The Earnings Game: Whisper Numbers Beat Published Estimates
By Cindy Christ

America's raging love affair with game shows like "Greed" and "Who Wants To Be A Millionaire" has come to Wall Street.

Every quarter, investors across the board -- from retirees and day traders to institutions -- are all playing the earnings game. And they've all figured out that the player with the trump card is the one who holds the latest "whisper number."

Not long ago, a company's stock moved up or down based on how close it came to matching quarterly analysts' earnings estimates published by reporting services like First Call/Thomson Financial, Zacks Investment Research and I/B/E/S.

But that was then.

In the Internet age, the top share price mover during earnings season are the oral updates of published estimates, or whisper numbers, that analysts and brokers often give only to their best customers near the end of each quarter in advance of the company's reporting date.

On Tuesday, Yahoo! demonstrated how whisper numbers have stolen the thunder from securities analysts.

Yahoo! (YHOO), which reported fourth-quarter earnings of 19 cents a share, bested by 4 cents the average estimate prepared by 27 First Call/Thomson Financial analysts. Yahoo's revenues more than doubled from the year-ago quarter, and traffic during December skyrocketed from 167 million page views per day last year to 465 million. The company also announced a 2- for-1 stock split effective Feb. 14.

At first it all sounded good. Yet, in after-hours trading, shares slipped more than 25 points because Yahoo! failed to beat whisper estimates of around 18 to 19 cents a share.

To be fair, Yahoo! also warned that future revenue increases would be modest. Still, it's not an isolated case. Online auction site eBay (EBAY) plummeted nearly 9 percent after reporting third-quarter earnings Oct. 26 that beat published estimates but fell well short of its whisper number.

Where can individual investors find whisper numbers?

Because Wall Street Big Shots have traditionally traded whisper numbers as a kind of currency in a mating dance with institutional clients, they used to never show up on individual investors' dance cards.

But the Internet is changing all that. People have never been good at keeping secrets, and once divulged, whisper numbers fly at mega-speeds across online message boards, popping up on free websites like EarningsWhispers.com, StreetIQ.com and Citibank's new WhisperNumber.com.

If you've visited an online message board lately, you might be questioning the wisdom - and accuracy - of such information free-for-alls. But don't be too quick to judge.

A study released in November by Bloomberg shows that whisper numbers published by EarningsWhisper.com and rival StreetIQ.com are more accurate than earnings estimates published by leading reporting services.

The two-and-a-half-year study, conducted by professors at Purdue University, Indiana University and the University of Michigan, followed 101 high-tech companies. Results showed that website estimates of whisper numbers missed actual earnings by 21 percent, while analysts estimates were off by 44 percent.

The study also showed that analysts consistently underestimated earnings, and that 78 percent of whisper numbers were higher than averages published by companies like First Call. And while websites overshot actual numbers, they were more on target than the pros.

Do these non-analysts know something the pros don't? Nope. As it turns out, analysts just don't want to show their hands.

"These rookies aren't actually beating the pros as much as they're exposing the earnings-estimate game the analysts play," writes Bloomberg Personal Finance writer Ed Leefeldt in a detailed report on the phenomenon.

It's old news on Wall Street that publicly traded companies, whose CEOs' and top managers' pay are often linked to stock prices, have become adept at engineering earnings "surprises" by talking down their prospects with analysts, who then discount profit estimates.

And so it goes that savvy firms like Microsoft Corp. (MSFT) and Cisco Systems (CSCO) beat estimates with amazing regularity, producing a calculated pop in their stock prices.

"Talking down an analyst's forecast has become as commonplace as a corner Starbucks in Manhattan," says Securities & Exchange Commission Chairman Arthur Levitt, according to Bloomberg.com.

What hasn't been as obvious to individual investors is why analysts play the game.

According to Bloomberg's Leefeldt, analysts fear being cut out of the loop if they challenge a company's guidelines.

The Bloomberg study showed that half of analysts estimates were made at the beginning of the quarter, with a mere 1 percent made within five days of the report date, suggesting that whisper numbers are the preferred method for analysts to update their forecasts.

In addition, analysts have figured out that earnings updates can buy them brownie points when offered to prime customers as a value-added service.

Thus, trades placed ahead of a surprise, or a disappointment, are just a phone call away for institutional traders and money managers.

But now, the Internet is leveling the playing field by making whisper numbers widely accessible. Publicity exposing the earnings game is forcing analysts and companies to be more truthful. Investor relations departments also are becoming more forthright with individual investors.

In an interview with Bloomberg.com, Shannon Puls, who operates EarningsWhispers.com, said that he is often able to get truthful guidance on earnings from investor relations departments, proving that profiting from whisper numbers is anyone's game.