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The SEC is dragging AT&T to court for illegally duping analysts into lowering expectations

The SEC is dragging AT&T to court for illegally duping analysts into lowering expectations


AT&T’s CFO instructed the IR department to ‘work the analysts’

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Illustration by Alex Castro / The Verge

The US Securities and Exchange Commission (SEC) is suing AT&T for providing nonpublic information to 20 different analyst firms so they would lower revenue estimates ahead of earnings, according to a press release. That let AT&T “beat” expectations for the quarter when the information-sharing took place, turning what could have been some nasty headlines in the financial press into a win instead.

According to the SEC’s complaint (PDF), AT&T learned in March 2016 that its quarterly results would fall short of estimates due in part to “a steeper-than-expected decline in smartphone sales.” As you might recall, we used to live in a world where carriers like AT&T subsidized part of the cost of your smartphone, but by then AT&T had passed that cost along to the customer — which meant far fewer customers were upgrading them every year or two.

This quarter was going to be AT&T’s worst-ever for smartphone upgrades: a record low of just 5 percent, according to the complaint. As a result, AT&T expected that its consolidated gross revenue “was expected to fall more than $1 billion below the consensus estimate.”

Here is what happened next, from the complaint:

Fearful of a revenue miss at the end of the quarter, AT&T’s Chief Financial Officer instructed AT&T’s IR Department to “work the analysts who still have equipment revenue too high.” 

In turn, the Director of Investor Relations (“IR Director”) instructed Womack, Evans, and Black to speak to analysts privately on a one-by-one basis about their estimates in order to “walk the analysts down”—i.e., induce analysts to reduce their individual estimates. The goal was to induce enough analysts to lower their estimates so that the consensus revenue estimate would fall to the level that AT&T expected to report to the public—i.e., AT&T would not have a revenue miss, which would have been the company’s third consecutive quarterly miss. 

In their calls, the three IR executives “intentionally disclosed material nonpublic information regarding AT&T’s results to date,” the SEC alleges. Of the 20 analyst firms listed in the complaint, all of them lowered their revenue estimates — and many took AT&T’s 5 percent number directly. The SEC suggests that AT&T’s executives hid the fact that these numbers weren’t the kind that are supposed to be shared, so analysts may not have known that they shouldn’t have had access to that information.

Executives emailed amongst themselves the day before its Q1 2016 earnings in relief, the complaint shows. The company’s CFO even apparently told the CEO that two analyst updates “may do it for us,” with the CEO replying, “Good.”

AT&T ended up reporting $40.535 billion in revenue for Q1 2016, barely beating the revised consensus analyst estimates by less than $100 million, according to the complaint.

The company disputed the SEC’s allegations in a statement, claiming that “there was no disclosure of material nonpublic information”.

“The information discussed during these March and April 2016 conversations concerned the widely reported, industry-wide phase-out of subsidy programs for new smartphone purchases and the impact of this trend on smartphone upgrade rates and equipment revenue,” the company says.

“Not only did AT&T publicly disclose this trend on multiple occasions before the analyst calls in question, but AT&T also made clear that the declining phone sales had no material impact on its earnings,” it continued. “Analysts and the news media frequently wrote about this trend and investors understood that AT&T’s core business was selling connectivity (i.e., wireless service plans), not devices, and that smartphone sales were immaterial to the company’s earnings.”