FOOL ON THE HILL: An Investment Opinion
Copper Mountain Low

Most companies are not known for telling it like it is. Rather, there is a significant tendency among them to "spin" news in a positive light to ensure the company's message gets out. But sometimes a company has an opportunity to tell the truth to its shareholders and it does not. DSL equipment manufacturer Copper Mountain's CEO Rick Gilbert appeared on a Motley Fool-featured interview recently and intimated that the company would grow at 10-15%. This week the company warned that its sales would shrink by 35% next quarter and its earnings next year would be up to 80% below current expectations.

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By Bill Mann (TMF Otter)
October 20, 2000

[Correction: In this Fool on the Hill column we originally quoted from an interview with Copper Mountain CEO Rick Gilbert, which incorrectly stated third-quarter earnings would come in at 50% above the previous quarter. The figure should have been 15% and this column has since been amended.]

It happens to the best journalists. Someone authoritative says something factual that is impossible to check. Politicians may be the best at this, but do not count out the masterful job companies do at "getting their stories out."

But sometimes the story and the reality do not match. When this happens a writer ends up looking silly, complicit, or both. It happened to The Motley Fool last week, and the more I think about it, the madder I get.

One thing should be made clear: The majority of the writers for The Motley Fool are not trained journalists. We are individual investors who write for other investors. We do not run an "investigative" type organization. Our job, as we see it, is to try to educate investors on how to use information that is available to them to make better investing decisions. Going back to the genesis of The Motley Fool, we have always promoted the benefits of communicating directly with the companies you own or want to own, through shareholder services, annual meetings, and occasionally, through executives or other employees.

This is one of the rationales behind our "StockTalk" feature. We enable company executives to talk directly to Foolish investors about their companies in an informal interview-type setting. It's pretty basic stuff -- we don't generally drill down on accounting ephemera or other detailed information in this format. Past guests include executives from Yahoo! (Nasdaq: YHOO), JDS Uniphase (Nasdaq: JDSU), Oracle (Nasdaq: ORCL), and Coca-Cola (NYSE: KO), all of whom have given investors some great information about their respective companies, from an insider perspective that is unavailable to most investors.

This is what troubles me so much about the fact that our interview last week was with Copper Mountain (Nasdaq: CMTN) CEO Rick Gilbert. For any of you who do not watch the market on a day in, day out basis (good for you!), Copper Mountain announced at the close of business on Tuesday that it was guiding its revenues for the next quarter down by 35% and its earnings for next year down by 80%-plus. And yet, there was Mr. Gilbert, telling Chris Rugaber from The Motley Fool in an interview conducted on September 26th, and posted on our site October 12th, that revenues could grow at 10-15%. In fact, here is the exact exchange:

TMF: One other question on your revenues. I noticed the most recent quarter, while you still had pretty good year-over-year growth, it looks like the quarterly sequential growth slowed a little bit. Generally, what kinds of guidance are you giving or can you give?

Gilbert: Generally speaking, we have given the guidance in the past that we obviously can't grow exponentially fast in top-line growth forever or we'd be the largest company in the United States in two or three years. So the law of large numbers applies at some point, and your quarter-to-quarter revenue growth would have to slow from where it was, say, a year or two ago, in the 40% or 30% range, to something more like 10% or 15%. What the analysts are expecting for Q3 is about $92 million in revenue. That's about $0.26 per share, which represents about 15% growth.
Now, I know that you could read this a number of different ways, and that this phraseology does not actually spell out the numbers. But the insinuation is there: We are going to keep growing. (The exchange quoted above is actually from a portion of the interview that was posted on our Copper Mountain discussion board).

Only three weeks later, the company is giving an abysmal earnings warning based on reduced spending by Competitive Local Exchange Carriers (CLECs), the majority of Copper Mountain's customer base. But Chris Rugaber asked about that, too.
TMF: Regarding CLEC customers, are you worried about their financial health? We've been hearing about a couple of them having trouble. What's your take on their future and how that will affect your business?

