Risk & Compliance

CFOs Put Away Their Crystal Balls

Citing the uncertainty in the U.S. economy, more companies are shying away from providing quarterly earnings guidance.
Sarah JohnsonApril 21, 2009

Fewer CFOs will be offering investors short-term guidance during this earnings season. The heavy fog that settled into the U.S. economy more than six months ago has made it harder for them to see how 2009 will shape up and gives them an opportunity to end, at least temporarily, the pressure to provide quarterly earnings-per-share forecasts.

In recent years, business groups have tried to stem the demands by investors, analysts, and CNBC commentators to provide to-the-penny predictions about how their next quarterly financial results will turn out. The U.S. Chamber of Commerce, for instance, has long advocated for companies to wean investors away from the volatility inherent in quarterly earnings guidance and get them focused on long-term growth instead.

Since September, when the credit markets closed up and the economy’s future began to appear bleak, an increasing number of companies have shifted their guidance policies by stopping quarterly earnings guidance and trying to focus investors’ attention onto other metrics, such as expected revenue, same-stores sales, or capital expenditures. Some are instead providing earnings guidance only on an annual basis.

CFOs like Robert Rivet of Advanced Micro Devices have reminded analysts during recent conference calls that “the current environment is pretty murky, visibility is pretty low.”

Moreover, it’s pretty ugly. As major companies began sharing their latest earnings results over the past few days, their figures have fallen below market expectations. Merck, for instance, saw its first-quarter profits fall 57% compared to last year, reporting $1.4 billion in net income for Q1 today. The drug company has also reduced its 2009 revenue range to between $23.2 billion and $23.7 billion. While DuPont emphasized today that its Q1 earnings of $488 million, or 54 cents per share, were in line with previous quarterly guidance, those numbers reflect a 59% fall in profit. The chemical giant has likewise cut its full-year 2009 earnings forecast to a range of $1.70 to $2.10 per share.

Companies that have announced plans to stop quarterly earnings guidance or scale back on detailed guidance for other metrics in recent months include Aetna, Cogent Communications, General Electric, Ingram Micro, Intel, Knoll, Nexstar Broadcasting, Unilever, and Universal American. In a survey released earlier this month, one-third of 614 corporate investor-relations professionals reported their companies’ guidance polices have changed because of the financial downturn. Most of them have either limited or eliminated guidance, although a few reported that they have actually increased the forecasts their companies provide, according to the National Investor Relations Institute.

“Companies are not sure as to what is going to happen,” explains NIRI president and CEO Jeffrey Morgan. As predictions vary over whether the economy will recover this summer, this fall, or not until 2010, companies are reticent to publicize detailed forecasts.

Remarking last week on CNBC why Intel was not specifying its future revenue numbers, and instead saying revenue would be “approximately flat to the first quarter,” CFO Stacy Smith said the economic uncertainty restricts the information his company can share with investors. “It’s not clear what the shape of this [economy] looks like over the course of the rest of the year, and that creates a level of variability around putting a specific point estimate out there on revenue,” he said.

While it’s certainly true that the economy is murky, “Others may have used the financial crisis as an excuse to duck a practice that they have been considering cutting for some time,” writes Broc Romanek, editor for TheCorporateCounsel.net and a former counsel for the SEC’s corporate finance division, in a recent newsletter about investor relations.

In an alert sent to its clients earlier this year, corporate law firm Bass, Berry & Sims advised companies not to commit to resuming guidance or give any indication of when that could happen. But if the company chooses to stop the forecasts for reasons beyond the financial crisis, such as because of a belief that investors are too reliant on short-term goals, then it should let investors know the decision is permanent, the firm noted.

NIRI’s Morgan recommends that companies be upfront with investors about changing guidance policies, and to do so in advance of investor conference calls. The decision should “not be a kneejerk reaction” to negative financial results, he adds.

Most companies that have made recent announcements haven’t specified when or if they’ll continue issuing guidance. But other companies, such as Intuitive Surgical, have made it clear that guidance is not gone forever. “Rather than give you guidance that has a high degree of uncertainty, we’re just going to suspend guidance at this time, and when visibility improves, we plan to resume giving you guidance,” CFO Marshall Mohr told investors last week after acknowledging previous sales forecasts for Q1 were off by about 10%.

NIRI is in the process of surveying its membership about current guidance practices; the results for its annual report on the subject won’t be ready until May. Last year, of the 64 percent of IR professionals who reported giving earnings guidance, nearly half were giving quarterly earnings forecasts — a number that will likely decrease for NIRI’s next report.

Still, the practice of giving any kind of earnings guidance had been increasing in recent years despite business advocates’ hopes, such as the U.S. Chamber of Commerce, that companies would band together to stop investors’ expectation for on short-term guidance. However, the companies that do stop the practice risk letting outside analysts do the predictions for them and feeling pressure to meet those targets or having to explain every three months why they haven’t met them.

The practice of predicting quarterly guidance became commonplace in the mid-1990s, following the passage of the Private Securities Litigation Reform Act, which offers companies certain liability protections when stating projected performance.