Deciding whether your company should give financial and earnings guidance, and how detailed it should be, is a complex choice. It involves understanding the company’s situation, taking into account the range of current analyst estimates, looking at what similar companies do, and talking it over with lawyers to avoid legal issues. In recent years, most companies that choose to provide guidance either give a yearly financial outlook or update it every quarter. Once the decision to give guidance is made, it may be problematic to stop in the future, so the decision should be made in a deliberate manner.
Should Your Company Provide Guidance?
Whether to provide guidance in this industry involves weighing a number of key considerations. The choice to give guidance, and its extent, should be made carefully, factoring in the company’s ability to predict future performance accurately. Below are some thoughts on what to bear in mind.
Your Peers
One consideration in the decision process should be whether peer companies are providing guidance. If most of your closest peers are doing so, it may be beneficial to follow suit in order to remain consistent with companies of a similar profile.
Set Expectations for Sell-Side Analysts
Another consideration for providing guidance is to help better set covering sell-side analysts’ expectations about future revenue or earnings. This can lead to more realistic analyst estimates, giving more transparency, while leading to better clarity for investors.
Never One and Done
Once the decision to give guidance is made, it may be problematic to stop including it in the future, as the facts change. This is because, generally speaking, investors expect consistent updates, and a sudden halt in communication can lead to uncertainty and negatively impact investor confidence.
The Current Trend
According to industry sources, most companies that provide guidance do so for the full year, communicating expectations via quarterly earnings releases and on earnings calls.
Interacting With Your Investment Community
Management should clearly tell investors when guidance will be given so they know what to expect. Doing so also gives the executive team more leeway to discuss their company’s outlook between earnings announcements. Without issuing guidance, management can often find themselves restricted in what they can communicate due to SEC regulations, specifically Regulation Fair Disclosure (Reg FD).
Not All Companies Give Guidance
According to a FactSet report from 2020, 285 S&P 500 companies, including in the health care space, planned to give EPS guidance. A 2017 snapshot showed varied practices: about a third gave quarterly, annual, or no guidance. A growing body of evidence, going back more than a dozen years and continuing today, suggests that such guidance can be more of a distraction than a help to investors and that many of them do not put as much weight on quarterly EPS guidance as executives believe they do. McKinsey found no stock performance difference between companies giving guidance and those that did not, nor between those meeting or missing earnings forecasts. This indicates providing earnings guidance is a strategic choice which does not always directly impact returns to shareholders.
Additional Strategies for Providing Guidance
The National Investor Relations Institute (NIRI) recommends that companies aim for long-term guidance, meaning for a year or more, focusing on both financial and non-financial indicators that are most likely to drive the business forward. This approach is particularly key for life sciences companies, where long-term value drivers often include drug development milestones, granting of patents and regulatory approvals, among others.
Established Versus Newly Public Companies
For established companies, it is about looking back at what your company has done historically and ensuring consistency, whether deciding to keep things status quo, or changing strategy and maintaining it, going forward. For those just entering the public markets, the key is deciding how long and how often you want to talk about future earnings. It is a tailored decision, heavily influenced by the specific needs and circumstances of your company.
Be Consistent
Make sure your company sticks to a consistent set of metrics. There is no one way to do this; the scope for what you can guide on is wide. Whatever metrics you choose, ensure they are ones you are confident in forecasting and will continue to be relevant over time. This is crucial for life sciences companies, where predictability can be especially challenging due to the industry’s inherent uncertainties.
Short-Term Guidance
While companies are encouraged to provide longer-term guidance, NIRI acknowledges that there will be circumstances under which a company may need to provide short-term forecasts. Examples include addressing seasonality or an unexpected market development, or, if a decision is made to be consistent with the practices of industry peers.
Establish a Clear Policy and Communicate It
According to the Harvard Law School Forum on Corporate Governance, companies should institute a clear policy on providing financial guidance, considering the unique aspects of the business and particular industry. In order to maintain good communications with analysts and investors, in good times and bad, companies should try to focus their guidance on business fundamentals and long-range goals.
Strategic Guidance Planning with Rx Communications
Rx Communications is well versed in advising life sciences companies on when to provide guidance. We are experts at crafting and communicating financial narratives and guidance, effectively. From deciding on the metrics that matter to determining the cadence of updates, we partner with you to ensure that your financial and earnings guidance strategy is aligned with your company’s goals and the expectations of the investment community.
Contact us today to explore how we can support your company, ensuring that your financial guidance enhances your investor relations and aligns with and enhances your company’s long-term success.
