Focus on the Fundamentals

I spend a fair amount of time listening to business experts on the Harvard Ideacast and Knowledge@Wharton podcasts. I choose to listen to the podcasts as opposed to read the scholarly articles they are based upon for two reasons: First I find that authors are much more likely to speak in plain English than they are to write it. Second, I spend a fair amount of time cycling to stay fit and listening to podcasts beats hearing my playlist of oldies for the 2,000^th time (and I can hear traffic over the sound of the spoken voice whereas Bruce Springsteen tends to drown out the sound of approaching cars).

One thing I’ve noticed about business experts, whether their field is human resources, finance or management, is that they are all convinced that the insights they bring and the field they are working in are the most important and critical applications for the modern corporation. Almost every expert comes across as being convinced that if company managements would only sit up and take notice of the expert’s crucial insights, companies could solve all of their ills and rake in the profits.

And so it is with investor relations experts as well. Over the past several years as I have observed and commented upon the field of investor relations, I have seen a parade of experts inform us how our lives were going to be radically changed by the latest topic du jour, and that we had better get on the train because it was leaving the station and those that were not on board were doomed to extinction.

Let’s start with XBRL. I first wrote about this topic in January 2009, so almost two years have gone by since I confessed that I didn’t understand the revolution. Guess what? I still don’t understand what all the fuss was about. XBRL sure hasn’t changed my life, and I look at company filings and websites all the time. It may have changed the lives of some programmers that had to map all that data, but to me it just seems like another government mandate that has had little to no impact in the real world.

And how about social media? Has it totally changed your IR program yet, the way all the experts claimed it would? I think the only change social media has made to IR is to give rise to an entire set of new experts that will get you prepared for the revolution they say is coming.

The point here is not that these issues don’t have an impact – they do, albeit a minor one in the scheme of things. These relatively new technologies will grow in importance over time, just as the use of the web and email have, although each new technology brings about its own dangers (see my June 10, 2009 post “Email is Not Your Friend”). The point I am trying to make is that IR practitioners should not let the latest fad overshadow the fundamentals of what we do. And what we do is to ensure that investors have sufficient information to make reasoned investment decisions about our company’s stock. This is accomplished by making sure the information our companies disclose is clear and understandable and presents a complete picture so that investors can make an informed investment decision. Clear and understandable generally comes in two parts: how we plan to make money in the future, back-tested against what the company has accomplished in the past.

The medium of how information gets delivered, whether it is in the form of paper, telephone, fax, email, text messages or social media, is just a tool – the important part is the information itself. So as we move into a new year, let’s focus on the important stuff and make sure that we make sure the basics are covered before we start chasing the stuff at the margin.

XBRL – Part Three, or, Son of the Return of XBRL

Back in January and February of this year, I wrote a couple of pieces about how I didn’t really get what all the whoopla surrounding XBRL was about. Those pieces generated a fair amount of comments and I even wound up talking to the folks at the SEC about XBRL. Not to put too fine a point on it, at the time I stated that I just couldn’t understand how XBRL was going to revolutionize the use of data by investors.

While I was doing research the other day on the SEC’s EDGAR database of filings, I noticed that reports are now beginning to be tagged as having “Interactive Data”. So I thought that I owed it to myself to go back and see how this XBRL stuff works in practice. Maybe the scales would fall from my eyes and I would see the error of my ways. Maybe I would be able to see how the data flowed seamlessly, enabling us to quickly reach investment decisions that were lost to us before. And maybe pigs would fly.

What I found when I went to the interactive data was that you could click on a heading such as Income Statement, and the P&L would come right up. I found the data had two properties: first, the headings were tagged. So for example, if you click on Revenues, you find that it’s US GAAP, the data type is monetary, the balance type is a credit and the period is the duration of the quarter. In other words, what you learn in Accounting 101. Secondly, you can grab the data and paste it into another document fairly easily. Also of note was the fact that the financials and notes are available as an Excel download, although everything I downloaded had a file name of “Financial_Report.xls”, so if you don’t rename the file right away, it becomes one of many with the same name.

