Sow and steady seems to be winning the minds of financial officers considering the delicate topic of earnings guidance. Just ask Robert Dietrich, chief financial officer of MKS, a $32 million software company based in Waterloo, Ontario.
Dietrich's philosophy on earnings guidance is to deliver forecasts to analysts and others in the investor community once a year - and that's all. To his thinking, the less often you speak with analysts about where earnings are going, the better. "Once you provide it, you have an obligation to correct it" if some event might skew estimates, he says. And that can create an tedious cycle of disclosure over-management. "What is management's role," asks Dietrich, "to run the company or talk to investors?"
Long Term Focus
Dietrich is not alone. A recent survey from the National Investor Relations Institute shows that more companies now offer less guidance, as they try to steer the investor community away from quarterly estimates to annual projections.
Overall, NIRI's survey of 572 public companies found that only 71 percent offer earnings guidance today, down from 77 percent in December 2003. That decline itself is not surprising, considering the surge in awareness of corporate governance issues in recent years. More telling are NIRI's findings about what sort of guidance is being offered. Among them:
In addition, it appears that the number of companies providing guidance may continue to decrease over time; according to the NIRI study, 36 percent are considering discontinuing earnings guidance.
Chief financial officers "are trying to focus the market on long-term performance," says Louis Thompson, NIRI's chief executive officer. "Is it working? That's questionable."
Numerous investors attack earnings guidance on principle alone, including some high profile corporate leaders like Warren Buffet. Not surprisingly, companies such as Coca-Cola Co. and Gillette Corp. - where Buffet has long been a major shareholder-offer no guidance at all. Neither do other large names such as McDonald's Corp., Google, and Mattel Corp.
Guidance vs. Volatility
Of course, it's easy enough for top-tier companies to forego guidance; analysts will relentlessly scrutinize Google, Coca-Cola and the like regardless of whether the CFO proffers any help. For the vast majority of companies, however, the fundamental questions are how much guidance to give, and how much volatility to endure by not giving.
"I have more fear that analysts will have unrealistic expectations ... than I am that we'll miss our earnings against our own internal forecasts," says Bruce Nolop, CFO at $5 billion shipping services company Pitney Bowes.
Nolop offers guidance on both revenue growth and earnings, quarterly and annually. He stresses, however, that Pitney Bowes can offer such detailed guidance because it has a large number of repeat customers. "We believe it makes sense for us. That doesn't necessarily mean it's right for every company," he says. "We have the advantage of a relatively predictable business model."
Dietrich represents the other extreme. Because MKS is so small, one major customer win or loss could radically change results for a quarter. That prods Dietrich to omit quarterly guidance so he won't waste time worrying about events that may or may not be material enough to merit additional guidance.
Thompson at NIRI encourages companies simply to disclose their internal forecasting models. "That gives you a lot more to talk about one-on-one with analysts or institutional investors," he says. And since forecasting models are not earnings guidance outright, they avoid trouble with Regulation Fair Disclosure, which bars selective disclosure to only certain parties.
Dietrich, for example, calls disclosure of forecast models "a very good idea" and offers useful ratios and benchmarks to the three analysts that cover MKS. The tactic also helps prevent a single analyst and plenty of small companies have only one analyst from misunderstanding the business and issuing wildly incorrect expectations.
Fundamental Focus
Would the world unravel without guidance? Probably not, according to the NIRI survey: 47 percent of the companies said dropping guidance would have no effect on their analyst following. Only 2 percent said they would lose coverage altogether.
Interestingly, though, less than half of the respondents felt that, if they did stop providing guidance, their analysts would take a longer view of their prospects.
Regardless of the reaction, analyst coverage for many remains the lynchpin to attracting good, stable institutional investors.
And most expect some sort of guidance. Nolop at Pitney Bowes, for example, says the half-dozen analysts that follow his company have never insisted on guidance, "but they certainly appreciate it."
And Nolop is happy to provide it. "It allows them to focus on the business fundamentals rather than trying to predict within a penny or two the earnings for the next quarter."