Ann: Revised December 2018 Trading Update, page-6

"Thats a very big change in guidance within a very short timeframe..."

Yes, it is.

Usually when I see an adjustment of this sort of magnitude I suspect that it is a reflection of a management group that isn't really on top of the drivers of its business earnings.

However, in this case I think what it simply demonstrates is that the deep seasonality of the business - recall that SDI makes makes only around a third of its earnings in the December half year - makes it difficult to accurately forecast the profit result of the seasonally weaker half, when net profit margins are their skinniest ...between 5% and 10%, in this case.)

Because, due to the law of small numbers, even a small variance at the Revenue line translates into a large variance at the bottom line. So, even if one or two large-ish customer orders, which had not been expected, were booked late in the month of December, this could have added meaningfully to the bottom line, given the significant operating leverage at work.

Which is what I strongly suspect happened here, so I wouldn't get overly excited about it, and far prefer looking at the overall performance of the business over time, instead of interpreting the wrong things out of six-monthly reports.

Because, today's update reflects the exact opposite of the situation that occurred in DH2017, where orders expected in December of 2017, ended up slipping into the June half, and the result was a whopping 45% reduction in Pre-Tax Profit vs pcp.

In its infinite wisdom, because it took the wrong cues from that specific half-yearly result, the market sold the stock down to 45c! Keen followers of the stock will recall all the wailing and gnashing of teeth about SDI at the time.

Revisiting the discussion threads from 12 months ago - which I recall included alarming suggestions that the business was fundamentally flawed or broken - would surely make for instructing reading!

Given the ensuing events, both in half-yearly earnings results, as well as the associated share price performance is, I think, a very valuable lesson in not reading too much into short-term reported financial performance, but to - instead - adopt a longer-term fundamental investment mindset, one that treats single-period profit figures with the context that is warranted.

Just as the DH2017 result clearly reflected a meaningful degree of "under-earning", the result for DH2018 is almost certain to reflect a degree of "over-earning".

Point being made is that one needs to not read too much into certain single reported numbers, but to always view them in a broader, longer-term context.

Or else, you'll end up zigging when you should have been zagging, and vice versa.

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