:: Tuesday, June 20, 2006 ::
When Corporate Earnings Conference Calls Take a Bad Turn
I've developed a guilty pleasure this month. It's June, which is the last month of many corporate fiscal years, and so June brings with it a flurry of earnings announcements and conference calls. Most conference calls are recorded and made available for at least a couple weeks afterward as webcasts or recorded conference calls.
So, this month, I've been visiting a business website that lists corporate conference calls and looking for calls by corporations in dire straits. I'm not interested in companies that have fallen on hard times. Rather, I'm looking for companies that are poorly managed and hanging by a thread in hopes that analysts listening to the call get tough with the CEO and CFO and ask jabbing questions. My reasoning is that a poorly managed company with a history of poor performance has lost most of its investors, and any remaining investors are so frustrated that they've abandoned the formalities of discretion, politeness, respect usually given to corporate executives in a public forum. It's like those Looney Toons cartoons where a character takes off his glove, pours gravel into it, and then swings the glove around to slap another character in the face... a gentlemanly fight, if you will.
Take Atari, for example. Atari announced Q4 2006 earnings on June 14. Atari has also failed to meet NASDAQ requirements (NASDAQ requires companies maintain at least a $1 stock price), which is a red flag that the ship is sinking and has probably been taking on water for a while. Also a sign of trouble, after the market had a few days to digest the earnings announcement, Atari's stock price fell over 10%: it closed at $0.61 about 30 minutes before the June 14 announcement, then began a steady decline, dropping to $0.58 on June 15, $0.55 on June 16, and $0.53 on June 19, accompanied by significantly increased trading volume since the call. It's a sign the investment community isn't pleased with Atari's attempt to ease its concerns.
First, a few highlights from the business and financial overview segment. The numbers are elapsed time (minutes:seconds) of the conference call webcast, in case you want to skip to specific times using Media Player and hear for yourself how things "went down." The call began at 34:19, and I'm not sure what that means; perhaps Atari kept callers waiting for 34 minutes after the scheduled start of the call, someone jumped into the wait queue and started the recording 34 minutes early, or the call timer is just whacked.
- 40:57 - Atari currently expenses all R&D ($14.1 million). This struck me as an odd statement to make, because any analyst would know current accounting practices require corporations to report all R&D as expense. So, duh!
- 41:09 - 4Q 2006 net loss was $4.3 million, even after a $6.2 million intellectual property sale. Ouch.
- 42:53 - Explaining why Atari filed for an extension to file it's 10K (the granddaddy of SEC financial reporting, which includes the corporation's annual report and financial statements such as the income and balance sheet). The reason? "We need more time." Got it - we figured as much, but what happened that caused you to ask for more time? That's a huge regulatory miss!
Throughout the call, there was a broken record playing: CEO Bruno Bonnell made numerous promises to make major decisions in the next few weeks. Ah, but if only such announcements could have been made at the earnings conference call to appease all those nervous current investors getting ready to jump ship and convince any potential investors to buy the stock! Most of CEO Bonnell's "I can't comment on this now" question dodging came during the Q&A session, but two notable mentions during the overview:
- 43:36 - Fiscal 2007 will continue to be a year of focus at Atari... details forthcoming!
- 43:42 - New CFO and other leadership team members announced within the "next weeks."
Next came the Q&A session, and the questions progressively become more brutal, even a bit hostile, especially in the last 15 minutes. On a human side, it was painful to hear CEO Bruno Bonnell try to defend Atari. I felt embarrassed for him. I don't have the "right stuff" to be a CEO, and I'd have a difficult time trying to keep all the facts straight in my head in a high pressure situation... but when it came to Atari's Q4 2006 earnings conference call, it didn't seem as if poor Bruno had the "right stuff," either... not that day.
Note: if you want the exact transcript, use the timestamps I provided to locate the statement in question during conference call. What I've provided here is a satirical interpretation to cut through the jargon and get to the bottom line that already is well understood in the investment community: stay far, far away from Atari. However, any quoted text is a direct quote of something said during the conference call, because some of it was so unbelievable that it didn't need to be satirized. But if you listen to the conference call, and know what to listen for, and read along with my comments, I think you'll appreciate just how disastrous or hilarious (depending on your perspective) this conference call was.
