INTRODUCTION
Valley Systems was a computer hardware company which manufactured high performance internetworking systems for integrated computer networks and multi-protocol routers, among other products. It had a strong domestic presence and was beginning to expand internationally. The company had a successful initial public offering (IPO) six months earlier, and had just released its next-generation enterprise router, which to date had received positive reviews and was expected to provide a healthy boost to revenues. Being a public company did bring with it many perks and benefits, but also meant adhering to much stricter regulatory requirements and the constant scrutiny of Wall Street. It was 5:30 p.m. on a Friday, two weeks before the close of the quarter, and Matt Tucker, president and chief executive officer of Valley Systems, was poring through a stack of financial statements and sales contracts. Overall, it had been a solid quarter for the company, which had booked several large orders with a number of new enterprise clients while maintaining steady business from its installed base of small and medium-sized customers, some of which were handled through “resellers.” Despite the healthy sales, Tucker was recently made aware that the company would not make its quarterly numbers based on its current quarter-end shipment schedule. He quickly sent an e-mail to his senior management team (VP of sales and marketing, VP of operations, and the CFO), asking everyone to meet in the company conference room at 6:00 p.m. to come up with a game plan. Tucker was becoming accustomed to both the increased oversight and the importance of earnings guidance and “meeting or beating” estimates, demands generally not relevant at private companies. He was also aware that there was a great benefit to the company in achieving This document is authorized for use only by Yun Li in [FINM7401] Finance (St Lucia). Semester 2, 2018 at University of Queensland Business School, 2018. Valley Systems (A) E385-A p. 2 consistency in earnings—smooth and steady results were perceived as healthier than “lumpy” numbers. Needless to say, Tucker felt a tremendous amount of pressure from the investor community to meet the consensus quarterly earnings estimate. Valley Systems had reported earnings consistent with the Street’s estimate in the first quarter following its IPO, although the stock had sold off slightly following the announcement. He knew that if the company missed earnings this quarter, its stock price, and thus market capitalization, would take an even bigger hit. Not only could this ring alarm bells on Wall Street and among the company’s customer base, but it would doubtless also lead to a loss of morale among employees motivated by the value of their options. When the management team gathered at 6:00 p.m., Tucker reviewed their options. The quarter end delivery schedule was made up of a collection of products that would be built to order and shipped based on a specific delivery slot prioritized by the customer’s order date. The company also had a healthy backlog of large equipment deliveries that were scheduled to ship early the following quarter. If those larger orders were moved forward so that they shipped in the current quarter, Valley Systems could book that revenue now and achieve its earnings target. Though reconfiguring the delivery schedule would allow Valley to make its numbers, the “swap” was not without consequence. In order to free up capacity for the larger deliveries, several smaller orders would have to be pushed from the existing quarter to the following one, forcing those companies awaiting product to deal with the inconvenience associated with delay. Similarly, the customers with larger orders would be required to pay for their product earlier than anticipated, a proposition they likely would not receive well. The scenario was not ideal, but the implications of missing their quarterly earnings the second quarter after their IPO loomed large. Tucker and his team debated their next move.
Questions:
1) If you were Tucker, do you adjust your delivery schedule so that you can meet your quarterly numbers?
2) If so, what are the primary issues likely to arise, and how would you deal with those issues?
3) If not, how do you address investors’ and employees’ concerns regarding missed earnings?
