Posts Tagged ‘Earnings’

Hillary (or Donald) ate my homework

November 7, 2016

Passing Blame with arrows pointing to others accusing them of doing something wrong or messing up and denying responsibility, accountability or culpability

Ya gotta love it! This just in from today’s Wall Street Journal:

If you believe U.S. corporations, Americans are drinking less coffee, eating fewer doughnuts and taking fewer cruises, all because of the presidential election. Companies have made a habit of finding excuses for their quarterly results. Blaming the weather is a perennial favorite. The fear of rising interest rates is another. Brexit is a newer culprit.

Now, Tuesday’s vote is front and center.

Among the companies blaming election angst for lagging performance, according to WSJ, are Starbucks, Dunkin’ Brands (Dunkin’ Donuts married to Baskin-Robbins), Carnival Cruises and McDonald’s. After tomorrow, of course, companies can blame it on whoever wins.

Oh, for the days when companies blamed slow sales on weather – snow in winter (or too-mild weather), heat (or cool) in summer and so on. Is the problem ever that we aren’t selling what people want to buy?

Is this a question investor relations people should ask before news releases and conference calls make these excuses an official message point? My guess is investors are taking notes.

 © 2016 Johnson Strategic Communications Inc.

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Mind the GAAP – and the perceptions

August 1, 2016

London, United Kingdom - October 30, 2013: Detail in the Metro with train in station. The door are open in on person is written "Mind the Gap". Inside the train is strong light and door on other side is closed. On right is woman, passenger sleeping in train.

One of many fond impressions London offers to visitors is the warning “Mind the gap” – a uniquely British way of cautioning subway riders not to trip over, or get their foot stuck in, that space between platform and railcar. Very polite and considerate. A stumble could be nasty.

The gap investor relations people must mind – pardon the pun – is the difference between earnings under Generally Accepted Accounting Principles and the measures that CEOs, as well as some investors, prefer for assessing the performance of businesses. The EBITDAs and Adjusted-Whatevers are so many and varied that investors and IR professionals must watch our footing.

A good primer on the issues is provided in “Where Financial Reporting Still Falls Short” in the July-August issue of Harvard Business Review. A couple of accounting profs look at GAAP and the gaps in terms of what investors should look out for, and to some extent what policy wonks might try to regulate next. For accounting is also all about regulation.

Issues they cover are disclosure matters that IR people need to “get”:

  • Universal standards, with GAAP and IFRS converging (or not)
  • Revenue recognition, especially for complicated products or services
  • Unofficial earnings measures, Adjusted-How-We-Look-At-Our-EPS
  • Fair value accounting vs. what you paid for an asset
  • Cooking the decisions, not the books

The writers call this last item “the more insidious – and perhaps more destructive – practice of manipulating not the numbers in financial reports but the operating decisions that affect those numbers in an effort to achieve short-term results.” So a CEO (or other execs) seeing indications of a revenue shortfall will cut prices to move more product before quarter-end, or to save earnings will delay a discretionary cost like an R&D project or ad buy. Voila! Suddenly EPS meets expectations.

I’m not sure that’s new, or always insidious. When you judge people by numbers, they strive to hit the numbers – teachers teach to the test, sales people sell what they have incentives to sell, and CEOs try to hit their numbers. If the market wants to encourage long-term thinking, boards and perhaps investors can start judging CEOs by the change in performance over years, not quarters. Short-termism is an issue. But I am skeptical of policy makers (or accounting profs) tinkering with regulations to alter how executives make decisions.

The perceptions behind this article are more concerning: Investors don’t trust, with good reason or not depending on the company, disclosures they receive. GAAP or non-GAAP, trust is absolutely critical. Perceptions matter.

What can investor relations people do about this gap?

  1. Understand our own companies’ GAAP and non-GAAP metrics, not just to provide the mandated reconciliations but to be able to work through the numbers and clearly explain the rationale.
  2. Ask investors what they like (or don’t) about our financial reporting.
  3. Benchmark peer companies for insightful metrics and best practices.
  4. Challenge our managements if metrics are confusing or misleading.
  5. Be an advocate for simplicity and clarity.

