Formal Financial Guidance for FY’ 21: Reinstate or Wait?
Many public companies withdrew, or never introduced, formal financial guidance in spring 2020 as a result of severe and widespread business disruption and the high level of uncertainty surrounding the COVID-19 pandemic. We are now roughly two weeks into the fourth quarter and fiscal year 2020 earnings reporting season and wanted to share a few notable trends and key considerations that public company management teams should bear in mind as they evaluate whether to give formal financial guidance for 2021.
1. There has been a notable shift in public company formal guidance practices in the Medical Technology and Diagnostic sectors (my primary sector-focus at Westwicke/ICR), consistent with trends to-date across the broader public equity markets.
In the first two weeks of the Q4 reporting season, roughly 75% of medical technology and diagnostics companies have reinstated formal financial guidance practices. This compares to only 20% during the Q2 ’20 earnings season and roughly 50% during the Q3’20 earnings season.
Westwicke’s takeaway: To the extent this trend continues as we move through earnings season, it is clear that “COVID-related uncertainty” is unlikely to remain a viable ‘excuse’ to avoid giving formal guidance on your Q4 report.
2. While companies are reinstating formal guidance at a higher clip this quarter, they are taking a different approach than in years past. Given the challenges in setting formal guidance expectations for ’21 in light of ongoing COVID-related uncertainty, we highlight a few of the more thoughtful strategies that management teams might consider, based on what we are seeing companies employ when setting ’21 guidance.
- Provide formal financial guidance that reflects a range of expectations for growth and profitability, using a wider range than you may have employed in prior years.
- Ensure that your guidance ranges include a level of conservatism at the lower-end to reflect expectations for potential COVID-related headwinds.
- Include messaging to help the investment community understand the key considerations driving the low and high ends of your guidance ranges. These may include:
- Details on COVID-related headwinds over the near-term that may impact financial performance in early ’21 vs later in the year. Consider sharing additional color on what your guidance range implies for growth trends over the first half of ’21, compared to the expected growth profile of the business over the second half of ’21.
- Expectations for the pace of recovery during ’21, notably the anticipated timing for a return to “normalization” in each of your key business areas.
- New strategies you will employ to drive better growth and profitability performance in ’21, based on lessons learned during 2020.
What if you lack the visibility to give formal financial guidance for ‘21?
If that’s the case, then the outlook section of your earnings call should focus on the lack of clarity. Help the investment community understand why you don’t have the visibility to give you enough confidence to provide formal guidance and what needs to improve or change to give your team the confidence to do so.
Keep in mind that, overall, the Street understands it’s a challenge to give guidance when there’s so much uncertainty. Providing visibility into your expectations, with appropriate conservatism, however, will be appreciated by the investment community and worth the effort.
Recent public company reporting trends suggest the Street expects your team to reinstate formal financial guidance during your Q4’20 report; we suggest developing a more thoughtful approach given ongoing uncertainty surrounding the pandemic. Westwicke’s experienced investor relations professionals can help you prepare to report your Q4 results and introduce financial guidance for 2021.
Contact our team to help you prepare your messaging this earnings season.
Mike Piccinino is a Managing Director on Westwicke's medical technology and diagnostics teams. He has extensive experience in the buy-side investment process. He has a BA from James Madison University.
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