Some management teams assume — incorrectly — that they can play it safe by withholding financial guidance, believing they can’t miss estimates they don’t provide. To the contrary, companies may inadvertently limit their Street credibility by opting out of earnings forecasts and, at the same time, miss an opportunity to manage investor expectations.
Investors judge financial results against analysts’ consensus estimates even if a company doesn’t provide projection, so it makes sense for leadership to set expectations themselves and provide some guardrails. Perhaps more importantly, formal earnings guidance signals management’s confidence in the company’s growth and stability.
When executives refrain from providing a forecast, investors and analysts may conclude that management lacks good control over financial performance. By issuing guidance, you can instill confidence in your company’s prospects and predictability, and help manage analysts’ estimates into a reasonable range.
We’ve heard various reasons why some management teams take a pass at providing guidance, including revenue lumpiness, uncertain government contract timing, and other variables. Here are a few tips for dealing with those factors and providing guidance to investors.
- Maintain transparency
Aim to be straightforward and transparent with the Street. Discuss any potential swings, seasonality or timing issues, as well as quarterly distribution of results early in the year. The Street is fairly forgiving on lumpiness if given early notice and color on what drove a shortfall, and as long as any revenue that slipped appears in the subsequent quarters. This advice corresponds with our recommended best practices for providing guidance, which generally call for transparent, consistent, and timely communication with the Street.
- Issue annual ranges and a one-quarter look ahead
Among other recommendations, we suggest that companies issue annual ranges — at least for revenue, EBITDA, and EPS — when releasing fourth-quarter results, providing a one-quarter look ahead on the same metrics. You’re typically halfway through the current quarter when reporting the previous quarter’s results and should have a pretty good handle on how it will go. This approach also tightens the range of analyst estimates for the upcoming quarterly report.
- Provide a standard set of key metrics
The more insight you can provide analysts and investors on your key metrics — whether you’re discussing members, facilities, prescriptions, bookings, users, devices sold, contracts won, or patients admitted — the better the Street will understand and gain confidence in your business. To maintain Street confidence, provide the same set of metrics each time you issue guidance and report results.
- Stay conservative
To avoid unpleasant surprises, issue relatively conservative forecasts. Put out a number you are confident in hitting and won’t lose sleep over, but don’t significantly underestimate results either. It doesn’t take long for analysts to pick up on management attempts to lowball expectations. And if you see an unexpected curve ahead, providing advance warning to the Street will help maintain trust.
Guidance may be even more important for companies without active research coverage, as it gives Wall Street insight into growth trajectory and offers analysts greater comfort in their own estimates.
By following a few best practices to communicate your corporate outlook with analysts and investors, you can enhance your firm’s relationship and credibility with the Street. Do you need guidance on providing guidance? The ICR Westwicke team is ready to help. To learn more, get in touch.