A “miss” relative to a company’s financial guidance can happen to even the best management teams. Misses can arise from a hiccup in company operations or they can be related to factors outside your company’s control. In either case, the ways in which you assess the problem, communicate it, and follow up in later quarters will have a powerful and lasting impact on the Street’s views of management’s credibility and thus your stock’s long-term valuation.
Assessing the problem
Before you communicate with the Street, make sure you’ve honestly assessed the reason for the miss and its ongoing impact to your results. Was this merely a soft quarter for seasonal or other factors, or was there a one-time event? While it’s possible that ongoing results won’t be impacted, it’s also possible that greater forces are at play: a business segment could be maturing, or your internal growth expectations may have to be moderated. Even if the miss is truly related to an issue out of your control, such as a reimbursement change, make sure you critically evaluate the impact before you communicate any revised guidance.
There are many competing pressures related to creating your public guidance – the desire to present an optimistic view of your company’s future must be tempered, for example, by the need to provide guidance you are confident you can achieve. Particularly in the quarters following a miss, it’s crucial to re-establish confidence in your ability to predict your business. You’ll have to be realistic about your ability to address the original problem when resetting internal expectations. Many companies in an attempt to mitigate the “bad” news will unintentionally underestimate the scope of the problem and its impact on future results. It’s important to remember that while one earnings miss creates a challenge, repeated earnings misses create far greater problems and a much longer lasting impact on management’s credibility and your stock price.
Communicating the problem
No matter the source of an earnings miss, it’s most important to address the topic head on and with specificity. If you’ve realized early enough that numbers will be sufficiently below consensus to require a pre-announcement, make sure that you have taken the time to fully assess the problem before you get on a conference call to discuss the miss. Whether you pre-announce the miss or discuss it on your regular earnings reporting cycle, don’t beat around the bush. Shareholders recognize that companies will miss earnings from time to time; what they care most about is how you communicate the factors leading to the miss, how you’re addressing the problem and how confident they can feel in your updated guidance.
Finally, in the next several quarters, all eyes will be on how well you’ve reset your guidance as well as how you’ve executed on plans to address the original problem. Most stocks get hit following an earnings miss, but there’s a much wider variance in how quickly (or if) they recover in subsequent quarters. If you’ve taken the right steps to assess the cause, established and executed on a plan, and communicated these steps clearly with your shareholders, recovery will be quicker.
At Westwicke, our team members have counseled many clients on how to prepare to deliver difficult news via earnings calls, and even found ways to help ease the financial pain. Contact us for more information and sign up for our newsletter to stay informed on this and other IR-related topics.