Being transparent means giving information that enables investors to see what’s going on in the business. That doesn’t just mean more pages of accounting boilerplate and reconciliation tables. Perspective is one of the greatest values IR people can give investors.

© 2016 Johnson Strategic Communications Inc.

Is ‘guidance’ all there is?

November 13, 2013

Providing financial guidance has become so common – NIRI says 76% of public companies offer forward-looking financial guidance – that investor relations professionals don’t stop to think much about it. But an investment banker in the pharmaceutical industry notes increasing frustration with investors and analysts who obsess on guidance.

In a piece called “The Tyranny of ‘Guidance’,” Michael Martorelli of Fairmount Partners tells readers of Contract Pharma that he’s hearing more questions on conference calls seeking clarification or expansion specifically on management’s guidance for near-term financial results – as opposed to penetrating questions seeking insight into fundamentals or trends:

If you thought all analysts developed their own estimates for the revenue and earnings paths of the companies they follow, welcome to the post Sarbanes-Oxley world of Wall Street research.

Before Sarbanes-Oxley, Martorelli notes, sell-side analysts were committed to building in-depth knowledge of  companies and industries. Investors and corporate managements came to respect the best analysts, and the work of analysis was highly valued.

Post-Sarbanes, of course, the mandate to give the same information to everyone at the same time often takes the form of guidance. And market participants, Martorelli says, can put too much value in near-term numbers. They’ll ask, “Why didn’t you raise your guidance this quarter? Why is the range of your guidance so wide? Why did you lower (or raise) only the top (or bottom) end of your guidance?”

When evaluating the future financial results of a company … too many investors rely more on management’s guidance than on their own independent analysis of the company, the industry, and the trends.

The legal structure is what it is, but companies can perhaps affect the tone of the conversation by focusing what we talk about on the fundamentals … what is really changing in our businesses, growth drivers, challenges and the strategies our companies are executing. After all, we really outperform not so much by beating “guidance” as by beating the competition to create real value for shareholders. It’s the big picture, not the pennies for next quarter.

What’s your take on guidance? Has it taken over the conversation?

© 2013 Johnson Strategic Communications Inc.

Are stock buybacks overhyped?

June 19, 2013

Share repurchases aren’t the magic potions some investors and corporate managements think, according to an analysis of Standard & Poor’s 500 companies in the June 2013 Institutional Investor. Stock buybacks can create value, but they can also destroy value – and the actual results suggest some humility in talking up the advantages.

Cash stackSome institutional investors love financial wizardry. Share repurchases automatically increase EPS by reducing shares outstanding – and send a message of confidence in a company’s stock. So financial engineering fans press the idea on a CEO or CFO more than any business strategy, such as investing corporate cash in growth or new product creation.

And some companies love share repurchases. Now Institutional Investor, working with Fortuna Advisors, has begun publishing a quarterly scorecard of how effective stock buybacks actually are, at least in the large cap world. Based on S&P 500 companies that repurchase more than $1 billion in stock or at least 4% of their market cap, the magazine reports rolling two-year ROI for buyback programs.

You can get the overview in “Corporate Share Repurchases Often Disappoint Investors” or dive into raw data in a table detailing ROI for S&P 500 companies with big repurchase programs. (A majority – 268 of the 488 index members that were public for the whole two-year period – bought back at least $1 billion or 4% of their market value.)

The II-Fortuna analysis calculates ROI as an internal rate of return to evaluate investment performance of cash spent on buybacks over two years, including share value increases/decreases and savings on dividends avoided.

Results suggest investor relations people – and CEOs – may want to be more modest in discussing share repurchase plans. The accounting effects of buybacks are assured, but benefits to shareholder value aren’t:

Returning cash to shareholders is supposed to benefit everybody – at least, that’s how the theory goes. Investors who want cash get plenty; shareholders who prefer to stay the course see higher earnings and cash flow per share …

The fanfare that typically accompanies buyback announcements never hints that poor execution can torpedo more value than accounting-based bumps in earnings or cash flow can produce on their own.