Gilbert: Well, first of all, I think the market is in transition. I think after the Telecom Reform Act of '96 we saw initially some experimentation with DSL networks by both the ILECs [Incumbent Local Exchange Carriers] and the CLECs, and those grew into much larger networks. I mean, Copper Mountain at this point has installed about one million physical ports out there, and that's a big network... So, we think the ILECs will be acquiring or consolidating with the CLECs -- buying the CLECs in order to form these separate data affiliates. And a good example of that is the recent Verizon (NYSE: VZ)/NorthPoint Communications (Nasdaq: NPNT) deal, which I think is just the tip of the iceberg. I think we're going to see a lot more of this consolidation take place, and that's a great opportunity for Copper Mountain because it immediately gives us the out-of-region business for ILECs, and the opportunity to compete much more vigorously for the in-region business as one of the main vendors of an ILEC.
We've contacted the company since their earnings debacle. A Copper Mountain spokesman, in response to a question on why the company didn't issue a warning earlier (such as during our interview), stated, "We have to be very cautious and as accurate as we can be with our forecasting, and gathering information from our customers and factoring in other market conditions is a difficult and time-consuming process. The full extent of the impact of various market conditions (tighter capital markets, operational problems, etc.) on the CLECs and the full extent of how these CLEC difficulties would in turn impact Copper Mountain only became apparent during the past couple of weeks."

The company's spokesman also pointed out that in the online transcript of the interview, Gilbert did say: "Now, to just finish with what's happening with the CLECs -- going forward, I doubt if you're going to see a lot of new CLECs funded by private equity. I think that some of the smaller CLECs that really have poor business plans or limited management teams may even fail...."

Which is all well and good, but the fact is the CEO gave an upbeat interview roughly three weeks before a major earnings disappointment (and only a few days before the end of the quarter). Moreover, between the actual interview and the posting of it on our website, Gilbert was quoted in The Wall Street Journal as saying he was "comfortable" with analysts' estimates for the third quarter -- in an article specifically discussing the issue of how telecom equipment companies were affected by the troubles of CLECs and other phone companies.

It's also surprising, to say the least, that Copper Mountain contacted the Fool about an interview, and apparently was conducting a "press tour," in the weeks leading up to its earnings announcement.

Phillip Fisher has something to say about companies and their communications with shareholders. He looks for companies that have uncompromising integrity, ones that are as vocal about their missteps as they are about their successes. As a Foolish investor, I hold this quality to be as high as nearly any other I look for in a company. Even if I were convinced beyond the shadow of a doubt of a company's superior opportunity for market-beating returns, I would not invest a red cent if I considered the management team to be suspect in this regard. I've got a simple motto: A management must display integrity, intelligence, and creativity. But if it lacks integrity, rest assured that it is not using the second two for your benefit.

Now, this may be an overly harsh criticism to be leveled against Copper Mountain. I frankly do not have much of an opinion of the company or its products. But I question the company's suitability as an investment based on the fact that the CEO would be interviewed and answer questions as if things were fine when clearly they were not. Chris Rugaber asked the right questions, and Rick Gilbert did not answer in a way that a) informed his investors, or b) gave any hint of the reality of the company's situation. To think that, as of the last week of September, Gilbert did not know CLEC sales would be lighter over the next 15 months is questionable, at best.

Although it would be completely daft of someone to run out and buy Copper Mountain stock based on a single interview, the fact is that hundreds of thousands of shares traded hands after the interview and before the earnings report a week later. We've seen this before -- last year New Era of Networks CEO (Nasdaq: NEON) urged analysts to raise estimates and within three weeks the company announced worse than expected earnings -- and we're sure to see it again.

But Copper Mountain's management had some choices in regard to this scheduled interview. It could have canceled, knowing that it could not answer the questions satisfactorily. Gilbert could have passed on any forward-looking questions and referred to the company's upcoming earnings announcement. Or Gilbert could have told the truth -- that the company was at least "concerned" about CLEC spending.

In my opinion, there's a vast difference between spinning a situation to show the better side of it and answering a direct question about revenues in a deceptive manner. Gilbert's choice of answer shows contempt for shareholders, and no company that shows such tendencies is worth either our investment dollars or our attention.

Bill Mann
TMFOtter on the Fool Discussion Boards