Best Practices for Providing Investors With Guidance
Providing investors with guidance is a key component of any IR program. It is a company’s main avenue to set expectations. Management credibility, an important factor in a company’s valuation, is significantly driven by delivering on these expectations.
When providing guidance, we recommend that you keep these important themes in mind:
- Be consistent. Analysts and investors spend a substantial amount of time getting up to speed on your company, and the metrics you provide are a core part of that effort. They expect consistent metrics so they can monitor your progress against their expectations. Their models are built on these metrics. When companies “jump around” in the metrics they provide, many will assume that the company is hiding something negative about the business. Importantly, if you give a metric one quarter, prepare to provide that metric for the foreseeable future, as you have set a precedent.
- Be reasonably conservative. Obviously, better financial results leads to higher valuations, leading some management teams to issue “rosy” guidance. This may work in the short term, but missing guidance is a significant hit to management credibility. In the long term, management is much better off achieving guidance, as that credibility will ultimately be reflected in share price. On the other hand, don’t “sand-bag” guidance, either. In the short term, you will look smart for beating expectations, but over time, Wall Street will adjust and just hitting guidance could been seen as a negative. Be known as a company that hits reasonable guidance. And remember, a miss in a single quarter can erase all of management’s hard work.
- Narrow the range. Some companies try to be conservative, by providing a wide range for guidance. If analysts and investors sense a range is too wide, they might get the idea that you lack insight into your business. Analysts may also spread out their estimates in that range, leading to a lack of consensus on the Street, creating increased uncertainty. Importantly, when guidance is given in a range, the midpoint becomes the consensus, and when results come in below the midpoint, the Street may view this as a disappointment — frustrating a management team that believes it delivered results within guidance. The correct range for guidance is metric- and industry-specific, but the best first step is to align with peer companies.
- Pre-announce if necessary. If you are sure you are not going to make expectations, consider pre-announcing. If there is one thing any analyst hates, it’s a surprise. The best way to combat this negative is to be early and open with the update. Don’t wait until the last minute to announce, as investors and analysts will ask, “Why wait till now when you knew sooner?” Get out the news, reassess what is reasonable guidance going forward, and strive to rebuild.
Also, when providing guidance, don’t forget to provide any major assumptions for additional clarity. This will help analysts model and avoid potential surprises. Remember, guidance includes more than financial results, so keep the same themes in mind regarding potential events and other activities.
Some companies avoid providing guidance entirely. We don’t recommend that: If you don’t provide consensus, expectations are no longer under management control. Expectations will be set by analysts and investors, and companies will be judged on these expectations. Take control and set your own expectations.
Need more help on providing good consistent guidance? Reach out, and we’ll talk about it.
John Woolford is a Managing Director on Westwicke's life sciences team. He has extensive experience in investor relations, as well as IPOs, capital raises, M&A, and other business development activities. He has a BS in microbiology from the University of Maryland at College Park and an MBA from the R.H. Smith School of Business.
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