Apple is the magazine’s poster child for the disparity between  theory and reality. The magazine dings Apple CEO Tim Cook for his $60 billion repurchase program, the biggest authorization in history, which he enthusiastically called “an attractive use of our capital”:

Buyback ROI reveals a less ebullient story at Apple than Cook described. The company’s -56.7 percent return on buybacks trails those of all S&P 500 companies that compete in the rankings. Every dollar spent by Apple on share buybacks during the two-year period was worth less than 44 cents. …

Trouble is, companies often buy back shares when the price is high – and as we know, stocks go up and down. Timing is everything, at least for returns over a typical investment horizon of two years. Often the timing is wrong:

“During the downturn in 2008 and 2009, even companies with good cash balances didn’t buy back stock, and now they are buying back shares,” says Adam Parker, Morgan Stanley’s top U.S. equity strategist. “A lot of companies have not done a particularly good job of buying low.”

If you’re interested in more analysis, Fortuna Advisors CEO Gregory Milano offers companies some direct advice on how to approach share repurchases in “What’s Your Return on Buybacks?”

I’d love to hear your feedback on buybacks.

© 2013 Johnson Strategic Communications Inc.

Google gags on Q3 snafu

October 18, 2012

In the “Things Could Be Worse Department,” an investor relations nightmare struck Google Inc. today: Not only did third-quarter 2012 earnings decline and miss expectations, an unfinished draft of GOOG’s Q3 release was filed prematurely on the SEC’s EDGAR website, triggering a big sell-off before trading was halted.

“I think this is probably the worst technical screw-up I’ve seen in an earnings release in 20 years. I can’t think of anything as bad. I mean, clearly this was a premature release – it was put up on EDGAR prematurely. It even has boilerpate text in it that says, ‘PENDING LARRY QUOTE,’ ” said Bloomberg contributor Paul Kedrosky, a Kauffman Foundation fellow and blogger at Infectious Greed. “The result, however, combined with how poor the numbers actually are, is pretty dire.”

Oh, yes, pretty dire. GOOG closed down 8% on nearly five times average volume, a haircut of about $20 billion for shareholders. No telling whether the stock price would have reacted as violently if bad earnings had been released in a more orderly way – say, after the market closed.

So Google is the lead news story on all the financial sites – with headlines like “Google results, filed by mistake, miss; shares dive” (Reuters), and “Live: the Google Earnings Disaster” (live blogging on WSJ.com). And, of course, the tribulations are even trending No. 1 on Google Finance.

The erroneous press release from EDGAR may become a collector’s item, something to post over your desk as a warning:

It will take time to sort out what all went wrong. Google blamed the early release on R.R. Donnelley, the financial printer that does a lot digital work for IR departments. No doubt there will be further statements and explanations.

For now, what is certain is that “Google – October 18, 2012” will become a case study for investor relations officers in the future. A case of what not to do.

And each of us working on Q3 earnings for other companies should remember, “There but for the grace of God go I.”

© 2012 Johnson Strategic Communications Inc.

One message is better than five

June 8, 2012

Ken Segall, a creative ad man who worked with Steve Jobs through the heyday of building the Apple brand, has an idea worth considering in investor relations:

Minimize your messaging.

Segall came up with the “i” in the iMac brand (which led to iPod, iPhone, iPad …) and worked on memorable campaigns for Apple and other leading companies. Segall’s book Insanely Simple: The Obsession that Drives Apple’s Success came out this spring and is a good read for people involved in telling their companies’ story.

“Think minimal” is an idea at the core of Apple’s simplicity, Segall says. For example, Apple offers five choices of computers rather than dozens of variations sold by HP or Dell. Segall spoke Thursday at the Mid-America Corporate Growth Conference hosted by Association for Corporate Growth in Kansas City.

Minimalism works in getting your message across, too, he says. From the book:

Human beings are a funny lot. Give them one idea and they nod their heads. Give them five and they simply scratch their heads. Or even worse, they foreget you mentioned all those ideas in the first place.

Minimizing is the key to making a point stick. … Your point will be more quickly understood, and more easily remembered, if you don’t clutter it up with other points.

When talking to investors, our temptation in IR is to unleash a tsunami of facts. More details in the earnings release, more slides, more bullet points, more pages. We want to overwhelm doubts by flooding people with every piece of information.

Though Segall’s expertise is in marketing consumer goods, he’s right when he urges us “Don’t bury your fact in facts.”

