Scrapping mid-quarter updates
The practice of providing regular mid-quarter performance updates, now increasingly shunned by US 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. NIRI’s 2007 survey on earnings guidance practice 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 of any size.
For some firms, like Minneapolis-based bed 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, former 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 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 ‘Mid-quarterly conference calls are a legacy thing, meant to cater to a now outdated analyst group,’ explains Milano.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 that they sometimes 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 long-time mid-quarter update tradition (giving plenty of lead-time so the change couldn’t be misconstrued). Long-term shareholders had complained that 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, a former CFO currently completing his DBA thesis at Henley Management College.
Another firm believer in the power of communication is Michael Thompson, managing director of Thomson Research. ‘An almost universal theme across academic research is that more information leads to more efficient markets,’ he says. ‘Guidance is good, 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 On the way out, below).’
Mid-quarter updates might have emerged as a weapon in ongoing marketing wars. On the day 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 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 that using them to spoon-feed analysts is less rewarding than treating them as a forum to communicate pieces of the puzzle. ‘Analyst models can provide a company with planning insight,’ concludes Hill, now CEO of Bostonbased 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.’
On the way out
'Earnings warnings may be going out of style,' warns a Reuters report. In July 2007, preannouncements were released by 898 companies - down from 1,427 companies in July 2006, according to Reuters estimates. This represents the slowest pace of preannouncements for the month in the last three years. July is usually a big month for preannouncements.