After I had played with the data for a while, I sat back and thought about the cost /benefit analysis for what we’ve gone through with XBRL. On the benefit side we’ve gained a bit of functionality. I, for one, will welcome the ability to grab data off a downloaded spreadsheet rather than re-keying it when I want to do some analysis. But I don’t see a lot beyond that. The tagging of the data seems to merely tell me what I knew before. Further, professional investors have had the data in comparable and downloadable form for years. Systems such as Bloomberg and Telemet Orion (and I assume Reuters, although I have no experience with that system) already perform this function and a lot of other analytics as well. So my conclusion is that only relatively small investors are being helped. Against this we have to weigh the thousands of dollars spent and numerous man-hours invested by every company converting to XBRL.

To me this seems like another example of something that sounds good in theory, but the practical advantages just don’t seem to live up to the hype. In other words, it’s a governmental agency imposing a standard where the costs outweigh the benefits. The irony of it all is that the ultimate cost for all of this will be born by investors, because the cost of adopting to the new systems is a corporate expense, which lowers earnings, which will result in lower share prices.

XBRL – Part Deux

Much to my surprise, my recent post about XBRL has generated more emails than any other post I’ve written.  People from London and Washington D. C. have offered to help me see the error of my ways, so I’ve decided to continue to try and see the light.  (But, I mean, who would have thunk? This seems like a pretty dry topic to me.) 

I’m at an age where I’m not embarrassed to say that there are some things I just don’t get.  For example, in Game Theory class I never did figure out who was wearing that damned ret hat.  Be that as it may, this stuff is like an unscratched itch and it bothers me until I get some semblance of understanding, dim though it may be. 

So I went back and did some more digging on the web and I found an article about the 18^th XBRL International Conference held in Washington, D. C. last October.  What caught my eye in the article was a presentation where a Microsoft official stated that his company had already installed a XBRL enabled tool on its Investor Central website.  The specific statement was that the site allowed investors to drill down into segment results that sum into top line numbers on the financial statement.  I thought, “Ah ha, here’s a concrete example of XBRL in use that can really help me understand what’s going on.”  So off I went to the Microsoft website to look at the way they report segment results in their Investor Central.

I’ve inserted a screenshot of what I found.  The first page under segment reporting gives you the breakout of revenue and operating income.

If you click on one of the line item headings, it takes you to another screen (shown below) that drills down into the line item detail and the language from the Management Discussion and Analysis section of the 10-Q that discusses that segment.  So far, so good – it doesn’t give you any more information or insight than reading the 10-Q, but it assembles the data in one spot so that you’re not confined to the logic of a governmental filing form as you try and figure out what Microsoft’s various business segments are doing.  Nice, but hardly revolutionary.  Then I took a closer look at the way Microsoft had laid out the information and I lost my appetite for XBRL. 

The segment I had chosen by random to look at was Microsoft’s Online Services Business.  Microsoft starts the page with a headline stating “Online advertising revenue grew 7% in a weak ad spending market” and follows it up with three bullet points about search revenue up double-digits, continued display revenue growth and healthy engagement growth in page views and search queries.  It all sounds very positive until you look down into the actual detail pulled over by XBRL and you see that actual revenue growth for the segment was flat and oh, by the way, operating losses increased by 91% to $471 million.  Maybe that’s just a rounding error to Microsoft and not worthy of a mention, but it sure seems like a lot of money to me. What Microsoft did was to take the opportunity created by having an additional, non-SEC filing page to create some positive, non-XBRL commentary in order to try and spin the results on a horrible quarter in the segment.  If this is XBRL, you can have it; I’d rather try and figure things out without the commentary trying to divert my attention elsewhere.

Also, curiously enough, something appears to be awry with the transporting of data, as the last sentence on Microsoft’s web page refers to “headcourt-related [sic.] expenses” whereas their 10-Q filing gets it right.  If this data is just being moved around automatically, how could that happen?  And how confident does that make you feel that all the numbers have been transported correctly?