Segall tells a story of discussing an ad with Steve Jobs for an iMac computer. Jobs considered four or five major facts critical to the ad – and thought 30 seconds was plenty of time to make these key points. Segall’s ad-agency boss, Lee Clow, tore off several sheets of paper and wadded them up into little balls.

Taking one ball, Clow said “Here, Steve, catch,” and tossed the ball to the client – who caught it. “That’s a good ad,” Clow said.

“Now catch this,” the ad man said – tossing five balls at once across the table. Jobs couldn’t prevent paper balls from bouncing all over the place – and caught none. “That’s a bad ad,” Clow said. And Jobs was convinced.

So next time we’re working on the quarterly release, or slide deck for the road show, let’s try to remember. As Segall says:

People will always respond better to a single idea expressed clearly. They tune out when Complexity begins to speak instead.

Yeah, yeah, I know. In investor relations, we have a lot of information we must get across to the audience. A lot, even, that we’re required to communicate. But the principle of simplicity holds true. Advice we should heed: Less is more.

© 2012 Johnson Strategic Communications Inc.

Metrics are the message

March 26, 2012

Flipping through the annual report of an oil company I own a few shares in, I skimmed over the usual headline cliches (“proven business model,” “rigorous execution,” “strong results”). As a shareholder – and a practitioner of investor relations – I’m glad they don’t have a discredited business model, lackadaisical execution or weak results. But maybe there’s something more to take the measure of this company.

As a casual weekend reader, I passed over the gray-looking shareholder letter. I did have to circle back and see if there was an explanation of that puzzling schematic diagram on the cover – it was an engineer’s view of the company’s proprietary oil sands technology, of all things, decorating the cover of the annual report.

Finally I landed on a page headed Financial Highlights. And there I dug in.

You often hear investors say, “It’s about the numbers.” Or if you talk a bit more, the numbers and management – because having the confidence to bet money on a company includes believing in the management team.

But the numbers – more particularly, key metrics – are the main thing investors are looking for in a company’s disclosures, reports and presentations.

The metrics and what management is doing about them are the strategic message.

When I landed on the financials in this report, my eye was drawn to the 5-year history of sales and a similar line for net income – both up nicely in 2011, looking like the last time oil prices were high, in 2007-08. I scanned down to ROE and ROCE, both of which which this company provides – nicely. Other metrics of interest … well, they weren’t there, until I went to work on the financials with my calculator.

My thought is that investor relations people ought to make key metrics – those viewed by management and your investors as driving the share price in the long term – easy to find in news releases, reports and presentations. Because key metrics are what investors, whether institutional or individual, are looking for.

A few metrics are likely to be top-of-mind for nearly any company:
  • Earnings per share. Sure, I know the theories about cash flow or some other measure being more important, and some managements are passionate about EBITDA as the key metric. For most shareholders EPS is still the bottom line.
  • Growth rates of sales and earnings. Whether the picture is pretty (sales up 23% in the current period) or ugly (earnings down 14%), companies ought to make growth rates easy to find. And do the math for investors; don’t make ’em get out their calculators.
  • Return on equity – or capital employed or assets. To know whether a business is attractive as an investment, the most basic question is whether it earns more than its likely cost of capital. If  ROE is 27.5%, as an investor I’m comfortable on that issue. If it’s 7.5%, I’m going to look a little closer.
  • Profit margin & its trend. Gross margin seems to be the most popular, or operating margin. Investors want to know the power of a business to take raw material or merchandise, sell it and turn a profit. Margins provide an objective view of the impact of rising costs, dropping prices or lack of scale.

Every industry and many companies have their own key metrics. Same-store sales growth. Net income margin. Proven reserves. Milestones in drug development. Whatever investors see as driving the value of the company for the future.

Of course, companies also offer up all kinds of non-GAAP metrics like “adjusted EBITDA” or “ongoing operating earnings” – which investors may or may not trust. If it works for you, OK, but you may want to validate that with your investors.

In any case, settle on your key metrics (not 20, just a few) and then use them …

Investor reporting ought to emphasize, say, three or four key metrics – make them highly visible in words, tables and graphs – and explain what you are doing about them. When they improve, take credit on management’s behalf – this is what we did to add 50 basis points to margin. When they go the wrong way, acknowledge it and tell shareholders what management is doing now to turn the situation around.

