indicators in what Lu said. First, Lu’s remarks aren’t always intelligible. And along with his garbled grammar, he offers a series of qualifiers: “we’re expected to,” “probably,” “we should be able to.” The interrogators’ training told them such weasel words meant Lu might be trying to avoid offering a weak third-quarter prediction.
Ounjian then asked about potential problems he’d spotted with revenue recognition as a result of a backlog of products. Revenue recognition is the way companies record income. It can be done either on a cash basis, with companies recording income only when the checks arrive in the mail; or on a more aggressive accrual basis, which means recording the revenue when it is earned, not when the money is in hand. Ounjian wanted to know what was causing the backlog, where in the world it was, and what kinds of delays were involved. All this could affect when the company would be able to record the revenues from the products involved. If the problems were serious, they could affect the company’s financial results in the next quarter, and might cause the stock price to dip.
“Are there any issues related to recognizing revenues on these?” Ounjian asked.
The voice of Michael Sophie, then the company’s interim chief financial officer, came over the phone line: “Yes, with the backlog, the vast majority of the wireless backlog is clearly PAS [an acronym for one of the company’s products, Personal Access System]. I think you saw the announcement at the end of June where we announced on the PAS infrastructure orders in China. And again, it’s just the timing of deployment and achieving final acceptance, we’ve also got some CDMA [an acronym for a type of mobile phone standard] to a lesser extent in the backlog…. But Q3 is clearly a little more handset oriented than we would typically run.”
After analyzing the call, BIA’s employees supplied a twenty-seven-page confidential report to their client, and they singled out Sophie’s response to the question about revenue recognition for particular attention. They noted that Sophie qualified his response and referred back to another announcement from the end of June. BIA called that kind of conversational reference a “detour statement,” and its analysts were convinced that Sophie was trying to minimize the delays. “Mr. Sophie avoids commenting on any issues related to revenue recognition, and his overall behavior indicates that revenue recognition problems cannot be ruled out.” They recommended a presumptive and direct follow-up question for BIA’s client to ask of executives at UTStarcom: “What issues are there related to revenue recognition?”
Overall, BIA’s team rated the second-quarter conference call as a “medium high level of concern”—the same rating they’d given UTStarcom’s call the quarter before. This time, though, the BIA team found more problems, which they listed in a box on the first page of their report: “Lacks Confidence,” “Underlying Concern,” “Avoids Providing Information.”
In the report, BIA went through the call line by line, highlighting possible red flags throughout the transcript.