To preannounce or not to preannounce: Surely that is the question that stumps many management teams during the quarterly earnings cycle.
There are several reasons for a company to preannounce its financial results — that is, provide the Street with a preliminary, high-level understanding of what the company’s quarterly performance will be. Typically, a preannouncement is made in the weeks preceding the full earnings release and conference call. Management also may decide to update investors with preliminary results ahead of investor days, investment conferences and major acquisitions, so that it may speak about the most current financials and not violate Regulation Fair Disclosure.
The question is more complex than simply whether to make a preannouncement, however. Many considerations contribute to the decision on what information to include — and whether to produce an early release at all.
What’s the Rationale?
To get a snapshot of the prevailing trends and rationale for early announcements, we enlisted AlphaSense, a unique search engine that offers a newer standard for information discovery. AlphaSense uses a blend of advanced linguistic search and natural language processing algorithms, enabling research professionals to search, navigate and analyze corporate filings and other disclosures for critical data points.
Using AlphaSense, we looked at a sample of 59 preannouncement releases that had been issued in the U.S. in the first six weeks of 2016. We examined the rationale stated for issuing the announcement, the metrics the companies provided, the sentiment of the announcements, whether the companies provided/updated guidance, the presence (or absence) of reconciliation tables for non-GAAP guidance metrics and the amount of discussion the firms provided beyond basic financial data. In this post, we will focus on the rationale for releasing.
Among our sample:
- 37% explicitly stated that they were issuing preliminary results because they were updating their previous guidance
- 19% had not provided guidance, but our research showed us that they had missed or beaten analyst expectations and were presumably providing a warning to the Street
- 17% preannounced in conjunction with an acquisition announcement
- 12% issued the release prior to an investor event (conference presentation, 9%; investor day, 3%)
- 7% issued in conjunction with the announcement of a share repurchase program
- 2% related to an SEC investigation
The remaining 5% of the sample offered no information as to the catalysts behind the release.
Where’s the Consensus?
So why didn’t any of the companies that missed or beat the Street simply refer to the analysts’ consensus expectations? There are three reasons why the absence of any mention of analysts’ consensus estimates, whether it be in the final earnings release, a results preannouncement or any other type of management commentary, is best practice.
First, by commenting favorably on analysts’ estimates, management is essentially endorsing those estimates. What happens the next time an analyst changes his or her forecast? Will management comment again, and every time thereafter?
Second, by commenting negatively on consensus, management still creates an expectation it will provide updates on analysts’ estimates in the future. And if management does not comment on future estimate revisions, it presents a no-man’s land in which investors are left to decide for themselves whether management still disagrees with the consensus or implicitly agrees with the Street, given its lack of commentary going forward.
And third, the unspoken word here is “guidance.” Any comment on a third-party’s estimate or commentary regarding future company performance can be interpreted to constitute guidance. For companies that already provide their own guidance, commenting on third-party estimates creates a potential conflict if consensus and management guidance are not aligned. Companies that have a policy of not issuing guidance violate that policy by opining at all, and now they have created a situation they never wanted to be in in the first place.
What’s the Answer?
This brings us back to our initial question: Should companies preannounce their financial results? By issuing an early announcement in a press release, companies advise investors and analysts of potential surprises ahead of the time stockholders normally would be expecting the news. This enhances goodwill with the investment community and may protect the stock against wider swings after an earnings estimate miss. By placing that announcement in a press release, companies fulfill the “broad dissemination” requirement of Regulation FD. This enables management to provide all investors with the same information and to guard against the news being released inadvertently to individual third parties.
In Part II of our preannouncement blog based on AlphaSense research, we will focus on the qualitative discussion of the results in the preannouncements and the financial metrics used, including issues surrounding the use of non-GAAP metrics.
David Calusdian, the Executive Vice President and a partner at Sharon Merrill, oversees the implementation of investor relations programs, coaches senior executives in presentation skills and provides strategic counsel to clients on numerous communications issues such as corporate disclosure, proxy proposals, shareholder activism and earnings guidance.