To Guide or Not to Guide: That is the Question (Part 1)

Posted by on June 26th, 2013

…Or is it?  The question of whether or not to issue guidance for a public company is one that many management teams find difficult to answer.  On one hand, they want to be transparent with investors and analysts and help shape their expectations; on the other hand, a company’s stock price can be penalized if they miss their numbers – so why issue them at all?

In my opinion (hence why I’m writing this blog), every company should issue some form of guidance or outlook projections.  Since I believe that this is the case, I’m not going to debate why a company should or shouldn’t issue guidance, but rather what type of guidance a company should issue.  Some factors to consider when determining what type of guidance to issue include:

  • Quarterly vs. Annual
  • Visibility in the revenue stream
  • Point Guidance vs. Range Guidance
  • Financial measures
  • Non-financial measures

I’ll briefly go through the top two points above (saving the rest for Part 2), and while this is definitely just the tip of the iceberg, it should serve as a starting point when determining the issuance of guidance.

Quarterly vs. Annual

Providing annual guidance gives investors a longer term view of what to expect over the coming year.  This is typically better for companies that are largely dependent on bigger contracts or have some amount of seasonality throughout the year.  It also allows the management team to focus on execution throughout the year without the scrutiny of meeting public quarterly objectives.  However, providing annual guidance allows analysts to dictate the “appropriate” quarterly earnings, which may unfairly affect the stock price if the earnings do not match or exceed analyst expectations.

On the other hand, providing quarterly guidance allows investors to hold management to a greater accountability over a shorter time frame.  This is typically better for companies that have a significant amount of booking and backlog as well as companies that have steadier revenue streams.  Providing quarterly earnings can be a double edged sword.  While providing these details proves the management team is transparent and has greater visibility into the quarter, it also allows investors and analysts to hold them accountable if these numbers are not met.  As much as investors and analysts may push a company to provide quarterly guidance, I would make sure you have a business model that allows you to appropriately predict what your quarterly earnings will look like.

Visibility in the revenue stream

This is one of the most (if not the most) important factor to consider when issuing guidance.  A company’s ability to correctly forecast their revenue stream for the upcoming period is a major reflection and responsibility of the management team.  While nothing in business is certain until it’s in the books, a strong management team has systems in place that enable them to forecast this appropriately.  Each industry has its own unique characteristics that a management team should be able to analyze so they can accomplish this.

How does your company accurately predict its revenue stream?

As you prepare for your upcoming quarterly earnings announcement, maybe it’s time to reconsider your guidance strategy or review your current practices for determining your guidance.  Do you agree or disagree with any of my opinions above?  Let me know!!

Part 2 coming soon for further discussion on point guidance vs. range guidance, financial measures and non-financial measures.