There are several reasons a company will preannounce its financial results, including giving the Street a preliminary, high barometer of what the company’s next earning quarter may be like.
A full earnings release and conference call is usually preceded by a pre-announcement in the weeks preceding. Management may also want to send preliminary results to investors before investor days, investment conferences, and large acquisitions. This helps the conversation of current financials without breaking Regulation Fair Disclosure.
But the question is more complex than whether to preannounce. There are many considerations in deciding which information to include or whether to produce an early release.
What Justifies Preannouncing Earnings?
We decided to conduct an AlphaPro search to gain an overview of the current trends and the justification for the early announcement. AlphaPro combines sophisticated linguistic search and natural language processing algorithms, allowing research experts to search, browse, and analyze business filings and other disclosures for crucial data points.
We examined 59 preannouncement announcements published in the United States as a sample.
We looked at:
- The justification given for making the announcement
- metrics supplied by the businesses, the tone of the announcements
- Whether the firms provided/updated guidance
- Reconciliation tables for metrics pertaining to non-GAAP guidance are present (or absent).
- The depth of the companies’ discussions beyond just providing financial data
Among our sample:
- 37% made it clear that they were modifying their prior advice, which is why they released preliminary findings.
- Although 19% of them had not given any advice, our data revealed that they had either exceeded or failed analyst expectations and were likely alerting the Street.
- 17% preannounced in connection with an acquisition announcement
- Prior to an investor event (investor day, 3%); conference presentation, 9%; 12% released the release
The remaining 5 percent of the sample did not provide any insights on the catalysts causing the release.
Consensus: Where is it?
Yet, why didn’t any of the companies that didn’t make or beat the Street just cite the analysts’ consensus expectations?
The reason for avoiding any mention of analysts’ estimates of earnings, whether reference is made in a final earnings release, a results preannouncement, or otherwise by management, is best practice.
- With the management’s thumbs up on the analyst estimates, what are you telling analysts by commenting favorably? What happens the next time an analyst changes his or her forecast? Will management repeat something from there every time?
- While management still emphasizes the consensus, this breeds an expectation that management will update analysts’ estimates in the future. This no man’s land occurs if management does not clarify whether it intends to respond to future estimate revisions. Investors are left to opine themselves whether management still disagrees with the Street consensus or implicitly agrees with it.
Here, the term “guidance” is left unsaid.
Talking about a third party’s estimate (or commentary about the company’s future performance) can be deemed guidance. For companies that already have their own guidance put out, commenting on third-party estimates becomes a potential conflict if consensus and management guidance are not aligned. Companies then violated their policy of not issuing guidance when they opined at all, and now they’ve managed to create the situation they never wanted to find themselves in.
This brings us back to our initial question: Should companies preannounce their financial results? That is why an early announcement in a press release lets companies warn investors and analysts about what is likely to be surprising. It also gives goodwill to the investment community and mitigates the stock against further swings in reaction to an earnings estimate miss. Companies also meet the “broad dissemination” requirement of Regulation FD by placing that announcement in a press release. It allows management to give all investors the same information. It also prevents news from being published to individual third parties accidentally.
Preferred Metrics Mentioned in Preannouncements of Profits
Companies must decide which early financial data to reveal before releasing their financial results.
We’ve divided the metrics the sample firms shared in their preannouncements by category. Within this cohort, the most often used measures were:
- Revenues or sales
- EPS or net income (either non-GAAP or GAAP)
- Profit and Loss
- Cash reserve or operational cash flow every three months
- Gross profit/margin
- Operating earnings or costs
If companies are giving preliminary results, it needs to be information they are confident with.
Even on the theory of accrual accounting, revenue figures don’t tend to change much once a quarter’s over. However, profit is a more complicated calculation than that and is a function of other inputs as well. When disclosing a bottom line in the preannouncement, we believe it is best practice to show a preliminary range of management has some confidence in it so that investors are not surprised twice.
Offering an Explanation
Management will next have to decide which metrics to send and the type and magnitude of messaging supporting the financial data. With AlphaPro, we can even examine some of the messaging companies used to explain the results.
The Significance of Setting
Why wouldn’t firms provide more “color” around the results? The extra detail would be more informative to investors.
We believe it would, but here is a little subtlety. First, we assume that the firm is preannounced to assist investors. That is the best perspective from which to choose to preannounce, but not the only one. Management may issue it only to satisfy the “broad dissemination” requirement of Regulation FD. Example situations where that might be the case would include remediation of selective disclosure of material nonpublic information, pre-equity offering, or M&A transaction preliminary results.
As the numbers demonstrate, though, expressing the figures that way is only one of the standard practices. The other 80% of our sample gave at least some rationale for the companies’ performance. This came as additional color — via outside events, industry trends, and corporate strategies. About two-thirds of the companies provided that color in the form of a quote from the CEO. However, whether the information appeared between quotation marks is not particularly relevant for our purposes. The crucial thing here is to provide an investor with a reason for the advance announcement and a frame of reference for the result.
In summary
The key word here is context. Beyond being a regulatory requirement, a preannouncement is essential to conveying unexpected results and events to investors. It allows the platform’s management to be ahead of an earnings surprise by sending its message first. For this to make sense properly, elaborating on the factors that influenced the company’s performance is vital.