The continued uncertainty created by the COVID-19 pandemic will continue to present unique challenges for public company management teams as they report Q2 earnings and attempt to provide the investment community with an appropriate update on the business.
With this as a backdrop, we wanted to share some of the most likely questions and focus areas that management teams should expect from sell-side analysts and investors this quarter. As the investment community seeks to understand the impacts of COVID-19 on Q2 results — and on your outlook for the second half of 2020 — the way that companies choose to address the four key questions below will likely have important implications for their perception and valuation in the market.
- “Reported results for the second quarter reflect a significant impact from COVID-19. How did your business trend in each month of the fiscal quarter?”
During the Q1 earnings season, we saw two notable trends in public company quarterly reporting practices. First, the majority of public companies — especially small/mid-caps — withdrew formal financial guidance given the high level of uncertainty related to COVID-19. We also saw a pronounced increase in the amount of information that companies voluntarily disclosed in addition to the disclosure mandated by regulatory requirements.
Heading into the Q2 earnings season, we believe most investors are not expecting a material shift in the number of public companies returning to their respective pre-COVID formal guidance practices. However, in lieu of formal guidance, investors do expect companies to provide as much detail as possible on the drivers of second quarter performance. Specifically, we expect “business trends” to be the key phase for investors and analysts during the Q2 earnings season. Management teams should be prepared to help the Street understand the year-over-year performance in the business during each month of Q2.
Broadly speaking, investors understand that results were impacted by the unprecedented business-related disruption caused by COVID in late-March and early-April. Now, they want to hear how things have progressed, and hopefully improved, in recent months.
- “Has your business continued to show improvement during the first four to six weeks of Q3?”
We expect that the Street’s focus on “business trends” will not be limited to Q2. Given the uncertainty created by the recent uptick in U.S. COVID-cases, investors are likely to be highly focused on disclosures and details related to the performance to-date in Q3 as they look for signs of continued stabilization and improvement.
As we enter the Q2 earnings season, keep an eye on what your peers are disclosing on this front, and think about what you are willing and able to provide in order to help investors and analysts understand how the business is faring now.
- “How is your overall liquidity position and outlook evolving?”
Balance sheet and financial condition are key focus areas for the investment community in every earnings season. However, we saw the level of scrutiny in these areas increase during the Q1 earnings season.
When reporting Q2 earnings, we recommend that management teams consider including a comprehensive update on their liquidity condition — not only to appease the investment community, but also because this was one of the key considerations highlighted in a recent SEC guidance document published by the Division of Corporate Finance on June 23, 2020.
- “What is your current thinking on the pace and timing of recovery in the U.S.?”
While investors appreciate how difficult it is to predict the future, management teams should expect some grilling about their expectations with regard to the trajectory of their business’ recovery and expectations under some of the most likely future scenarios.
The investment community will likely look for management teams to opine on forward-looking, macro-related topics including:
- What are the potential implications for the business if we see a second wave of cases in the second half of 2020?
- Do you expect a V-shaped, W-shaped or other type of recovery?
- What is the current health/demand of your consumers and how is demand for your products expected to recover going forward?
More importantly, we suggest preparing messaging to help investors understand how you are managing the business differently during the second half of 2020. Management teams should be prepared to discuss both how they are establishing contingencies in the event that public health or economic factors deteriorate further and how they are proactively positioning the company to return to strong operating and financial performance as soon as the overall environment improves.
As your team prepares its messaging for this earnings season, you may find a seasoned, objective perspective is exactly what you need to strike the right notes. Contact our team to help you prepare.