At this point in the year, many companies are preparing to issue 2013 guidance as part of their calendar 4Q earnings call. We thought it would be helpful to share some insights and best practices about the most effective ways for your company to issue earnings guidance.
- Be realistic. Trying to figure out what you’re going to earn a year from now is difficult, and occasionally companies trip themselves up because they issue guidance that they know in their hearts is not attainable. Managements should honestly assess their prospects for the next year, haircut their internal numbers a bit, and provide guidance that feels 100% attainable.
- Range or point estimate? Issuing a guidance range is always the best answer. As you consider this range, make sure it is appropriate for your company’s size and business model. Too wide of a range implies that you may not have a good handle on your business. Too narrow a range doesn’t leave any wiggle room.
- Think like an analyst. As you establish your guidance, ask yourself, does this make sense? Are there any inconsistencies in your numbers? Does the feel of the script sync with the numbers you have provided? Any inconsistencies will alert the analysts, and bring lots of questions.
- Don’t let the Street influence you. While it’s important to be aware of the Street’s expectations, don’t let those numbers influence your guidance.
- Take the stock price out of your thinking. Managements fear issuing guidance that may cause the stock to tumble. This fear causes them to be unrealistic (see point 1) and potentially overly optimistic about the assumptions in their forecast.
- If you’re going to miss, just rip the band aid off. If you are in the unfortunate position of needing to lower guidance, don’t take baby steps. Nothing kills management credibility more than repeated reductions in guidance. Get the numbers to a point where you can meet or beat them. The analysts will respect your honesty and your shareholders will appreciate your candor.
- Consider the one quarter “look ahead”. Many management teams get frustrated when their analysts’ published estimates for next quarter look too high. There’s an easy way to fix this: give them guidance for the upcoming quarter. By the time you report the current quarter, you should have a pretty good idea of how the next quarter is shaping up. This simple act can eliminate potential problems and the analysts will appreciate the increased transparency. Bonus item: this incremental insight will bring any “outliers” back in line.
- If you are going to change any metrics, now’s the time to do it. We are big fans of providing as much insight into your business as possible. If you want to introduce a new metric to the Street, do it during the full year guidance discussion. Making this change mid-year can potentially raise some red flags, causing the Street to question the timing and motives of the change. Be aware, however, that once you give this metric, you can’t take it back.
- Be cognizant of your peers’ metrics. The guidance metrics that you provide should be at least comparable to your closest peers. Companies often get “dinged” for providing fewer metrics than their peers, whereas companies who provide incremental metrics are viewed favorably by both sell-side analysts and investors.
- If you are going to beat the Street, save some dry powder. If your internal forecast is ahead of the Street’s expectations, don’t give them all of this upside in the initial guidance. Leave yourself some dry powder to raise the numbers throughout the year. Raising numbers during the year will build management credibility and can lead to multiple expansion.
We hope you have found these suggestions helpful. We’ll be taking on a number of these issues in more detail later on this site. To be sure you don’t miss a future post or more information on this topic, please follow us on Twitter, subscribe here to our RSS feed, or sign up to receive our email newsletters.