Scrapping the updates
In the beginning, companies issued annual earnings guidance along with other financial information. This system worked for many years. Then came more volatile financial markets. At the demand of sell-side analysts who were finding it harder to predict companies’ performance in the short term, the companies began to issue quarterly guidance. This remained common practice at most companies for some time. But then the demand for information became even more intense, and perhaps just a little over the top.
The practice of providing regular mid-quarter performance updates, now increasingly shunned by US public companies, emerged with a promising future. Spurred by amenable legislation and regulation, clamored for by analysts and hotly anticipated by investors, guidance became the name of the game. And – it seemed – the more incremental the guidance, the better. In 2001 Chuck Hill, then First Call’s director of research predicted: ‘There will be mid-quarterly and even monthly [conference] calls.’
As it turns out, after an initial surge of exuberant voluntary disclosure, more and more companies have chosen to pull back on issuing short-term guidance, often citing its alleged Svengali-like sway over management’s strategic thinking. A 2007 NIRI survey on earnings guidance practices confirms the trend: of companies providing any earnings guidance, only 27 percent (and falling) report giving quarterly earnings estimates. That suggests even fewer provide regularly scheduled mid-quarter updates.
For some firms, like Minneapolis-based bed and mattress specialist Select Comfort, mid-quarter analyst updates have become a bit of a pain. ‘I’d much rather senior management used the time on the road meeting with investors,’ says Frank Milano, vice president of investor relations at the firm. ‘For us, the pendulum has swung from trying to serve the sell side to serving our owners.’
For their part, those owners – a hefty percentage of which are of the substantive, long-term variety – aren’t all that keen on short-term guidance. ‘They like the way we stay focused on our yearly and multi-year targets,’ adds Milano. In fact, Select Comfort doesn’t offer quarterly earnings guidance at all, preferring to provide fiscal year target ranges. ‘Mid-quarterly conference calls are a legacy thing, meant to cater to a now outdated analyst group,’ explains Milano. ‘Some shareowners feel they are more than is necessary.’
Prediction and volatility
If Select Comfort’s mid-quarterlies communicate little of value (though Milano does note they spur a few analysts to ‘pick up a pen’) neither do they address earnings-related volatility problems. ‘You haven’t changed the volatility. You’ve just changed the pattern,’ explains Milano. ‘The rub is that analysts aren’t just waiting for us to tell our story. They are trying to predict it, and with prediction comes volatility.’
Other companies are similarly disposed. For instance, in early May 2007 Procter & Gamble said it would end in 2008 its longtime mid-quarter update tradition (giving plenty of lead-time so the change couldn’t be misconstrued). Long-term shareholders had complained the announcements created more short-term stock volatility while adding little strategic value.
That position appears at odds with a recent study that found firms issuing regular mid-quarter earnings updates enjoy significantly fewer surprises and volatility around earnings release dates than peers disclosing ad hoc. ‘In other words, their earnings announcements are much more in line with the consensus forecast,’ says study author Jacques Barnea.
Another firm believer in the power of communication is Michael Thompson, director of research at First Call. ‘An almost universal theme across academic research is that more information leads to more efficient markets,’ he says. ‘Guidance is useful and achieves good things and mid-cycle updates are totally reasonable.’
Who should still update?
According to PR Newswire’s disclosure advisory board, companies with no analyst coverage are among the best candidates for using short-term guidance. ‘Large, well-understood companies may well question why it is necessary to report or forecast quarterly,’ comments Mark Hynes, managing director of global IR for PR Newswire. ‘But more obscure companies would be well served by drawing attention to themselves by communicating and forecasting quarterly and even mid-quarterly. It is an excellent way of reaching out to the buy side.’
For some companies, mid-quarterlies might simply be meaningless. ‘Most of our business happens in the quarter’s last few weeks,’ notes Mike Haase, director of IR at semiconductor manufacturer Advanced Micro Devices (AMD). ‘So financial results are not at all clear until the very end. At that point, if necessary, we’ll do a preannouncement release (see textbox: On the way out).’
Mid-quarter updates may have emerged as a weapon in ongoing marketing wars. On the day that AMD announced its latest chip, rival Intel surprised the market with a mid-quarter update, a practice the firm discontinued last year. While Intel denies that the timing was designed to steal headlines, the feud has, in fact, smoldered for years.
Other high-tech companies see plenty of value in mid-quarterlies. For instance, when senior managers of Chartered Semiconductor Manufacturing attended a major investment conference in September, they benefited from having conducted a mid-quarterly the previous day. ‘Without formal mid-quarterlies, we’d have the same story for three months,’ says Suresh Kumar, vice president for investor relations at Chartered. ‘Giving mid-quarterlies lets us talk with investors with the most up-to-date information.’
Whatever the future for mid-quarterlies, almost everyone agrees using them to spoon-feed analysts is less rewarding than as a forum to communicate bits and pieces of the puzzle. ‘Analyst models can provide a company with planning insight,’ concludes Hill, now CEO of Boston-based investment research firm Veritas et Lux. ‘Analysts should be updated, but only with information you are confident about. It’s when you tell them what you hope you can do that you paint yourself into a corner.’