Ten Top Earnings-Call Questions

As the financial crisis makes companies water down their guidances, analysts and investors hit CFOs with a new level of adversarial probing.

Shocked by the suddenness and depth of the economy’s free-fall, many companies are choosing to provide less guidance on future financial performance in their earnings releases and conference calls, investor relations experts say.

Some companies that had been giving quarterly guidance are shifting to annual guidance, others that offered quarterly guidance a year out are limiting their forecasts to the next quarter, and some are withdrawing guidance altogether, according to IR consultants.

An analysis of second-quarter earnings releases by the Corporate Executive Board’s Investor Relations Roundtable showed that while 64 percent of S&P 500 companies provided guidance, only a third of those were doing so on a quarterly basis. Data on changes to guidance following the third quarter, after the autumn financial meltdown had begun, couldn’t be obtained at presstime, but the trend is nonetheless clear.

Simply put, many companies don’t have the wherewithal right now to make meaningful earnings or top-line projections. “This has hit them very hard and very fast, and they’re just in the beginning stages of trying to understand how it’s going to affect their customer, market, and business,” said Elizabeth Saunders, head of the capital markets group at FD Ashton Partners, a business communications consulting firm. “Most of [the financial meltdown] happened in a four-week period, and few companies are nimble enough to figure out right away that, for example, demand for product is going to drop 18 percent in Japan.”

To be sure, there’s significant risk in eliminating or watering down guidance — namely, that analysts’ estimates may become more varied, which in turn may cause extra volatility in share prices. But Saunders, who helps clients with their earnings releases and call scripts, said that if a company can’t see into the future as well as the Street expects, it should put guidance on hold.

If CFOs don’t give detail on future performance during an earnings call, what should they talk about instead?

The best thing, if it’s justifiable, is to portray the company’s risk profile in a positive light compared to its competitors. “You’ve got an incredibly skittish buy-side community out there,” said Saunders. “They’re trying to figure out how to reallocate stocks in their portfolio and probably thinking that top-line growth is somewhat less important than lower risk.”

So the CFO should explain, say, that the company doesn’t need access to the credit markets because it’s in cash-generation mode, has no significant capital expenditures to make, or has a credit facility that isn’t slated to be renegotiated for two years. Such things aren’t normally brought up in earnings calls — but times are hardly normal.

Another possible area to highlight is any expectation that the poor economy actually might produce new customers. In a recession consumers will be “trading down” — shifting to lower-end products — so it’s a good idea to point out pricier competitors. “Articulate where you expect to gain ground in tough times, because everyone knows you’re going to lose ground in some segments of your market,” advised Cameron Doolittle, senior director of the Finance Leadership Exchange practice at the Corporate Executive Board, which provides research and other support for corporate executives.

Discuss

Your email address will not be published. Required fields are marked *