Should we give guidance? With what metrics? At what interval? These are questions management companies often struggle with when it comes to how they want to manage the street’s expectations. The answers to these questions, like any other component of an investor relations strategy, are unique to each company. Establishing best practices when it comes to providing guidance is vital. That being said, data on the topic can help you make informed decisions.
In 2016, the National Institute of Investor Relations (NIRI) published data from a survey on earnings practices specifically surrounding guidance. NIRI invited its corporate members from publicly-traded companies to participate in an electronic survey questioning their practices on quiet periods, earnings guidance, earnings releases, and earnings call practices. A total of 407 individuals completed the survey, yielding a response rate of eighteen percent. We’ve summarized a few interesting tidbits on guidance from the report below.
Ninety-four percent of the responding companies say they provide some form of guidance (financial, non-financial, or both). This figure is consistent with data dating back to 2009.
Most companies provide both financial and non-financial forms of guidance. Fifty-eight percent of respondents reported providing both forms of guidance, identical to the 2014 percentages and up from thirty-nine percent in 2012. Thirty-three percent of respondents reported providing only financial guidance, up five percent since 2014. Only nine percent provided only non-financial guidance, which has remained constant since 2012.
The most common guidance metric provided is revenue. The top line of the income statement is often viewed as the strongest indication of a businesses’ performance, thus lending itself as the most coveted metric. The most popular method for communicating guidance is providing a range. Companies issue a range to communicate the set of expectations. The second and third most common methods, respectively, are directional information and fixed estimates. Most of the companies surveyed (sixty-seven percent) chose to issue guidance over the span of a year, while twenty-nine percent provide quarterly estimates and twenty percent provide estimates with a time frame greater than a year.
Non-financial guidance is most frequently issued as qualitative statements about market conditions. This can include market conditions, regulatory environment changes, governmental factors, foreign currency impacts and industry specific information.
The goal of guidance is to create a transparent dialogue on business performance expectations between management and the investment community. Factors companies should consider before issuing guidance include:
Precedence – are we willing to consistently provide these metrics? The information provided will be expected to be discussed, updated and issued continually as part of the regular reporting structure of a company.
Accuracy – are we confident in our projections? These numbers will be the benchmark for future performance. Management credibility is at stake and instilling confidence among the street is paramount.
Contact Gilmartin Group for assistance in establishing best practices surrounding your guidance framework and to work through reasonable guidance timelines and ranges.
Philip Taylor, Associate