Providing Earnings Guidance

The morning blog published by the CFO Journal of The Wall Street Journal last week opened with a mention of Alex Edmans, Professor of Finance at London Business School, and his advice to companies on Five Ways CFOs Can Focus on the Long Term. One of the ways Edmans described is to avoid providing earnings guidance, which is quoted below.

“Avoid Providing Earnings Guidance. Providing guidance on likely quarterly earnings numbers increases transparency, but also means that the market holds firms accountable to their forecasts. Thus, companies will focus on meeting short-term targets, rather than pursuing long-term value,” Alex Edmans.

Promoting a short-term view by providing earnings guidance is an unintended consequence of the Fair Disclosure Act of 2000, in my opinion. I also believe we have come a long way in the last fifteen years under the watchful eye of FD. Many corporations have learned how to provide guidance while building long-term value.

In the old days we would manage expectations to a tight range of sell side EPS estimates by reviewing and commenting on the brokerage analysts’ financial models. We did not provide actual dollars or percentages, but would try to correct any misperceptions about operations leading to inaccurate financial expectations reflected in the models. Most portfolio managers relied on a combination of their own internal financial models and sell side research to make their investment decisions to buy and sell stock.

As FD was changing conversations between corporations and institutional investors, the number of brokerage firms was starting to decline as a result of industry consolidation and a new type of hedge fund investing was just beginning to grow. Not only were conversations changing, the market was changing. Providing guidance to manage sales and earning expectations leveled the playing field and many long-term institutional investors complained that the practice eliminated the competitiveness of stock picking. It seemed to be helping the less analytical, short-term investor.

In 2006 the CFA Centre for Financial Market Integrity published Breaking the Short-Term Cycle comprised of a discussion and recommendations on how corporate leaders, asset managers, investors, and analysts can refocus on long-term value. Concerning earnings guidance only, the panel encouraged:

  1. Ending the practice of providing quarterly earnings guidance.
  2. However, companies with strategic needs for providing earnings guidance should adopt guidance practices that incorporate a consistent format, range estimates, and appropriate metrics that reflect overall long-term goals and strategy.
  3. Support corporate transitions to higher-quality, long-term, fundamental guidance practices, which will also allow highly skilled analysts to differentiate themselves and the value they provide for their clients.

At the time, I was the IRO for a nearly $3.0 billion market cap retailer with a growing PBM business managing through a turn around. We had provided quarterly and annual revenues and earnings guidance since the beginning of the turnaround primarily due to the unpredictability of our retail operating performance and financial results. We consistently provided a nickel spread for quarterly earnings per share and a dime for the spread for annual EPS, which was revised quarterly. Rather than labeling this information guidance, we were more comfortable calling it Management’s Outlook.

The following was extracted from one of our earnings releases and included in the earnings conference call script.

Management Outlook

For the quarter ending date, Company Z estimates total revenues will be flat to negative 0 percent and same-store-sales will be flat to up 0 percent compared with last year.   Given these revenue assumptions and the Company’s continued progress on previously stated initiatives, Company Z’s goal is to achieve net income of $0.00 to $0.00 per diluted share in the first quarter. By comparison, Company Z reported net income of $0.00 per diluted share for the first quarter last year.

For the year ending date, Company Z estimates total revenues will increase 0 to 0 percent and same-store-sales will increase 0 to 0 percent compared with last year.   Given these revenue assumptions and the Company’s continued progress on previously stated initiatives, Company Z’s goal is to achieve net income of $0.00 to $0.00 per diluted share this year compared with net income of $0.00 per diluted share reported last year.

In addition to the top and bottom line, we provided relevant financial and non-financial metrics to better link operating performance with future financial results. Examples include:

  • Future shifts in holidays or the fiscal calendar which would impact revenues for a given quarter or full year
  • New initiatives and progress updates on existing initiatives
  • Range of expected one time costs or charges for future quarter
  • Effective tax rate for the year
  • Range of increases in inventory for future quarter(s) when significant
  • Range of depreciation and amortization expenses for the year with updates when necessary
  • Range of estimates on capital spending for the year with updates when necessary
  • Expansion and remodeling plans for the year
  • Future regulatory changes that could impact financial performance
  • Long term (5-year) growth rate for number of stores
  • Long term goal to achieve operating margins comparable to our peer group

By 2007, our operations were improving and our financial results were becoming more predictable. We started evaluating our practice of providing Management’s Outlook on revenues and earnings. I still have the presentation to my then Board of Directors recommending we eliminate the practice of providing Management’s Outlook over a three-year period. We were not pioneers in this quest as many corporations were evaluating their guidance practices at the time as well.

Apparently, we have gone full circle. The National Investor Relations Institute (NIRI), conducts a study of guidance practices every other year. Providing guidance remains popular; however, there has been a shift away from quarterly guidance.

