VideoIn the hope of ending the quarterly beat-the-estimates game, more companies are doing away with quarterly earnings forecasts in favor of annual targets.
According to a survey conducted in March by the National Investor Relations Institute (NIRI), 52 percent of companies provide quarterly earnings guidance, down from 61 percent when the survey was conducted last year. Companies that have recently decided to scrap quarterly projections include Motorola, Citigroup, and Best Buy.
Meanwhile, the percentage of companies furnishing annual targets increased from 61 percent to 82 percent. Lou Thompson, president of NIRI, says there is a clear trend away from quarterly earnings guidance. "The expectation is that it will drive longer-term valuations," he says.
When Best Buy announced in April that it would end its practice of giving quarterly earnings guidance, it said that instead it will offer annual forecasts and provide updates whenever it expects a material change in results. The decision came a few months after Best Buy's stock dropped 12 percent when the company missed consensus earnings projections by just 2 cents a share. Starting in July, Motorola will also no longer provide quarterly earnings forecasts, though it will continue to offer annual projections and guidance on its revenue expectations. In addition, it will provide company and industry commentary on performance, said CFO David Devonshire in an earnings conference earlier this year.
Motorola's move reflects a trend toward added qualitative information. "The misconception is that companies aren't providing any guidance at all," says Kara Newman, vice president of strategic research at Thomson Financial, which released a study on earnings guidance in April. Thomson's study finds that 27.6 percent of the S&P 500 provide only qualitative guidance, such as commentary on industry trends and events that could affect sales. Newman says companies are moving away from giving numerical earnings targets or ranges each quarter.
Why? A recent study by McKinsey & Co. shows that firms offering quarterly earnings guidance enjoy no valuation premium compared with companies that do not. Moreover, while some companies might fear that ending the practice could signal trouble and bring a penalty from Wall Street, such fears seem unfounded. When McKinsey looked at 126 companies that discontinued guidance, it found they were just as likely to see higher valuations as lower ones, compared with the market.
Some companies offer no guidance at all. Books-A-Million said in March that it would stop giving quarterly or annual guidance on earnings per share. Google has eschewed earnings guidance completely since it went public in August 2004. Some 16 percent of the S&P 500 now provide no financial guidance. That might not be a bad way to go. It certainly hasn't hurt Google. — Joseph McCafferty
| Talking Points What type of earnings guidance do you provide? |
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| Quarterly only | 13% | |
| Annually only | 43% | |
| Both | 39% | |
| Midquarter update | 1% | |
| As needed | 4% | |
| Source: NIRI survey of 654 IR officers | ||
Passing on India?
Rising wages in India are eating into some of the cost advantages of sending work to the popular outsourcing destination.
Wages have increased roughly 11 percent in each of the past three years with little sign of abating, says Michael Spellacy, vice president at The Boston Consulting Group. In major cities like Bombay and Bangalore, inflation has climbed as high as 14 percent, with worker attrition rates now averaging 25 percent. A full-time worker in outsourced financial services in India earns between $22,000 and $27,000, Spellacy says.
So far companies that have tapped India for business process outsourcing (BPO) aren't leaving in droves, but many are hedging their bets. Companies are diversifying by adding other countries, such as Sri Lanka and the Philippines, to their rosters, says Spellacy. "If you're building a business case for outsourcing based on cost alone," he says, "the case for going to India is reduced." Although wages are comparable in Sri Lanka and the Philippines, companies can negotiate more-favorable deals in those countries because the industry is not as developed there.
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