Maybe I’m just a skeptic (regular readers of this blog knew that already), but I don’t see what all the fuss is about with XBRL.  It’s just rearranging the data that we already had, which to me seems like a lot of work for not much benefit.  Better understanding and benefit come from working through the data.  Balanced against this we seem to have given companies yet another opportunity to spin the data.

Then again, maybe I’m just an old curmudgeon and this is another instance of not being able to figure out where that damned red hat is…

XBRL – What Is This Stuff?

I don’t think of myself as a Luddite.  In fact, for someone with as much grey hair as I have, I think of myself as pretty tech savvy.  After all, I have a blog, I also have my own web site, I carry around a Blackberry and I spend much of my day in front of a computer.  But, I have to confess, when it comes to XBRL as it relates to investor relations, I’m lost.  I’ve been to presentations at NIRI conferences where I hear speakers expound upon their theory that XBRL will revolutionize the way we look at and use financial data.  I hear them extol the virtues of how the information will be tagged and prepared for automatic comparisons and I wind up more confused at the end of the speech then when I started listening to them.  I find that when people start talking about XBRL, it’s similar to when I listen to computer programmers – I’m pretty sure they’re talking English, but not in a way that I can comprehend.

Finally, I couldn’t stand it anymore and I decided to try and figure out how all of this will affect me.  So I went out and did a Google search on XBRL (I told you I was half-way tech savvy, didn’t I?)  Here’s what I found:

“XBRL, like XML, applies identifying tags to items of data, which allows them to be processed and analyzed. Like XML, XBRL is a language intended to be read by computers, not humans. The use of XBRL tags enables the automated processing of financial data by specialized computer software, which eliminates the need for the tedious and costly process of manual re-entry and comparison. Once data has been tagged, computer software, rather than human labor, is used to select, analyze, store and exchange information. Moreover, since it is a standardized language, XBRL enables an apples-to-apples comparison across multiple companies and multiple industries.” 

So as I understand it, we’re going to be able to grab all sorts of data and the computer will tell us if the information is comparable.  If it is, then we can drop it into spreadsheets and unlock all that hidden information.  Leaving aside the issue of whether or not companies will code everything in the same manner (which is a pretty big issue by itself), as I see it, there are two potential problems here.  First, the numbers that are being tagged by XBRL are being prepared by humans using accounting.  As we all know, accounting involves a multitude of judgments.  Things that seem straightforward on the surface, such as revenue, can actually be quite tricky when you start to adjust for accrual accounting with its accrued revenues, deferred revenues, advances, long-term contracts and exceptions.  The tagging for XBRL will follow the accounting judgments, so unless all companies start to account for things exactly the same, discrepancies will crop up in the numbers.  In my experience, every company has certain accounting items that they handle differently from other companies.  The reasons for this range from “We’ve always prepared it that way” to “The system can’t handle it that way” to a variety of other excuses, but I assure you these exceptions exist.  Unless you get uniformity, comparisons are an illusion. 

Second, and this goes back to something I learned when I was taught math (or as we used to call it in those days, arithmetic), you can’t just read the problem and say, “I understand it”.  You have to get out your pencil and paper and work the problem to absorb what’s happening.  Maybe I’m a dinosaur, but when I’m examining a company’s earnings report, I pull out a calculator and work out the relevant ratios and changes I care about.  That way, as I work my way through the financial statement, I find I have a better understanding of where the variances are.  Maybe the next generation will be better at letting machines point out these things, but having helped three children learn math, I don’t think so.  

So as I understand it, XBRL will allow people to use software to manipulate numbers easier and faster (because they’re already tagged) for purposes of analysis and comparison.  There is, of course, no guarantee that the analysis will be any better understood or that the comparisons will be meaningful, but hey, you’ve got to start somewhere.

Sounds to me as if the XBRL revolution is being oversold.