- 45:08 - Q: How will you raise cash this year, and how quickly will you spend it? That's a straightforward budgeting question, right? If you went to the bank for a business loan, this would be one of the first and most basic questions the loan officer would ask, so you'd better have a solid answer for damn sure if you wanted that loan! Atari's financial calculus seems to be a bit different, however.
A: CEO and acting CFO Bruno Bonnell awkwardly passed the question to an unexpecting individual, Principal Accounting Officer Arturo Rodriguez, who explained Atari is raising $15 million cash by selling non-core assets (the household equivalent of having a garage sale and selling off the extra family vehicle), but can't comment on how long that money will last. Scary!!!
- 46:09 - Q: How will the year flow? Will it be similar to 2006 (a polite way of asking if it will completely suck) or how should we look at it?
A: CEO Bruno Bonnell admits Atari cannot be satisfied with 2006's performance, blames it on an unfavorable video game market, Atari's own products (sub-par compared to other industry offerings), and a management crisis involving most of Atari's upper management, who have now been axed. Bruno concludes by saying Atari has not, does not, and will not, provide guidance on what to expect in 2007. YIKES!!! Given the state of things, maybe Atari should reconsider this practice and throw investors a bone... or maybe it's because Atari doesn't have a long-term business strategy, hmmm?
- 48:50 - CEO Bruno Bonnell vaguely describes Atari's plan to expand into the online gaming market. But apparently, Atari is a follower, not a leader, so it's waiting for the online market to develop. Atari will disclose details in due time for "competitive reasons."
- 49:50 - Q: Can you tell me what you expect for the software side of Atari and what the industry will look like for the year ahead?
A: The gist of CEO Bruno Bonnell's reply = Of course not! But watch me try to deflect the question by talking about a more positive area of the company (hardware), instead, only to have it backfire in my face as I suddenly realize hardware is also a faltering area of our business in the midst of discussing it. Yes, sadly, CEO Bruce Bonnell killed two of his own birds with one stone when he shifted the conversation from software to hardware: this year did see our hardware develop... but wait, sales of our hardware fell short of expectations, didn't they? Hmm. Well, we hope that will improve soon. So basically, Atari is playing the "wait and see" game, and you should just "hold your breath" and place smaller bets. Whoa! This is the equivalent of telling investors that Atari is a very risky investment, and investors should back off. That's crazy, man!
- 51:57 - Q: What is the company's strategy now? Will it be console gaming, handheld games, or online gaming? "What exactly are you doing here?" (ah, now the analysts' frustration really begins to show!)
A: CEO Bruno Bonnell describes the video gaming industry's pattern of game development: the video game industry invests $25 million to make a successful game, but this year, Atari has learned that is not enough. Unfortunately, the game also has to have quality and good timing. Things like missing the market's expectations and delaying a game's release because of licensing problems can really screw a company!
Mr. Bonnell summarizes by explaining that Atari is pragmatically focusing on big title games like Test Drive 7 and Alone in the Dark, PSP (PlayStation Portable) titles, and online gaming. So, in other words, the answer to the analyst's question is: YES, YES, and YES! Our strategy is to focus on everything and jump on it as soon as we think it's the industry's new direction! In other words, Atari has no long-term business strategy. Atari is chasing every industry trend, hoping for a break that never comes. Sorry, guys!
- 57:53 - CEO Bruno Bonnell says he was "shocked" to see how quickly video gamers were eager to adopt the next generation of gaming consoles. Whoa... let's stop and think about this. How could anyone not possibly understand the gaming market is completely about building anticipation and bringing the next greatest thing to market? That is the secret to Sony's success and the secret to Atari's lack of success, which Atari apparently has failed to realized time and time and time again. Will they ever learn?
The nail in the coffin: On Atari's corporate philosophy and strategy webpage, Atari claims to "adapt next-generation technologies." This statement appears next to a headshot of CEO Bruno Bonnell, who said he was surprised at how quickly consumers are willing to adopt the next generation of gaming consoles. Do you see? Do you understand why Atari is doomed??? No? Then let me explain it to you: if Atari wants to bet the farm on next-generation technologies, then it had better understand these technologies and understand the relationship they have with consumers (for example, how consumers will adopt new technology). Atari has failed at one or both.
