Quarterly Earnings Press Releases: What Investors Actually Think When You…..
As is evidenced by the numerous different formats for earnings press releases, there is no “correct” way to communicate quarterly financial results. But experienced investors are constantly frustrated by many small-cap companies’ lack of awareness of investor expectations in this regard.
Small-Cap Institute consulted a number of seasoned investors in order to provide a practical rendering of what quarterly releases should include, and, perhaps just as importantly, what they should not include. We’ve presented the results in a “FAQ” format, because so many investors have seen these patterns with their portfolio companies.
Earnings Release Headlines
Q: Our company is performing well, but investors don’t seem to be paying attention. We’d like to underscore in the headline of our next earnings release that we achieved “record” results last quarter.
Most experienced investors aren’t big fans of the “ABC Company Announces Record Revenue for the Second Quarter” press releases for three reasons:
- In theory, growth companies should regularly be achieving “record” results if they are… growing (i.e., it’s needlessly repetitive).
- Serially announcing “record” results creates a slippery slope of expectations. For example, if the company doesn’t elect to refer to similar quality results the next quarter as “record” results, then investors might intuit that the results weren’t compelling from the absence of the word “record” in the headline.
- Editorializing earnings headlines is always somewhat disingenuous, because it’s only done when results are great. In order to be intellectually consistent, companies that are inclined to editorialize earnings release headlines should also do it when results are bad.
Q: Our company is going to miss the revenue and gross margin guidance we provided for our upcoming quarter, but we shipped a record number of products. We’d like to draw attention away from the guidance miss, and state in our headline “ABC Company Ships a Record Number of Products in the Second Quarter.”
Investors are unlikely to respond well to this practice, because even though it’s accurate, the intent of the headline is to distract investor attention away from the company’s missed guidance.
Key Takeaway: when in doubt, don’t editorialize earnings release headlines. You can never go wrong by sticking with the tried and true: “Company ABC Announces Third Quarter Results.” If you had poor results, nothing you say in the headline is going to change that; rather, it’s likely to exacerbate the poor results.
Earnings Release Sub-headlines
Q: Our company has been working on improving several key metrics each quarter, and we’d like to emphasize them in several italicized sub-headlines below the main headline in order to call investor’s attention to the improvements.
This is more of a stylistic issue than anything else, but since it’s become increasingly common – and some companies offer multiple lines of sub-headings – it’s worth considering these three points.
- Most financial websites don’t reflect the sub-headings when listing company news, they just list the primary headline (i.e., the sub-headings are unlikely to attract readership).
- If you went to a restaurant, and immediately above the entrees on the menu the restaurant listed two of the six entrees using the exact same words, you would openly wonder how that’s helpful to diners. Sub-headlines are functionally the same thing. Since the identical information is set forth immediately below, they are of very little help to investors. Instead of doing this, companies would be better served using management’s quote to call attention to results they believe investors should pay additional attention to.
- All that said, as long as the sub-headlines aren’t inaccurate or sensationalized, they are probably not damaging.
First Sentence of Earnings Release – Tagline
Q: Since the press release contains an “About Us” section at the end, it seems like overkill to also include a company “tagline” in the first sentence; is it OK to just omit it?
It’s a mistake for small-cap companies to assume that everyone who is reading an earnings press release understands what the company does. Moreover, since so many small-cap companies aren’t followed by sell-side equity research analysts, storytelling is always at a premium. Accordingly, when in doubt include the company’s tagline in the first sentence of an earnings press release; those new to your company will appreciate it, and those who already know your company will simply gloss over it.
Q: Our investor relations firm has advised us to insert a bullet-pointed list directly below the opening sentence entitled “2nd Quarter Financial & Business Highlights.” Is that considered a best practice today?
As referenced earlier, there is no “correct” earnings press release form, but the short answer is that investors find it helpful to get an accurate, bullet-pointed rendering of the prior quarter’s salient results as close to the top of the press release as possible so that it’s easy to locate, skim, and digest.
Some do’s and don’ts:
- Since it’s a summary, be succinct.
- Bullet-point the same key financial metrics each quarter (with YoY comparisons), whether the results are compelling or not. In other words, investors don’t just want to see the results you think were favorable. They will know if you routinely change the metrics you report to obfuscate poor results, and you risk suffering lost credibility as a result.
- For life science or other pre-revenue companies, it’s fine to refer to this section as Key Operating Highlights.
- Don’t refer to non-GAAP results before first discussing GAAP results.
- If your company typically bullet-points key financial metrics and compares those results to the year ago period, don’t suddenly change the comparison period to the previous quarter because the YoY comparisons are less favorable.
- Don’t turn the Second Quarter Financial & Business Highlights into 100% business highlights, because your company’s financial results were poor.
- If there weren’t any material business highlights in the prior quarter, don’t discuss business highlights from other periods of time without disclosing when they occurred.
- Don’t include immaterial business highlights.
- Don’t editorialize; just stick to the facts.