I see metrics as the core message of investor relations. What do you think?

© 2012 Johnson Strategic Communications Inc.

Adding wiggle room to guidance

August 5, 2011

Are we in recession again? Weak recovery? Heading for Financial Crisis 2.0? No wonder more than a few CFOs and IROs have been wringing their hands over what guidance to provide investors as part of the second-quarter reporting season.

If you’re looking for an example of softening guidance by widening the range, Procter & Gamble provided just that today with its fiscal fourth-quarter results. For the new fiscal year, P&G forecast core EPS “in a range of $4.17 to $4.33, up six to 10 percent.” Fair enough. That’s not exactly fuzzy, but the range is a bit broader than P&G gave last year at this time (a 10-cent span in EPS, vs. 16 cents this year).

Market watchers commented on the change, as in The Wall Street Journal story headlined “P&G Outlook Reflects Jitters”:

P&G adopted a wider-than-normal range for its fiscal 2012 outlook, which encircled Wall Street estimates, calling for per-share earnings growth of 6% to 10%. The low-end is slightly below the consumer-product giant’s long-term goals for annual growth of high-single digits to low double-digit growth, largely on questions percolating through the global economy.

On P&G’s conference call, Chief Financial Officer Jon Moeller blamed a cloudy macro environment:

Our guidance ranges will be a little bit wider than normal this year, reflecting a broad policy uncertainty, ongoing high levels of volatility and market growth rates, input costs and foreign exchange, as well as uncertainty both upside and downside related to pricing across the portfolio.

So there you have it – big, sensible P&G is a pretty safe role model. Go ahead and add wiggle room to your guidance. We may all need it.

© 2011 Johnson Strategic Communications Inc.

IR nightmare: leaking earnings

August 2, 2011

As the Q2 reporting season winds down, a nightmare scenario for investor relations professionals comes to mind: accidentally leaking your company’s earnings release or M&A announcement by inadvertently posting it online. Such a leak spreads easily into a widespread spill into social or traditional media.

Can’t happen? Well, it does. A panel discussion at the NIRI 2011 Annual Conference in June was all about warning IR people of this potential mishap. Two folks from Microsoft, IR manager Dennie Kimbrough and IT manager Josh Bailey, courageously provided the red meat of the NIRI panel discussion called “Keep a Lid on It: How to Guard Against Leaks, and What to Do if One Happens.”

Most importantly for all of us in investor relations, the Microsoft staffers shared lessons learned on how to guard against similar leaks at our companies.

The software giant is one of a handful of companies – Walt Disney, NetApp and Transocean are others – recently tripped up by the interplay of humans and technology, causing the inadvertent, early and selective release of earnings.

For MSFT, it happened on January 27, 2011. According to Kimbrough, the first word of a problem came about 12:35 p.m. Pacific time, an hour before the market would close. A Reuters reporter called to confirm an online report of the software giant’s Q2 earnings – not due out until after the close. Not the media call you want to get.

It seems MSFT’s 77-cent earnings per share figure was already out on StockTwits, through the work of Selerity, a “low-latency news aggregator.” For us non-techies, that means Selerity uses web crawler programs to snoop around continually for information on web pages that might move stocks – and move the data quickly to its clients, who are hedge funds, banks and prop traders.

What Selerity’s crawlers found was a page where someone at Microsoft posted Q2 earnings data on what they assumed was a secure “staging” page, but actually was a live web page. “It was just a simple human error,” Kimbrough said.

There was no link to it, as an official news release gets when posted to a website, but crawlers don’t need a link. Kimbrough said MSFT put its earning data up on the blind (but public) web page at 11:23 a.m., and Selerity’s crawler found it six minutes later. Selerity sent the numbers right out to its clients – and broadcast MSFT’s 77-cent EPS on StockTwits at 12:50, a full 70 minutes before the close.

