{"id":2255,"date":"2022-09-21T16:03:36","date_gmt":"2022-09-21T20:03:36","guid":{"rendered":"https:\/\/seci.wpenginepowered.com\/?p=2255"},"modified":"2022-09-21T16:03:41","modified_gmt":"2022-09-21T20:03:41","slug":"sec-charges-vmware-in-reverse-channel-stuffing-case","status":"publish","type":"post","link":"https:\/\/seciblog.pli.edu\/index.php\/sec-charges-vmware-in-reverse-channel-stuffing-case\/","title":{"rendered":"SEC Charges VMware in \u201cReverse\u201d Channel Stuffing Case"},"content":{"rendered":"\n

We have blogged about many SEC \u201cpull forward\u201d enforcement cases.  They all involve companies that \u201cpull forward\u201d orders scheduled for future periods to the current period to meet sales forecasts and expectations. (Check out this post<\/a> for several example cases).  As the volume of these cases shows, \u201cpull forwards\u201d are a common way companies can try to mask revenue shortfalls.  Interestingly, in almost all these cases, there is no financial statement revenue recognition misstatement.  Goods are shipped and revenue is recognized in the proper period.  Most of these cases focus on companies not disclosing the impact of related management practices, including price reductions, extended payment terms and the potential impact on future period revenues.<\/p>\n\n\n\n

In an interesting twist on this practice, on September 12, 2022, the SEC charged VMware with \u201cmanaging\u201d its backlog to move orders from current quarters to future quarters, the mirror image of a \u201cpull forward.\u201d  According to the SEC\u2019s Accounting and Auditing Enforcement Release<\/a>, this allowed VMware to meet revenue forecasts and related analysts\u2019 expectations during a period where its business slowed relative to projections and its sales mix was shifting from a point in time license model to a revenue recognition over time subscription model.<\/p>\n\n\n\n

The basis for this case is failing to disclose to investors how VMware \u201cmanaged\u201d its backlog.  Revenue was not misstated.  The case includes disclosures in Exchange Act reports, earnings calls and earnings releases. According to the AAER:<\/p>\n\n\n\n

\n

\u201cBeginning with its Form 10-Q filed for Q1 FY19, VMware began disclosing in its filings that \u2018[t]he amount and composition of [VMware\u2019s] backlog will fluctuate period to period, and backlog is managed based upon multiple considerations, including product and geography,\u2019 but the disclosure omitted material information regarding the discretionary nature of VMware\u2019s backlog, the extent to which VMware controlled the amount of its backlog, and how backlog was used to manage the timing of the company\u2019s recognition of total and license revenue<\/strong>. In actuality, VMware\u2019s backlog practices during the relevant period were controlled for the purpose of determining in which quarters revenue would be recognized and had the effect of obscuring the company\u2019s financial results and avoiding revenue shortfalls<\/strong> versus company financial guidance and analysts\u2019 estimates in at least three quarters during FY20, as well as full-year FY20.\u201d<\/p>\n<\/div><\/div>\n\n\n\n

The AAER focuses on disclosure:<\/p>\n\n\n\n

\u201cIn making public statements<\/strong> regarding its backlog, VMware omitted material information<\/strong> regarding the extent to which the company controlled its quarter-end total and license backlog numbers through its use of discretionary holds, and the extent to which it used backlog to control the timing of revenue recognition generally. The managed backlog disclosure did not convey to investors the material information that backlog was used by VMware to manage the timing of revenue recognition based upon factors such as the company\u2019s financial guidance and  analysts\u2019 estimates<\/strong>. This information was necessary in order to make VMware\u2019s statements regarding its backlog, in light of the circumstances under which they were made, not misleading.\u201d<\/p>\n\n\n\n

In key parts of the AAER, the SEC addresses materiality:<\/p>\n\n\n\n

\u201cVMware\u2019s statements and omissions regarding its quarterly revenue and revenue growth, without disclosing the impact that the company\u2019s discretionary backlog practices and revenue management had on reported revenue, materially<\/strong> concealed a substantial FY20 slowing in the company\u2019s recognized revenue growth versus expectations. Reasonable investors would have considered the foregoing information to have been important in deciding whether to purchase VMware securities during the relevant period.\u201d<\/strong><\/p>\n\n\n\n

\u201cIn addition, this was important information to analysts, who began questioning VMware\u2019s backlog \u2018drawdown\u2019 following the company\u2019s Q1 earnings call and continued to question the continual reductions in quarter-end backlog numbers throughout the remainder of the fiscal year. VMware recognized the materiality of the issue when preparing its Q&A scripts<\/strong>.\u201d<\/p>\n\n\n\n

VMware paid an $8,000,000 fine.  The company did not admit or deny the SEC\u2019s findings.<\/p>\n\n\n\n

As always, your thoughts and comments are welcome.<\/p>\n","protected":false},"excerpt":{"rendered":"

We have blogged about many SEC \u201cpull forward\u201d enforcement cases.  They all involve companies that \u201cpull forward\u201d orders scheduled for future periods to the current period to meet sales forecasts and expectations. (Check out this post for several example cases).  As the volume of these cases shows, \u201cpull forwards\u201d are a common way companies can try to mask … Continue reading SEC Charges VMware in \u201cReverse\u201d Channel Stuffing Case<\/span> →<\/span><\/a><\/p>\n","protected":false},"author":9,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2},"_wpas_customize_per_network":false},"categories":[143,242],"tags":[],"coauthors":[154],"class_list":["post-2255","post","type-post","status-publish","format-standard","hentry","category-hot-topic","category-reporting"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"post_mailing_queue_ids":[],"_links":{"self":[{"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/posts\/2255","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/users\/9"}],"replies":[{"embeddable":true,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/comments?post=2255"}],"version-history":[{"count":0,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/posts\/2255\/revisions"}],"wp:attachment":[{"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/media?parent=2255"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/categories?post=2255"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/tags?post=2255"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/coauthors?post=2255"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}