Q: I regularly see earnings press releases with CEO quotes that are hundreds of words, and also see others that are just a couple of sentences. What do investors want to hear from the CEO in this context?
The easiest rule of thumb with respect to CEO quotes in earnings press releases is that “less is more.”
The best use of the CEO quote is to shed some constructive light on the results, along perhaps with some commentary about what’s going on in the company’s industry. In other words, the CEO’s quote should briefly preview some of the themes they hope to more comprehensively cover on the earnings call. What’s not helpful at all is to simply reiterate the results bullet-pointed directly above the quote.
CEO quotes that are particularly long might garner the wrong kind of attention from experienced investors. Unless the company recently underwent a seminal event deserving of substantive commentary or had unusually positive or negative results, investors know that lengthy CEO quotes are typically given in order to make investors feel better subsequent to reporting disappointing operating results. These attempts to refocus investor attention risk loss of credibility.
Also, effective CEO quotes stick to the facts. When CEOs wax on about how “unbelievably excited” they are about some of the “extremely transformative” things the company is working on that make them “incredibly optimistic,” reactions from experienced investors will be negative.
Q: Our business is still in its formative stages, and we just don’t have great quarterly or annual visibility, so our policy is that “we don’t provide guidance.”
There are few things that destroy credibility faster with small-cap investors than when companies over promise and under deliver. Accordingly, if the state of your business makes it too challenging to accurately predict typical metrics like revenue, margins, or earnings, then don’t do it.
For better or for worse, when a company states that “our policy is not to provide guidance,” there are many investors who interpret that to mean that the company is averse to being transparent with investors.
Accordingly, companies should, where possible, consider striving for some middle ground that shows it’s trying to be as transparent as possible. For example, some companies might have a high degree of confidence that revenue is going to grow on a year over year basis, they just don’t know by how much. Other companies could discuss a 2-3 year operating model that it’s working towards, in lieu of quarterly or annual estimates.
Regardless of the circumstances, investors will welcome the company’s attempt to provide some transparency, even if that commentary doesn’t qualify as “guidance” in the way that term is typically used.
Of course, if a company lacks sufficient visibility to offer any accurate forward-looking commentary, then silence is the best route until such time as visibility improves.
Q: We’re confident that our revenue this year is going to be between $50-$60 million, but we’re going to provide annual guidance of $35-$45 million so as to benefit from the large “beat.”
Companies could well achieve the desired result – in the near term – with purposefully inaccurate guidance, but there is only one sustainable communication strategy with investors: transparency. When companies routinely “sandbag” their guidance, they are just training sell-side analysts and investors not to believe company forecasts. The best, most replicable practice for companies is to construct a guidance range where the anticipated results fall towards the middle of the range.
In practice, here’s how companies can really suffer from repetitively “sandbagging” results. In Q1, Company XYZ believes quarterly revenue will be $10m. XYZ issues guidance for revenue between $5m – $7m, and subsequently announces $10m. The same thing happens in Q2. For Q3, XYZ decides to provide more accurate guidance of $7m-$10m; it anticipates $8.5m. Prior to the company announcing Q3 results, 3 analysts decide to amend their models given the seemingly better than expected results for Q1 and Q2, and, consequently, consensus expectation for Q3 revenue is now $11m. When XYZ announces $8.5m – exactly what it was expecting and guiding towards – the stock is clobbered, as news releases from financial media tout that XYZ “Misses Consensus Revenue Targets By 22 Percent.”
Q: How do we know whether our Safe Harbor statement is thorough enough? Some companies have statements that seem quite succinct, and others go on and on and on.
Three comments regarding Safe Harbors:
- Companies should be guided 100 percent by advice of counsel, and should never have non-lawyers edit them;
- Make sure that counsel revisits the Safe Harbor every time it’s published anew (i.e., don’t cut/paste them from prior periods to avoid the time and cost associated with legal review); and
- Implore counsel to make them as brief as practicable, while still protecting the company.
Q: Does anybody really read the “About Us” language in earnings releases? Some companies seem to have just a few sentences, and others have short novels; what’s the purpose of them?
As alluded to above regarding “tag lines,” storytelling is paramount to small-cap companies since many are owned and traded by nonprofessional investors, and many are not covered by sell-side research analysts. Your company’s “About Us” section of the earnings release should pass the following test: “If an average person at a cocktail party read the ‘About Us’ language for approximately 45 seconds, they should be able to accurately tell you – in their own words – what your company does.” If your company fails that “Cocktail Party” test, then your company is failing Investor Messaging 101.
Regarding spelling, formatting, and syntax. There is – no excuse whatsoever – for getting any of the three wrong… ever. When you do, experienced investors will notice, and the poor attention to detail will impact the Company’s credibility.
When it comes down to it, public companies – from a buy-side perspective – are really about: integrity, transparency, accurate/timely financial statements, and meticulous attention to detail.
Before hitting the “send” button on your next earnings press release, read what’s set forth through those 4 lenses. If you have any questions about whether you’ve met all of those hurdles…don’t hit “send.”