Being surprised at gamers' willingness to adopt the next generation of gaming console is the equivalent of a car manufacturer saying it's shocked to learn that car buyers are excited to buy new cars that feature new technologies like GPS navigation, HID headlights, heated and cooled car seats, Bluetooth technology for cell phones, dual zone climate control, and automatic windshield wipers.
The video gaming company that downplays the significance of new technology either does so out of ignorance, or in an attempt to justify it's own reluctance to invest big bucks in integrating new technology into its products. Remember, as Atari struggles to raise $15 million through sale of non-core assets, it is strapped for cash
- 1:00:12 - Now the gloves really come off! Q: "If someone asked me 'why would I invest in Atari?' what would your answer be?"
A: "First of all, we have to deliver a little more." (No kidding!)
"We are definitely not hoping to do the same, really bad year we had, this one." (Good, that's what we like to hear, but we were expecting you to take a more active role in prevention than merely "hoping.")
"The brand, Atari... that the company has today." (Umm, when I think of Atari, I think of early 1980s video games... brand recognition, yes... brand potential for future financial success, no.)
"We've seen so many recoveries in this business." (Really? Recoveries in Atari? I guess that depends on your definition of "recovery." And if you were referring to recoveries by other industry players, you failed to distinguish the successful recoveries from the failed ones. Successful recoveries require a recognition that your company has to evolve and do things differently -- the "same old, same old" won't cut it.)
"I think the company's balance sheet is fairly clean." (Really? Is that why Atari wants to delay filing it's 2006 10-K annual report and financial statements?)
"There are many ways to a successful strategy. The pattern of just repeating the same old, same old in light of the handheld, in light of the online, in light of the evolution of the consumers' demands, may re-invent some of the company faster than people expect." WHAT?!?! NO, NO, NO!!! The "same old, same old" routine has NOT and will NOT re-invent video gaming companies! I couldn't believe my ears. I think Bonnell might have meant to say something else, and misspoke... I hope so, because if he really meant to say that, then bad, bad, bad.
- 1:02:30 - Q: "I have a question about the shares you guys own. Correct me if I'm wrong, but you wouldn't even be able to sell the majority of your shares, because most of those shares are pledged to a bond."
A: We have no plans to sell any shares, especially in light of its valuation. So, yes, aside from the fact that parent company Infogrames and Atari can't sell Atari stock because we had to offer our own shares as collateral to secure credit, we wouldn't do so because any shares would be sold at a loss since Atari is a penny stock.
- 1:03:25 - At this point, the analyst (Alex from Goldman Sachs) becomes almost mocking and insulting: "Right, I agree with you on that [the share price sucks!] But my point is to everybody else is, even if you wanted to, you couldn't do it. [he almost laughs, and cuts off CEO Bruno Bonnell's reply] So, they don't even have to believe the statement, it's just factual, you can't do it!"
- 1:03:39 - Q: Can you give us more detail on timing, magnitude, and exactly what "non-core assets" you plan to sell?
A: CEO says they have no timing pressure, no set plan. Atari wants this to happen in a "comfortable way." Okay, that's crazy -- if your company is going to hell in a handbasket, you sacrifice "comfort" and do what you have to do to save the rest of the company, right? Unless... Atari has no long-term business strategy.
- 1:05:12 - Q: As for core assets, like patents and intellectual property, can you comment how you could leverage them to generate revenue or create value? (A very fair question, the equivalent of interviewing a job candidate and asking, "what can you contribute to this organization?")
A: CEO Bruno Bonnell explains that, as he said before, he cannot comment on those assets, because it depends on what's best for Atari's business evolution. (Beginning to sound like a broken record, "I cannot comment." And Mr. Bonnell makes a good point... he cannot comment on these questions because the answers depend on Atari's non-existentent long-term business strategy. What's so entertaining about all this is that CEO Bruno makes it so painfully obvious: Atari has no long-term business strategy.)
- 1:06:07 - Q: I understand you have a lot in the works, but can you help us understand the range of those assets you keep talking about?
