Guidance in a Less Exuberant Market: Ten Considerations to Keep in MindJune 30, 2022
As the June quarter comes to a close, many companies have asked whether they should change financial guidance practices in response to this uniquely challenging year. Should we limit guidance to the upcoming quarter? Should we offer guidance on different KPIs? Should we guide more or less frequently? The factors driving these questions include a multitude of uncertainties around both supply and demand, plunging stock prices, higher interest rates and the probability of a recession and its impact on revenue and margins. Compounding this uncertainty is the public demand from major asset managers for companies to focus on their longer-term opportunities rather than achievement of short-term financial targets.
While it is not easy to guide investors in this environment, and Larry Fink’s “long-termism” is a noble goal, we believe shying away from providing appropriate guidance is a lost opportunity to build credibility. The following is a list of the 10 top considerations to keep in mind when determining whether and how to provide guidance in the current volatile environment:
Build an understanding of what investors perceive about your industry as well as your ability to execute, use guidance as an opportunity to fill the gaps.
Think of the guidance exercise as an opportunity to demonstrate understanding and control of your business. Higher multiples will be assigned to the companies perceived to have an attractive market, a better, faster, cheaper product, AND the ability to execute – even in uncertain times.
Multiples are just that, so seek a higher multiple on future earnings rather than putting targets out that no one believes are achievable in the short-term. Prioritize building credibility. Don’t forget quality of earnings and predictability of earnings both count and drive higher multiples.
Prioritize clarity over brevity in discussing guidance. Take the time to disclose key underlying assumptions and risks ranked in order starting with largest impact. For example, does your guidance assumes constant currency exchange rates or availability of key components at current prices? Do this in any investor interactions and not just in SEC filings.
Identify swing factors you control and those you don’t. Talk about, or at least reassure investors that you have prepared, continency plans for the latter.
Be sure internal and external communications are aligned when discussing outlook for the business.
Share what you are seeing in terms of the health of your end markets. Articulate why your products are a must have, not a nice to have, even in a recessionary environment.
Run annual benchmarking exercises to be sure you are reporting on and guiding to the expected KPIs for your industry, current size, and the macro environment.
Ensure that your decision about whether to guide to next quarter, several quarters, full year, or several years matches up with what you can foresee at a point in time based on company specific factors like contract duration, seasonality, competitive landscape, commoditization, and barriers to entry and exit.
Rather than using arbitrary “round number” guidance ranges, set ranges on guidance that are aligned with actual swings your business could experience and again, tie underlying assumptions to both those you control and those out of your control.
Periods of significant change in the macroeconomic outlook can provide companies with the opportunity to tune up guidance practices and/or articulate the rationale for their approach. As we pass the mid-way mark of 2022 and prepare for what promises to be a very volatile market environment, it is worth considering whether your company’s current habits are well suited to the current conditions or could use some rethinking.