Is this truly the most wonderful time of the year? For normal people, I'd say the answer is most likely yes. But for that special breed of person we call the investor, there's an even more wonderful, and four times more frequent, time: earnings season.
Barring warnings and updates on guidance, most companies update their investors on how well they're doing just four times per year. These four days out of 365 are ordinarily considered the most important days in the companies' lives, the news they contain capable of sending a stock soaring to the sky or plummeting to the pit. And yet, every once in a while, they dwindle into insignificance.
For Progress Software (NASDAQ:PRGS), Wednesday was one such day.
Obligatory earnings recital
But before we get to it, let's quickly reel off the numbers the firm released. Sales rose 10% for the fourth quarter. Quarterly profits cratered 50%. And free cash flow for the year declined 35% to $45 million.
Stock options grants
Now on to the show. The more significant news this week is that Progress completed its review of historical stock options grants, filed its restated financials with the SEC, and laid bare its stock options story in astonishingly frank detail. Overall, the $29 million scandal at Progress doesn't hold a candle to the hundreds of millions of dollars on understated stock options doled out at bigger tech names such as McAfee (NYSE:MFE), Broadcom (NASDAQ:BRCM), or Rambus (NASDAQ:RMBS). But then, it's not the size of the scandal but its brazen nature that shocked me. Pulling out a few choice quotes from the release:
- "The Special Committee ... concluded that nearly all option grants made between December 1995 and July 2005 were accounted for improperly"
- In every fiscal year from 1996 through 2002, "for our annual grants ... we generally chose ... a date on which the ... stock was at or near the lowest price for the quarter"
- Beneficiaries of the backdating included the "Chief Executive Officer, the Senior Vice President and Chief Financial Officer, the Vice President and Controller, the Senior Vice President and General Counsel and one non-officer employee."
Despite all this, the Special Committee found "no evidence" of "willful misconduct." Pointing out that outside counsel "routinely attended meetings of the Board of Directors ... [and were] aware of the retrospective dating ... the Compensation Committee and management may have relied on such involvement in believing that certain aspects of the Company's stock option granting practices were acceptable."
Granted, Progress is taking steps we'd like to see other companies in similar situations imitate. Backdated options will be repriced to "fair market value." Those persons who have exercised and sold backdated options must disgorge, or give their profits back, to the company. Yet one precedent remains to be set: If Progress is going to lay the blame on its outside counsel for approving the backdating, I think it should go all the way. You can't exonerate the executives without blaming the lawyers here, so if the Special Committee truly believes the lawyers were at fault for blessing the backdating, then Progress should commit to "fire" the outside law firm and report it to the local bar to determine if its lawyers' actions constituted malpractice.
The buck has to stop somewhere.
For more on the backdating scandal, read:
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Fool contributor Rich Smith has no financial interest, short or long, in any company named above.