Bailey, the Microsoft IT guy, explained three kinds of web crawlers: Those used by search engines “play nice” with web administrators in handling nonpublic files. Others scrape email addresses and phone numbers from thousands of websites to enable marketers to spam us. A third, scarier group of crawlers search for not-yet-public pages, systematically guessing URLs that might provide interesting data (something like “…/earnings/Q2/press release.html”).

The problem isn’t brand new. Another panelist, Andy Backman (a former IRO and now CEO of InVisionIR) recalled an encounter 10 years ago when a reporter guessed the URL for his company’s second-quarter earnings release – and reported the numbers an hour and a half before the release was due out.

Of course, the damage-control step to take if a leak of this sort happens is to issue the darn news release – get it out fast! Microsoft posted a brief statement to its corporate blog immediately after the reporter’s call and had the full earnings announcement up by 12:55 Pacific time, about 20 minutes after the reporter’s call.

But prevention is the real need.

And prevention is where IROs can play an important role by taking precautionary steps as part of the team that develops earnings and M&A announcements:

  • Keep online staging areas secure to prevent public posting of earnings and similar announcements. “The only way to protect yourself against web crawlers is to keep your files on your side of the firewall,” Bailey says. Both in-house staffers and third-party service providers like lawyers, CPAs and newswires need to have strict procedures in place. The IRO needs to check.
  • Don’t allow anyone to leave drafts lying around on a printer or desk. This is the old-fashioned leak, allowing non-confidential employees or even members of the public who pass by to see nonpublic information sitting out in the open. “Shred everything. Lock it away,” Backman advises.
  • Demand better code names for M&A projects or offerings. Lawyers and I-bankers love to create code names. And they’re fun – we all get a sense of adventure working on a hush-hush project called “Operation Pegasus.” Trouble is, Backman notes, code names are almost always picked because they point to the real name. We’re making a bid for Procter & Gamble, so we call it Operation Pegasus. Sometimes namers use a double entendre (the acquisition of Energizer might be “Project Bunny”). Backman suggests: Pick a code name that has nothing to do with the target company – a code name.

In many respects, IR professionals need to be a little paranoid. For most of us, Q2 reporting is finished (my excuse for not posting in July), but security of financial information is a process issue we can start working on now for next quarter.

As gatekeepers of material information, IR people need to work with colleagues in finance and IT to ensure that “Top Secret” remains so right up until our broad dissemination to the market.

© 2011 Johnson Strategic Communications Inc.

Winter weather, Super Bowls & other excuses

February 9, 2011

While shoveling snow this morning – yet again! – I was thinking about how quick the media are quick to hype the latest “blizzard” or “worst winter since the Ice Age.”

But should investor relations blame weather for missed earnings or a chill in sales? It’s not an easy question, but IR people (like the investors we serve) should at least ask skeptical questions when confronted with a claim that rain or hail or snow or dark of night kept the company from delivering earnings.

If you haven’t seen it, warm up your day with this entertaining video of Barry Ritholz discussing earnings excuses. Speaking on “Tech Ticker,” the economic commentator, investment strategist and keeper of the Big Picture blog excoriates “these pinhead PR guys” for foisting weather on investors as an excuse:

We’ve had God knows how many feet of snow, but IT’S JANUARY! And you know what? It snows in the north in the winter. … Look, if it was 120 degrees in January – hey, that’s why winter coats aren’t selling -that’s a legitimate issue. But snow and sleet and ice in January and February? This is not a surprise.

And in case you hear another seasonal excuse, Ritholz says don’t go there:

There was, I don’t remember which restaurant chain it was, that blamed a bad quarter last year because few people went out to dinner during the Super Bowl Sunday. And I said, ‘Did you not know the Super Bowl was coming? I think it’s scheduled for the next hundred years.’

Of course, icy weather may in fact keep consumers home for a time. Or delay our trucks from running. Or even shut down a plant or office. But let’s not be too quick to write or say weather is the reason for sales and earnings falling short.

CEOs, CFOs and, yes, IROs should apply the same disclosure disciplines to weather as to other factors affecting the business. In internal discussions we should probe a little deeper: Can we quantify how bad the weather was compared to last year? How many days did we lose? What exactly was the impact, and how can we back that up?

Being just a bit skeptical up-front may help us answer our investors’ questions.

© 2011 Johnson Strategic Communications Inc.