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Hi former Wall Street enterprise software analyst here. Financial models were, generally speaking, tightly managed by the companies being modeled. For each upco
by _sword 7y ago
Hi former Wall Street enterprise software analyst here. Financial models were, generally speaking, tightly managed by the companies being modeled. For each upcoming quarter and full year, management (typically investor relations, sometimes CFO) would hop on a call with my team and discuss where our estimates were vs. consensus. Sometime, "consensus" was an internal measure and not what was reported by e.g. Bloomberg or FactSet.
If estimates were particularly out of bounds from consensus, they would politely ask how we modeled their business, if we would like help modeling their company, if we had a particular reason for out of bounds estimates, etc. That was a firmly worded but polite way to describe that the estimates might need some review and adjustment.
- arthurcolle 7y agoHi former bulge bracket technologist/trader here as well. That seems like an extremely terrible idea due to the ability to pollute independent thinking by the model makers. What do you think about that?
- _sword 7y agoI think that's the point though. Every growth software company wanted to have a beat and raise quarter, so they would manage expectations down to be able to offer exactly that, often no matter the quality of the earnings. As a sell-side analyst, if you wanted access to value-add with opportunities with corporates where you could get paid (e.g. non-deal roadshows), or even potentially banking business, you would generally need to have a good relationship with the company. The more divisive analysts would generally restrict contentious calls to one or two names that would generate call flow. A lot of sell-side research work that analysts are paid for also focuses on information outside of estimates such as brokering investor sentiment or offering more details on channel checks in addition to what was published.
- JackFr 7y agoThere was the whole era of “the whisper number” where analysts would publish one estimate and then feed journalists and certain customers another number. I specifically remember an analyst on CNBC literally say that he expected earnings on a company to come in ahead of his own estimate. Honestly, why is that number not your estimate then?
- _sword 7y agoWhisper numbers are still totally around, but as buy-side expectations in my experience. I'd often field calls around earnings from investors who were trying to understand what everyone else was expecting from earnings results. There would then be further debates about what numbers would be good enough, or what long-only investors were expecting vs. hedge funds.
- albertshin 7y agoI remember (and will try to find) this one instance a few years back where one of the large banks issued a price upgrade shortly before earnings. This brought up the consensus prior to the earnings announcement causing the company to miss/underperform consensus which CNBC and other public news outlets weren't afraid use as the headline grabber... The company management was pretty pissed, but it also shows how simple the public can be in interpreting the earnings miss/beat.
- o-__-o 7y agoI no longer trade during earnings because it’s effectively random for John Q Public. A company beats across all estimates (eps, total rev, next quarter guidance) but drops 6% because a random non-public metric (like same store comp sales, or new subscribers added) that not a single analyst talked about that quarter was missed.
- bitxbit 7y agoThis is pretty common on the street. Not only for companies but buysides trying to manage estimates up or down.
- hdevarajan 7y agoWere parties aware that this was close to or a de facto reg fd violation (https://www.sec.gov/rules/final/33-7881.htm https://www.sec.gov/rules/final/33-7881.htm) and/or how was this handled internally?
- wilg 7y agoCould you explain more? That is like a hundred pages of regulations and I don't know anything about this.
- OldManAndTheCpp 7y agoShort answer: reg fd requires companies to disclose information material to investors to all investors. The previous post is suggesting that the close work with the bank analysts is conveying material information without proper disclosure. My hunch is that the legions is compliance lawyers at both the banks and at the companies have deemed this to be within the bounds of the regulation, but we’ll see if the SEC/US Attorneys agree.
- erikpukinskis 7y agoFWIW, my hunch is lots of information gets shared that the SEC doesn’t know about.
- carlmr 7y agoAs long as breaking regulation is on average profitable the market dictates that regulation will be broken. So depending on the risk/reward it most certainly can happen.
- oldgradstudent 7y agoBeing cynical, I'd assume the "help" they offer is more likely to be stock market manipulation than disclosure of material information.
- 7y ago