According to the 2014 NIRI Guidance Practices Survey, approximately 94 percent of the companies responding to the survey provide some form of guidance including financial and non-financial. This compared with 78 percent of the companies responding to a similar survey in 2003.

According to the 2014 Survey, the majority of companies providing guidance choose do so on an annual time span (85%), which is nearly flipped with the data collected in 2003. The 2003 Survey indicated a majority of the respondents providing guidance chose a quarterly time span (52% quarterly; 25% both quarterly and annually; and 15% annual only).

The Heights is an experienced, responsive and intuitive investor relations consultancy with a proven process designed to build a comprehensive three-year IR Plan in three months. Our guaranteed approach removes the guesswork, makes an immediate impression within the financial community and allows you to focus on running your business and building value for your shareholders. More information about The Heights is available on www.theheights-planning.com.

 

 

 

 

 

 

Earnings Quiet Period

My professional organization, National Investor Relations Institute (NIRI), hosted a webinar about Quiet Period practices on May 20, 2015. I joined two other experienced investor relations professionals to comprise the panel of speakers for the webinar.   The archive is accessible on www.niri.org by members only. The following are my webinar speaking notes for people who do not have access.

I am a proponent of quiet periods prior to the release of earnings. It minimizes the risk for misinterpretation and the spread of rumors and/or speculation prior to an earnings announcement.   All of which can cause stock volatility and a distraction while preparing for the actual release of earnings and conference call. This is particularly a risk for companies offering “earnings guidance” or management outlook on future earnings.

The quiet period for the release of earnings is not well defined. Stock offerings such as an initial public offering by new issuers or stock offerings by established, listed companies such as secondary common stock or convertible preferred offerings have more defined quiet periods.

The absence of well-defined regulations result in greater variability of application, and that leads to confusion . . . both sell side and buy side. Let’s call this the downside of quiet periods. There will be external pressure to make exceptions to accommodate a scheduled investor event unrelated to the release of earnings.

The earnings quiet periods at my previous companies typically began at the close of business on the last day of the fiscal quarter and ended when we publicly disclosed our financial results. During quiet periods, we discontinued all one-on-one and group meetings with members of the financial community as well as declined invitations to speak at investor conferences. As IRO, I would continue to take phone calls.

IROs have a lot of experience talking to people without disclosing material, non-public information . . . regardless of whether they are in a quiet period or not. In the event a telephone conversation during a quiet period led to pending financial and/or operational results for the quarter, I would explain that the topic would be covered in the earnings release or conference call . . . and then made sure it was in the release and/or script for the call or made sure we were prepared to answer a similar question on the conference call.

Over time, the consistent practice of adhering to quiet periods led to a reputation for being accessible, but not available for investor conferences, group meetings and one-on-one meetings immediately prior to the release of earnings. It was viewed as fair and equitable to everyone. Time will increase the acceptance of quiet periods and alleviate the pressure to make exceptions. Here are some actions to accelerate acceptance.

1.    Quiet periods should be as short in duration as possible.

Depending on the complexity of your business and the sophistication of your financial system, it is possible to release earnings two weeks or less after the close of the quarter. With the help of the CEO and CFO, the length of the quiet period can be shortened. I have done it several times by shaving off a day or two at a time. The reduction was still appreciated by the financial community.

2.    Incorporate quiet periods into Disclosure Policy.

About ten years ago, I started incorporating the quiet period into our Disclosure Policy, which was distributed to all employees to achieve consistent application throughout the company. This helped create a distinction between quiet periods to promote full and fair disclosure of information and blackout periods, which clarify and enhance the prohibitions against insider trading. It also represented an opportunity to discuss quiet periods objectively with the CEO and CFO independent of outside influences such as an invitation to an investor event. (A sample disclosure policy can be found on The Heights’ Resources page.)

3.    Increase awareness of the end of each fiscal quarter.

Another action to increase acceptance was posting our fiscal calendar on the IR web site, which showed the end of each quarter. We did not indicate the quiet period since it hinged on the earnings release and we did not want to commit to a specific date for the release one year in advance. The financial community could still plan around the end of the quarter, which is important when your fiscal year end is anything but December 31.

4.    Offer appealing alternatives.

In the event we had to decline an investor conference due to a quiet period, we would make ourselves available for a non-deal roadshow with the sell side firm in one or two cities at a future date. As it turned out, this was an appealing alternative for the sell side as well my management team. It was also fair and equitable to all sell side firms publishing coverage on the company.

The Heights is an experienced, responsive and intuitive investor relations consultancy with a proven process designed to build a comprehensive three-year IR Plan in three months. Our guaranteed approach removes the guesswork, makes an immediate impression within the financial community and allows you to focus on running your business and building value for your shareholders. More information about The Heights is available on www.theheights-planning.com.

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