Earnings Season

It’s October again. I remember back in the 80s and early 90s, October earnings season was always a time to be defensive. Tech companies usually had weak third quarters and the news was normally bad in October. In addition, public stock managers who had good years didn’t need to take big risks and tended to lighten up in October heading into year end.

As the technology business continues to morph from lumpy licensing oriented businesses into more stable recurring revenue oriented businesses, we are seeing less of this. The hardware companies still have this issue and some of the big software companies still have licensing revenue streams that are lumpy and impacted by the summer slowdown.

But the definition of a technology business is changing. Saleforce.com is the future, Peoplesoft is the past. Google is the future, Microsoft is the past. Red Hat is the future, Sun is the past. These are provocative statements and are meant to be taken that way. I may be off in the specfics, but not in the direction of where technology is headed.

The other thing that is changing is research. It used to be that analysts would talk to the company, the customers, and the channel to figure out how the quarter was. Regulation FD stopped the companies from talking. And talking to the customers and the channel was always an exercise in guesswork. An analyst could rarely compile a sampleof customers large enough to truly be predictive.

The Internet is changing all of that. As technology businesses become “web enabled”, so do their revenue streams. And its now possible to track some of this stuff precisely. We are just at the beginning of this trend, but its happening today and is going to happen in even bigger ways over the next five to ten years. Companies that do business and deliver to their customers over the Internet will become a lot more transparent to Wall Street.

A case in point is Majestic Research, started by my former colleague Seth Goldstein and his partner Tony Berkman. Over the past several weeks, I have been getting research reports from Majestic that have reported on the third quarter activity at Yahoo!, Google, eBay, CarMax, Auto Nation, Mandalay Bay Casino, Ceasar’s Entertainment, WebMethods, RSA Security, and many more companies. All of these reports predicted some important aspect of the third quarter results. And all of them came out well before the earnings are reported.

I’ve been watching a bit as the earnings come in to see how they are doing. In mid-september, Majestic started “pounding the tables” with their research on Yahoo! and Google, saying that paid search results were likely to be up very significantly and predicting that revenues would come in at the high end of the range. Yahoo! reported on Tuesday and in fact did report a blowout quarter with revenues well above management and “street” estimates. We’ll have to wait until Oct 21st to see if Majestic is right about Google too.

But regardless of whether Majestic gets Yahoo! or Mandalay Bay right, the point is that we are seeing business activity become more transparent, more measurable, and more predictable. This is going to impact the way wall street trades stocks. Earnings seasons will bring less surprises because the bad news or good news will be known well before the announcement.

That may make for a better October for everyone involved.