Six common earnings pitfalls and how to avoid them
10 October 2019
By Marla Hurov
All IR roads lead to earnings. It’s the single most critical event to make a strong impression with the Street and frame expectations for investors — from presenting a company’s performance, to reinforcing forward-looking strategies and addressing investment community concerns. At the heart of it all is the IRO, who contextualizes and gives meaning to a company’s numbers, preparing management for delivering a smooth earnings call.
While it might be challenging to anticipate unforeseen circumstances during a call, like a technical glitch or your building’s fire alarm going off, there are a few avoidable mistakes that many companies make during earnings. Here are six pitfalls to watch out for, along with a few ways to proactively prepare your team and set your company up for a successful earnings call.
1. Not being honest about bad news
Nobody likes to be the bearer of bad news. CEOs and CFOs obviously want nothing more than to share positive updates with investors. But not every quarter can be a winner. While it might be tempting to avoid communicating certain issues or problems, ultimately, management teams inspire the most trust when they’re sincere and direct. Don’t try to hide or deny that there’s a problem. It’s critical to frame market perception, before the investment community comes to their own conclusion.
Instead of taking a defensive stance, articulate the problem in a candid and direct way, and then explain your strategic solution and the next steps for getting there. Controlling the narrative allows you to avoid misperceptions and helps assure the investment community that management is transparent, and IR is all about building trust with investors and analysts. It’s also important to contextualize your statement in light of past statements. After all, it’s the longer-term value appreciation that means the most.
2. Being reactive about value gaps
At the end of the day, analysts don’t have access to a company’s complete information set. This can often result in a “value gap,” or in other words, a perception gap between management and the Street about a company’s potential value. The key is to be proactive in reaching out to the sell-side to understand any misperceptions on the Street and addressing value gap issues in your earnings call prepared remarks.
The last thing you want is management arguing valuation with analysts. That’s akin to analysts telling management how to run their business. Instead, focus your dialogue on identifying any gaps in perspectives on fundamentals and opportunity sets, and then discuss value drivers directly — supported by hard facts and data. Don’t be afraid to engage analysts and investors on value gap issues. The secret is pointing to value-creating actions, in terms of broad opportunities (without, of course, crossing any material disclosure lines).
3. Refraining from earnings guidance
While beating quarterly projections is great news and an easy story to tell, companies often fail to take the future implications into account. It’s important to detail what drove the upside results, whether it was the market or execution, and if it was a one-time item or sustainable. This will help control expectations and ensure analysts don’t get overly enthusiastic and raise forward estimates. Above all, it’s better to exceed realistic growth expectations than miss unrealistic goals.
Management needs to carefully consider the impact of a good quarter on annual guidance. But tread lightly. It’s essential to stay realistic about future performance and the inherent risk factors. You don’t want to confuse the message or indicate that your future results will deviate from expectations. In fact, making any mention of Street expectations is often discouraged. Focus on your own guidance, rather than giving credence to consensus estimates.
4. Being unclear about strategic shifts
When it comes to messaging, it’s important to build credibility not only through transparency, but also by showing that you’re delivering consistently on your commitments. This is especially true when you’re introducing a corporate strategy change and helping investors understand how you will be measuring progress against your goals. Be realistic about nonlinear progress and communicate if it’s going to be three steps forward, two steps back.
It’s also imperative to be prepared with clear and straightforward answers to likely analyst questions. Management needs to be able to succinctly explain and provide the context and thought process behind the strategic shift — why you did it, why you think it creates more value, who owns the strategy, and again, how you’re measuring success. Thoroughly prepare for the most likely questions and practice the responses. The more comfortable you are in answering the questions, the more confidence you’ll project in your strategy and execution.
5. Presenting too much information
When it comes to words and graphics per slide, less is more. An excess of graphs and/or bullet points can be confusing. While images, graphics, and animation can help illustrate your company’s investment thesis, too many can overwhelm your key investment messages. Likewise, excessive detail makes it harder for your audience to synthesize and digest the content, and ultimately see your company’s investment opportunity. It might also distract investors and analysts from listening to management explain how your company will drive shareholder value.
The secret to a successful presentation is showing a clear narrative, with a focus on your corporate growth strategy and initiatives. Make your presentation concise, using the most essential information for each slide, with simple and specific points that clearly support your message. Focus on one major takeaway per slide and drive that home via chart or data. Too many takeaways per slide and you’ll get none across. Then weave your slides together for a comprehensive “story” — about how your business will strategically grow over the long-term and why an investor should consider investing in your company.
6. Underestimating Q and A preparation
Q and As are likely the most critical part of the earnings call. There’s not much room for “winging it.” The reality is that if a CEO sounds inarticulate or flustered, investors and analysts could interpret it as insufficient business knowledge or a deeper concern about the business area in question. This is becoming more and more apparent with the influx of AI tools used by investors to monitor voice and body language during earnings calls and investor presentations.
Management needs to be able to respond to questions as clearly and concisely as possible. It’s essential to try to anticipate questions, especially the most difficult ones. Do your due diligence drafting a Q and A “cheat sheet,” with talking points and performance metrics. Developing a comprehensive Q and A sheet will also ensure consistency between management’s responses and how your team replies to questions after the call.
Ideally a few weeks before the earnings call, reach out to target investors and analysts about issues they would like management to address. If you know which analysts will be on the upcoming call, review their prior reports, forecasts, and earnings call behavior to gauge their areas of interest and anticipate questions. Even consider formally surveying participating analysts ahead of the call. Another critical practice is tuning into the earnings calls of your peers. Review the event transcripts of your competitors to gain insight into the questions they were asked — especially those related to trends and issues in your sector. This is also fundamental to understanding how your earnings data fits into the context of the broader industry. Ultimately, knowing how your peers position themselves on key issues will also help you differentiate yourself.
Interested in learning more about earnings best practices and new approaches? Join us on Tuesday, October 15, 2019 for a webinar on Everything you need to plan stress-free earnings.