The earnings release is one of the most important tools that public companies have for communicating with investors, analysts and the marketplace. Unfortunately, the format, style, content and, yes, the effectiveness of earnings releases vary widely – causing many companies to miss opportunities to leverage this communications vehicle. According to Dix & Eaton’s “Best Practices for Quarterly Earnings Releases,” an effective release:
- Encourages transparency and clarity
- Facilitates understanding
- Improves information flow
In today’s hyper-sensitive economic environment, it is critical that earnings releases not only communicate results, but place those results – and market conditions – in the context of the company’s long-range strategy and outlook. In other words, we recommend that companies address their shareholders like bondholders, including baseline viability measures such as cash flow from operations, access to credit, and financial stability and strength.Although turbulent economic times may make the practice of providing traditional earnings guidance more daunting, companies should not use this as an excuse to stop the practice altogether. Dix & Eaton recommends that companies continue to provide guidance on future results, even if it means outlining their assumptions and offering caveats in greater detail than in previous quarters. Companies can also add flavor to traditional guidance by speaking to end-market trends and leading economic indicators. And, as in any market cycle, if a company is willing to provide guidance on the conference call, it should be included in the release as well.
Although they are not one size fits all, Dix & Eaton best practices address both the format and content of earnings releases. Format recommendations include using Plain English; separating long releases into sections; providing the same information quarter to quarter; leading with the most important information; and using descriptive headlines and subheads to guide investors, employees, the media, etc.
Content recommendations include:
- Discussion of Quarterly Financials: Explain the key drivers of results, provide segment operating results and review any significant unusual charges/gains/losses (in the release and the conference call). Also, consider providing sequential quarterly comparisons to highlight key performance trends that may not be apparent from year-over-year comparisons.
- Senior Management Quotes: Utilize quotes attributed to the chairman/CEO/president to put current results in the context of the company’s goals and/or strategies, not simply to state or restate results. For the greatest impact, use quotes to try to answer this question: “What is management doing to maximize results in the current situation?” And, speak to future opportunities and outlook.
- Other Measures: Consider providing and explaining both financial and non-financial measures that help tell a unique story. Examples include gross profit and gross profit margin, SG&A, cash flow, capital expenditures, R&D spending, order backlog, stock repurchase program and intangibles (such as new products, customer/project wins, sustainability, management changes, patents and awards).The earnings release is a valuable tool, no matter what the economic environment. But in today’s world, what you say, how you say it and even what you don’t say are more important than ever. Let best practices be your guide.