At the recent Society for Corporate Governance conference in Nashville, SEC Director of the Division of Corporation Finance Jim Moloney noted that he would be more interested in seeing staff resources devoted to listening to company earnings calls than to reviewing a routine Form S-3 omnibus shelf registration statement.

Consistent with that observation, we recently came across the comment letter exchange below, in which the SEC staff questioned a company’s segment reporting after management appeared to describe the business differently on its earnings call than in its SEC filings. The relevant staff comment and the company’s response are included below.  

The Company 20-F review
Consolidated Financial Statements
Note 16. Segment Reporting, Page F-48

3.  We note your disclosure indicating that you manage your business on the basis of one reportable segment and unit. Based upon comments made by management during your February 10, 2025, earnings call, it appears that discrete financial information below the consolidated level is both available to and reviewed by management. Please tell us how you considered ASC 280-10-50 in determining your operating and reportable segments. To the extent that you have aggregated multiple operating segments into a single reportable segment, please also tell us your basis for doing so.

Company Response

The Company acknowledges the Staff’s comment and respectfully advises the Staff that, as further explained below, the Company determined it has one operating segment and reportable segment. The Company notes that no discrete GAAP or non-GAAP financial measures are available or reviewed by management on any basis other than the consolidated level. The Company does use Annual Recurring Revenue (“ARR”), which is an operational measure, and other analytical, non-financial information that is produced on a disaggregated per product level, such as number of accounts per product. ARR is used by the Company as a growth operational measure and reviewed by the Company’s Chief Operating Decision Makers (“CODMs”) for that purpose only. ARR is an operational measure that is not directly comparable to GAAP revenue.

Furthermore, the Company carefully considered all of the relevant factors in ASC 280-10-50, including but not limited to the factors noted below. In identifying its potential operating segments based on the criteria set forth in ASC 280-10-50-1, the Company considered several sources of information, including the Company’s internal organizational structure, the basis on which budgets and forecasts are prepared, the financial information the Company’s CODMs review in evaluating company performance and determining how resources should be allocated (including that the CODMs review the Company’s consolidated operating results to assess performance and make resource allocation decisions), and how information is released to the public and analysts. The reports, in the package, delivered to, and reviewed by the CODMs do not include information at a disaggregated level. Based on the analysis of ASC 280-10-50-1, as further detailed below, the Company determined that (i) none of its stand-alone products meet the criteria of an operating segment and (ii) the Company therefore has only one operating segment. Since the Company determined that it has only one operating segment, the aggregation criteria set forth in ASC-280-10-50-11 are not applicable.

• The Company notes that it compiles and provides a monthly reporting package to its CODMs to facilitate the review of its operational performance and make decisions regarding resource allocation as well as for approval of budgets and forecasts. As described above, financial results and metrics are presented, reviewed and evaluated only at the consolidated level. As noted above, although supplemental disaggregated ARR by product is reviewed by the Company and included in such reporting packages,  that information is used as a growth operational measure only. ARR was not intended to, nor used by the CODMs to measure profitability at a level below the consolidated level.
   
• No other discrete financial information (including revenues, operating expenses or any other profitability measure) is provided, nor is it available on a disaggregated basis. The key profitability measure the CODMs evaluate to make resource allocation decisions is non-GAAP operating income, which is only available on a consolidated level.
   
• Although the CODMs receive ARR and other analytical, non-financial information at the product level, such as the number of accounts per product, it is important to note that:
   
  • All the products share the same platform and can be used simultaneously by different teams in the same organization. While the Company sells its products to customers of different sizes and those customers operate in many different sectors, the Company’s key focus and potential growth opportunity is from selling upmarket to enterprise customers, where the Company generally sells at least two or more products to the same customer;
     
  • The products are sold and revenues are recognized over the same time periods (most of the Company’s contracts are annual subscriptions or, to a lesser extent, multi-period contracts, all of which are recognized over time in the same pattern), and have similar terms and conditions; and
     
  • The key corporate functions in the organization, including research and development, customer support and sales, serve the consolidated business and are not organized by product line or otherwise, which is why most of the Company’s expenses are attributed to the consolidated business rather than a more disaggregated level.
     
• For these reasons, the Company is not required and currently does not allocate any shared operating expenses to individual products or solutions for management reporting purposes, and resource allocation decisions are based on consolidated operating results. This is also evidenced by the fact that the Company’s financial planning and accounting systems were not designed to budget, record transactions (revenue or expenses), or otherwise allocate shared costs for the purpose of reporting operating margin at the product level or at any other level of disaggregation.” (Read the entire letter.)

Takeaways

This SEC comment letter exchange may be a good reminder for the accounting team to assess the earnings calls’ prepared remarks for such potential issues.

On a related note, we note a trend by some companies of dramatically shortening their earnings call to just the Q&A portion by issuing “prepared remarks” in writing prior to the call so that the call itself is just Q&A.  In other words, investors can read the prepared remarks before the earnings call, and the call is limited to just a Q&A session.  This isn’t necessarily new, but an interesting development to watch.  (See these examples, Mondelez and J.M. Smucker.)