Risk & Compliance

Welcome Back, Guidance

NIRI survey shows earnings guidance being provided by two-thirds, up from 51 percent last year.
Stephen TaubMay 28, 2008

Earnings guidance may be back in vogue.

Two-thirds of investor relations professionals responding to a recent National Investor Relations Institute survey reported they were providing earnings guidance, reversing a trend away from the practice over several years.

In 2007, just 51 percent of NIRI respondents reported providing guidance, down from 66 percent in 2006.

In addition, 70 percent of NIRI members in the latest survey reported offering broader financial guidance — not including earnings guidance — about in line with 71 percent in 2007. This year’s survey found that 57 percent provided nonfinancial guidance.

Meanwhile, the CFA Institute — which jointly released its own survey with NIRI’s — found that its members approve the use of yearly earnings guidance more than the use of quarterly earnings guidance. Asked whether it is a best practice for companies to provide quarterly earnings guidance, 45 percent of investment professionals said they agreed or strongly agreed. When the same question was asked concerning yearly earnings guidance, 60 percent agreed or strongly agreed.

Why do companies choose not to provide earnings guidance?

About three quarters (74 percent) of NIRI members who do not provide quarterly earnings guidance cited a preference for focusing on long-term company performance. Among CFA Institute members, the main reason for their disagreement is the belief that companies should focus on their long-term performance (91 percent).

CFA Institute members who provide financial guidance (excluding earnings guidance) preferred annual estimates of guidance more than quarterly financial guidance or other options. Asked how they preferred such financial guidance, 46 percent said through annual estimates, with 25 percent preferring quarterly, and 24 percent long-term (greater than one year).

The survey of CFA Institute members also found support for use of yearly nonfinancial guidance on a long-term basis (more than one year), or on an as-needed basis more than yearly or quarterly nonfincial guidance. Asked about best guidance practices, for example, 71 percent responded that they agreed or strongly agreed that companies should provide nonfinancial guidance on a long-term (greater than one year) or as-needed basis. Sixty-five percent agreed or strongly agreed that such guidance was best given on an annual basis, while 51 percent agreed or strongly agreed that such guidance was best given quarterly.

When it comes to receiving guidance, CFA Institute members strongly preferred companies to simultaneously provide guidance on a broad number of financial measurements, with revenue and capital expenditures as the top two (86 percent and 84 percent, respectively).

Trend information that may impact a company’s business and industry-specific information were the top two nonfinancial measurements preferred by investment professionals.

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