A: CEO Bruno Bonnell continues to flounder, saying the range of assets is wide, but he "obviously cannot comment about this." He refers the analyst to Atari's large catalog of software titles and franchises. At this point, Alex from Goldmann-Sachs gives up and resignedly says "Okay." Perhaps Alex finally realized that Atari has no long-term business strategy.
- 1:06:46 - Perhaps the best and most damning comment of the entire conference call comes from another analyst who cuts in (I think he asked a previous question, but the operator forgot to put him back on mute), tired of the CEO Bruno Bonnell's broken record "we'll be announcing this in a few weeks" question dodging, chimes in and jabs, "We'll be waiting anxiously for the press release." You can tell CEO Bruno is wearing down by his meager reply: "No problem."
- 1:06:55 - An analyst further weaken's Atari's vague assessment of its own assets by asking if Atari really owns the Alone in the Dark and DragonBall Z franchises.
A: I'll spare you the long explanation: No. Atari only has the distribution rights.
- 1:09:16 - Q: What did you pay for the U.S. distribution rights for the DragonBall Z franchise?
A: CEO and acting CFO Bruno Bonnell, who should know the answer to such a question, but maybe has become too frazzled, says, "I wish I could tell you." I bet Atari's investors wished the same thing!
- 1:11:21 - Q: Has Atari ever acquired the North American distribution rights for a game from anyone else other than Infogrames [Atari's parent company, for which Bruno is also the CEO]? I think the point here was to ask if Atari has enough respect within the video gaming industry as a distributor to be chosen to market someone else's game, or if all its distributing deals have been "favors" from parent company Infogrames.
A: CEO Bruno Bonnell replied that he wished someone was here on the call who knew the answer (I'm not kidding!!!), and asks someone else to answer (it is an embarrassment for a CEO not to know the answer to such a significant question, but perhaps the tough questions have gotten the best of him). The general consensus among Atari executives is no. CEO Bonnell counters that distribution rights are not the main focus of Atari. But that begs the question -- what, exactly, is the main focus of Atari? Does Atari even have a focus? When pressed several times for Atari's focus, CEO Bruno could never give a straight, focused answer. Sadly, this may be because Atari has no long-term business strategy.
Or, perhaps it is because Atari is not yet willing to admit, as it reluctantly dissolves its internal development studio, that Atari is being shoved out of the game development business, and being forced to sell off (not to license and retain ownership, but actually to sell) its game ownership assets to remain afloat. Of course, there's no future in that business model.
- 1:13:12 - A defeated CEO Bruno asks, "I will take any last question. Operator, is there any last question?" You can even hear a tinge of relief in the operator's reply: "No, we don't have any left, sir."
"No, we don't have any left, sir." One must wonder... was he referring to questions, Atari investors, or Atari's future? Or all three?
:: Bryan Travis :: 06/20/2006 @ 08:28 :: [link] ::
:: Wednesday, June 14, 2006 ::
Psst, your fly's showing
Today I mowed the lawn and transplanted the last of the tomato, watermelon, and cantaloupe seedlings into the garden. Then I showered and went for a haircut. When the girl finished cutting my hair, she pulled off the cape, and when I looked down, my fly was unzipped.
I haven't walked around with an unzipped fly for years, but that's little consolation against everyone who got a chuckle from the jackass walking through the mall with his fly down. At least I was wearing my t-shirt untucked, so no one probably noticed as I was walking around, but not so when the hairstylist pulled off the cape after my haircut. Yes, folks, when she pulled off that cape, there it was for all to see... like a gaping, almond shaped mouth framed by brass-colored zipper teeth.
I'm not sure if the girl cutting my hair noticed, or not, but it's probably wishful thinking to assume she didn't. As nonchalantly as possible, as if it were merely a part of my ritual to prepare to stand up after sitting down for so long, I pulled my shirt over my crotch with my left hand and made exactly two flicking motions with my right hand, as if dusting off bits of cut hair. Then I stood up, followed her to the register, paid, tipped her a few dollars, and got the hell out of there.
:: Bryan Travis :: 06/14/2006 @ 01:03 :: [link] ::