This is Part II of our preannouncement series based on AlphaSense research. Today we focus on the qualitative discussion of the results in earnings preannouncements and the financial metrics used.
In my previous post, we focused on the factors that contribute to a company’s decision to preannounce its financial results — that is, provide the Street with a preliminary, high-level understanding of what its quarterly performance will be. Using AlphaSense, a unique search engine that offers an advanced level of information discovery, we looked at 59 preannouncement releases that were issued in the U.S. through the first six weeks of 2016. We examined the rationale for preannouncing and some of the issues at play when providing advance insight to investors.
In today’s post, we will examine that same sample of releases to ascertain what level of information companies are and should be providing. When preannouncing financial results, companies need to determine the preliminary financial metrics they will disclose. Below, we’ve broken out by category the metrics the sample companies disclosed in their preannouncements. Among this group, the most popular metrics included:
- Sales or revenue: 56%
- Net income or EPS (either GAAP or non-GAAP): 46%
- EBITDA: 24%
- Cash balance or quarterly operating cash: 15%
- Gross profit / margin: 14%
- Operating income or expense: 7%
As you can see, the most common financial metric provided in our preannouncement sample was revenue, followed by GAAP or non-GAAP net income or EPS. In 36% of the cases, the companies provided both top- and bottom-line metrics. Interestingly, in 32% of the cases, preliminary top-line results were provided without offering any bottom-line companion metric. So why focus on the top line when investors so often are more interested in net income and earnings per share? When providing preliminary results, companies can only provide the information in which they have a reasonable level of confidence. Accrual accounting notwithstanding, revenue figures do not tend to move much once a quarter is completed. Profit, on the other hand, is a function of several other inputs and is generally a more intricate calculation. If providing a bottom-line figure in the preannouncement, we consider it best practice to provide a preliminary range management has confidence in, so that investors are not surprised twice.
Providing a Rationale
Once management determines which metrics to provide, it should then decide on the type and amount of messaging it wants to use in support of the financial data. Using AlphaSense, with its robust search platform, it was easy to examine the specific messaging companies used to explain their results. Looking again at our sample:
- 20% gave no explanation at all for the results; they simply provided the preliminary metrics
- 20% provided specific operational rationale for their performance
- A full 60% provided more detailed explanations and color for the results, elaborating on the metrics, related events, market trends and strategic decisions that influenced the company’s performance
The Importance of Context
Why would 20% of the companies not provide more “color” around the results? The additional information would certainly be more helpful for investors, wouldn’t it? In our view, it would, but there is some nuance here. First, we begin with the assumption that the company is preannouncing in order to assist investors. That is the best perspective from which to decide to preannounce, but it is not the only one. Management may issue the release solely to fulfill the “broad dissemination” requirement under Regulation FD, which I discussed in my previous post. Example situations of when this might be the case could include remediation of selective disclosure of non-public material information or the issuance of preliminary results in advance of an equity offering or M&A deal.
As the percentages demonstrate, however, strictly stating the numbers is not the prevailing approach. The other 80% of our sample gave at least some rationale for the companies’ performance. This was in the form of additional color — via external events, industry trends and corporate strategies. Approximately two-thirds of the companies provided that color in the form of a quote from the CEO, but for our purposes, whether the information appeared between quotation marks is not particularly relevant. What is important is to provide investors with a reason for the early announcement and a frame of reference for the results.
The key word here is context. Beyond fulfilling a regulatory requirement, a preannouncement is an important way to communicate unexpected results and events with investors en masse. It provides management with a platform to get ahead of an earnings surprise by communicating its message first. Elaborating on the factors that influenced the company’s performance is essential to providing investors with the proper understanding.
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.