Stock Falls As IBM Investigated Over 'Revenue Recognition' Issues
Investors on Tuesday expressed concern about IBM's unveiling of a new SEC investigation by driving the company's stock sharply down.
IBM, in a Tuesday SEC filing, said it is being investigated for accounting transactions in three countries.
"In August 2015, IBM learned that the SEC is conducting an investigation relating to revenue recognition with respect to the accounting treatment of certain transactions in the U.S., U.K. and Ireland. The company is cooperating with the SEC in this matter," IBM wrote in the filing.
[Related: IBM Reduces Guidance In Q3 Financial Report Amid Transformation To Cloud Era]
IBM spokespeople did not respond to a CRN request for more information about the investigation.
Investors reacted strongly to news of the investigation, driving IBM's share price down by about 3.7 percent, to $137.86 a share, by the close of trade. Share prices stabilized in after-hours trading.
The investigation comes at a tough time for IBM. Last week, the company said that while its third-quarter 2015 financials exceeded expectations, revenue for the quarter fell 1 percent compared with the same quarter last year. A 65 percent growth in IBM's cloud business was not enough to overcome weakness in the company's storage business, IBM said.
An IT industry financial analyst said the investigation is actually not likely to result in a long-term hit to IBM.
Sanford Bernstein analyst Toni Sacconaghi, in a Tuesday research note, wrote that there are still too many questions related to the investigation to determine how significant it is.
Sacconaghi wrote that for now, it appears the SEC has opened a formal investigation, which means the SEC can subpoena witnesses to testify and provide documents.
It is also unclear how broad the investigation is, although it is likely relatively narrow, Sacconaghi wrote. "We note that the 10Q states that the investigation will investigate 'certain transactions' -- we suspect these words were chosen carefully. That said, investigations can and often do broaden in scope," he wrote.
The SEC has investigated IBM several times in the past decade-plus, including for revenue recognition issues, equity compensation grants, and another revenue recognition question specific to cloud revenue, Sacconaghi wrote. "None of the prior investigations led to a materially adverse resolution," he wrote.
Investigations of this type typically range in length from five months to 4.6 years, with an average length of just under two years, Sacconaghi wrote. However, he wrote, if it were a really serious issue, investors would likely have known by now.
Sacconaghi also does not expect a slump in IBM prices caused by the investigation to last long.
"Given that SEC investigations are private and generally have no news flow until their resolution, we were not surprised to find that stock performance appeared to be driven by fundamental factors, not investigation related factors, during the course of an investigation. Our analysis also revealed that stocks underperformed by an average of –3% and –2% in the 1 and 5 days following closure of the SEC investigation," he wrote.
PUBLISHED OCT. 27, 2015