Having to announce disappointing earnings to investors is a unique challenge. No one likes to be the bearer of bad news, but bad quarters happen to all companies. That said, Wall Street doesn’t like surprises (positive or negative, but especially negative).
Surprises damage corporate credibility and can have long-lasting effects beyond just a challenging quarter or two. So it’s crucial to find the right strategy for dealing with these types of surprises.
Maybe the quarterly earnings looked decent until an auditor discovered a previously overlooked error in revenue reporting. Or maybe raw materials costs suddenly spiked. Or perhaps that big anticipated contract evaporated. Whatever the reason, as you see the numbers coming in and it dawns on you that your earnings suck, you may be tempted to run and hide.
There is a better solution though. I promise!
First, don’t forget about situational awareness.
You might recall that I’m a big believer in situational awareness. No, it’s not a magic wand you can wave to turn lead into gold. Still, reporting quarterly earnings in the context of your company, your competitors, and the market is important. If nothing else, it shows analysts, traders, and investors that you have your eye on the right metrics.
Also, if a market shift due to a materials shortage, for example, affected your competitors’ earnings as much as your own earnings, that is relevant information to note during an earnings call with investors.
Your number one priority, though, should be ensuring the clarity of your message and maintaining transparency with investors. While it can be challenging (okay, downright painful) in the short-run, it will pay dividends over the long-term as it can stabilize challenges to credibility.
Let’s discuss the best strategies for revealing less than stellar earnings:
Now that you’ve done your homework to place your earnings in context, it’s time to face the music. While you cannot soften the blow, you can take steps to maintain credibility and goodwill moving forward.
1. Don’t sugar-coat.
It does no good to play up the good news and ignore the elephant in the room, so don’t sugar-coat or whitewash unequivocally bad news. If mistakes were made, own up to them. Talk about what you plan to do to respond and recover over the course of the next quarter or longer.
Be prepared to discuss the ways in which this challenge has made you reevaluate your business strategy and/or structure. Be tangible. Be candid. And, whenever possible, be quantitative. Don’t take a blow to the chin unnecessarily, but be clear about whether the impact is indicative of an ongoing strategic or structural challenge.
In preparing for these conversations, I find it helpful to think like an analyst and ask hard questions of yourself and your team during your earnings preparation process:
- Hold up the magnifying glass and go over every line item if necessary, until you are confident you understand what went wrong.
- Ask the hard questions about the quality of your business forecasting process.
- Get an understanding of the “early warning” indicators that might have helped or might help in the future.
- Be ready to answer uncomfortable questions from emotional investors like, “How could you not have known about this sooner?” or “What else don’t you know about?” or “So, what will be the next shoe to drop?”
Now is not the time to be defensive. Now is a time to be clear, concise, and aware in your message to and interactions with your shareholders.
2. Engage the team.
You have probably already tapped into the resources of your audit team, legal team, and C-suite. But don’t forget about those running the operations and working directly with customers.
These folks working “on the ground” in your operations or interacting with customers on a daily basis may be able to shed some helpful color on the situation. Take the opportunity to sit down with those who have more direct contact with what’s driving the numbers on your spreadsheets. Consider how this color can inform your earnings release and any forward-looking discussion.
3. Consider a pre-announcement.
If you have a material miss of market expectations on your hands, you may want to consider pre-announcing prior to your full earnings release. A pre-announcement is exactly what it sounds like, an announcement of results (to the extent they are available) before the full earnings release. Generally, this release will occur 2 to 4 weeks prior to a scheduled earnings announcement.
To be clear, there is no SEC requirement to disclose. However, many on the Street believe that a company has an obligation to warn investors if it will fall materially short of expectations. This is true even if your company does not issue formal earnings guidance.
The benefit to a pre-announcement is that it sends a message to the Street that you are sharing information in a timely fashion and gives comfort that the company isn’t keeping material information from investors.
However, there are legal intricacies surrounding corporate guidance (or lack thereof) and acknowledgement of consensus numbers. Pre-announcement can be a controversial issue for many companies and should be thoughtfully considered beforehand.
Look, an earnings surprise is hard and managing the disclosure isn’t easy. Your stock price will likely take a hit and you and your management team will need to have some challenging conversations.
At the end of the day, markets trade on future value and the reality is that future value takes a hit when earnings come in at less than expected. Your goal during this process is to maintain effective dialogue with the Street to communicate your firm’s future prospects and that requires credibility, transparency, and candor. You’ve got this.
We’ve got a great team at Audacia Strategies and we’ve helped companies navigate corporate crises like this before. We can’t make bad earnings disappear, but we can come up with a strategy for maintaining credibility and moving past the temporary crisis. Contact us today to schedule a complimentary consultation.
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