Did you notice the SEC filing and fine last week for misleading financial reporting/statements for an “undisclosed revenue management scheme”? SEC fines are common, but financial reporting fines/settlements seem to happen very infrequently for public companies.
I’m surprised the stock is not reacting to this news detailed in the SEC report. Here are my thoughts, I’d love to hear others.. am I way off here?
The SEC filing notes irregularities discovered in years 2015 and 2016 and MRVL settled with cease and desist. However, this kind of revenue management technique can be carried on for a long time (since a balance sheet account is being manipulated) and then blows up. Future years are not discussed one way or another in the SEC filing, other than the panic within the company about continuing the revenue scheme to keep meeting earnings and how this eventually affects future earnings.
The stock price barely reacted DESPITE the company issuing, the next day, earnings guidance that next quarter earnings is going to miss. I do not think investors realize how much earnings can miss when this kind of revenue scheme comes to an end and is reflected in the financial statements.
Tech company revenue recognition can be extremely difficult, especially for longer term projects, custom software, or third party suppliers or distributors. This undisclosed revenue scheme alleges that the company was pulling from future earnings (basically customer deposits or unearned revenue on in-process projects) to meet current earnings targets. "Unearned revenue" is the account on the balance sheet holding future earnings, and is where they were pulling from to meet projected revenues on their balance sheet.
However, in 2019 this unearned revenue account went from around $50-$70M most years to just under $5M. It appears the gig is up, as there is very little to pull from or all future earnings have been pulled for past earnings by the revenue scheme from this account (or unreasonably shipped to customers, as discussed in the SEC charges).
The last few quarters, unearned revenue/deferred income was so small it was buried with other liabilities, not presented on the front of the balance sheet, so it is difficult to track this account during 2019.
On page 6 of the SEC filing, the impact on future earnings and the vicious cycle of this unearned revenue scheme is highlighted. The SEC filing does not note when the undisclosed revenue management scheme ended or any information about 2017 and future years.
Here is an excerpt from Page 6 of the SEC report:
“ c. Second Quarter of Fiscal Year 2016 (ended August 1, 2015) 20. Several weeks into Q2 FY2016, Marvell’s senior management renewed its pressure on its sales managers to pull-in as much revenue as possible to meet the quarter’s revenue targets. Internal FP&A analyses reflected that the combination of declining market demand coupled with the effects of the prior quarter pull-ins had left the company almost $100 million short of its public revenue guidance of $710-$740 million. Again, senior management’s response was that the company could simply not afford to miss its revenue guidance. As one Marvell employee explained: “[W]e need to pull into this QTR, we are still short, we will worry about next QTR later.” “
Either way, the unearned revenue account affected dropped 90% on last fiscal year financials ending 2/2019 to only $5M and they announced disappointing earnings for next quarter.. I certainly am short now and curious to see how this scheme ending plays out in earnings released December 2019!!!
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