Risk & Compliance

The Last Quarter of the Guidance Game

More companies are deciding to issue earnings updates less frequently.
Helen ShawMarch 17, 2006

The recent news that Pfizer is considering walking away from issuing quarterly earnings guidance is only the latest evidence of what may become a sizable exodus. Indeed, the trend of abandoning frequent guidance has been gaining momentum. Just this year, Motorola, Citigroup, and Idexx Laboratories have announced plans to stop providing quarterly guidance. And a handful of companies, including GM and Google, have eschewed guidance altogether.

In January, Motorola CFO David Devonshire announced during the company’s earnings conference call that starting in July, it will continue offering sales guidance it would no longer provide earnings forecasts. “Other technology companies have taken similar steps,” he noted, “and many have never provided to begin with earnings-per-share guidance.”

Instead of citing EPS numbers, Motorola will also offer industry-specific and company-specific commentary to provide a picture of corporate performance, he said, adding that the nature of that information will evolve over time, he said.

Other companies are limiting the frequency of their guidance updates and offering other information to the markets. For example, Paul Otellini, Intel’s chief executive officer, announced on January 17 that the chipmaker would stop providing mid-quarter updates but continue to issue yearly and quarterly guidance. Further, the company will add annual revenue and spending projections to its outlook each January.

The trend of giving less guidance represents a reversal in corporate reporting. Companies began privately communicating their earnings forecasts to large investors in the 1970s. The issuance of public, quarterly guidance became more common after the passage of the Private Securities Litigation Reform Act of 1995. The law, which was supported by public Silicon Valley start-ups and the then Big Six accounting firms, protects companies from liability for statements about their projected performance.

The lawsuit protections moved companies to unleash a flood of information to a market hungry for guidance. In 1994, only 92 out of 4,000 companies with revenues over $500 million provided earnings guidance at least once, according to a study by McKinsey & Co. By 2001, that number had grown to about 1,200. Then—with some companies starting to discontinue guidance in the late 1990s—the surge in updates leveled off.

Now senior corporate managers and corporate-governance activists are debating the pros and cons of issuing or scrapping guidance. Some say discontinuing updates boosts investor confidence in corporate accounting, since it removes the temptation to rearrange the books to meet earnings targets. Others criticize tight-lipped companies for keeping owners in the dark, highlighting the importance of providing as much information as possible to the marketplace.

To be sure, investors can extract a toll from companies who remain silent about their future prospects. Google, which has never issued forecasts, experienced a 7 percent drop in its stock price on February 1, when its fourth-quarter results didn’t meet the markets’ expectations. Some have argued that if the Internet search engine had issued forecasts, expectations would have been more realistic, according to McKinsey.

A number of companies, however, have managed to stave off negative investor reactions by putting a positive spin on their guidance cutbacks. In 2002, for instance, Coca-Cola explained that it stopped updating the market on its earnings projections as a way to focus on the company’s long-term performance. Even though investors had been slamming Coke for its alleged lack of business progress and its declining stock price, they didn’t react negatively to the news that no guidance would be forthcoming.

Similarly, when Intel’s Otellini cited the company’s intent to focus on the long-term, the market seemed to accept that explanation. The company’s stock closed only pennies lower on the day Intel announced it would curb the frequency of its guidance.

Indeed, there’s no evidence that frequent guidance positively affects valuation multiples, boosts shareholder returns, or curbs share-price volatility, according to the McKinsey study.

At the same time, the practice of issuing forecasts does produce indirect costs. When it stopped providing guidance, Coke cited the intangible expense it incurred when its management focused on short-term goals to meet its own publicly stated earnings expectations. In the face of such costs—and of the finding that they get little in return for them—more senior executives might start letting the market draw its own conclusions about the fate of their companies’ earnings.