When it comes to an earnings process makeover, timing is everything
If your earnings process feels redundant, inefficient, or in need of a new approach to resonate better with analysts and investors, you should consider an earnings process makeover. And right now is the perfect time to set the stage for a revamped process you plan to roll out in fiscal Q1.
Investors don’t like surprises. And it’s generally not a good idea to deviate from normal practices, metrics, and methods of disclosure in the middle of a fiscal year. You can use your upcoming 2022 year-end earnings call to preface any significant changes for 2023, and give your investors time to absorb, adjust to, and perhaps even eagerly anticipate your new earnings process approach for the new year.
5 earnings process considerations for 2023
If you are going to change things up, keep these key points in mind to craft a process and materials that work for your company and its stakeholders.
1. Time is money. Companies that put out robust earnings releases and then spend an hour on the earnings call rehashing the same details are probably not making the most effective use of anyone’s time. Ultimately, your goal for the earnings process should be to ensure the Company narrative is communicated clearly and efficiently.
Earnings releases that are carefully crafted to deliver a compelling and comprehensive story while facilitating a quick and easy read are key to achieving this goal. Using highlight bullets at the beginning of the release is a good way to ensure the most important details are read immediately. As a rule of thumb, aim for no more than three to five highlight bullets in the release. Ideally, there should be some consistency in what these points cover each quarter. For example, many companies dedicate two points to cover sales and EPS. The remaining points can be used to highlight noteworthy bright spots specific to the period, such as strong orders, reduced leverage, robust cash flow, or solid working capital management.
2. There is no one-size-fits-all earnings release format. While succinctness is a hallmark of any good earnings release, there is more than one effective way to deliver important information efficiently. Different companies choose different approaches, all of which can be equally effective depending on management’s and investors’ preferences. Here are three different formats that work well:
- Short and sweet earnings release, saving the commentary for the prepared remarks. Adient takes the three-to-five key points guideline to heart, featuring only four bullet points in its 2022 fourth quarter earnings release that make up the entirety of the release. Management shares additional details on the earnings call through robust prepared remarks.
- Detailed earnings release followed by more concise prepared remarks and extra call time for Q&A. Other companies take the opposite approach, choosing to put the details in writing and reducing the commentary on the call. This allows for more call time to address sell side and investor questions. Analysts and investors can spend time in advance of the call to unpack the provided information and develop follow-up questions for diving deeper into pertinent issues. Following the outlook section of the release, MillerKnoll dives into the details on its quarterly performance and strategy. The language in their release is similar to what would typically be included in prepared remarks.
- Brief release with accompanying shareholder letter. A third option is to create a detailed shareholder letter that usually works in tandem with a brief release. Companies that choose this format often use the release to disclose critical financial metrics and then add more facts along with supporting color and explanation in the letter, which is typically written by the CEO and is often conversational in nature. Calls can then be used for brief prepared remarks and more in-depth Q&A. For example, Carvana announced its third quarter 2022 results in this short release featuring three highlight bullets and a quote from the CEO. The release directs readers to a shareholder letter for detailed results and commentary. DoorDash also favors this approach, and its 14-page shareholder letter includes detailed financials along with an in-depth review of the third quarter, financial and operational highlights, and a financial outlook section.
3. Investors and analysts may be looking for new or different metrics. Whichever earnings release approach you choose, be sure to give as much attention to what you’re disclosing as how you’re disclosing it. The beginning of the fiscal year is the right time to introduce new metrics or retire old ones which may have become less relevant to how investors and the sell side measure your company’s performance.
The best way to know which metrics and business drivers are currently most pertinent to your audience is to conduct a perception study. Among other valuable insights, a good study will determine if investors and sell siders have the information they need to make decisions, or if there are other metrics or KPIs that would be helpful.
It’s also best practice to keep tabs on peer disclosures. Find out which metrics others in your industry are reporting to see if there are any gaps in your KPIs. If you do decide to make updates, again, give your investors a heads up on your year-end call and plan to begin reporting against the new metrics in Q1.
4. Guidance changes can lead to more favorable and accurate estimates. If your company is consistently missing consensus because of inaccurate consensus estimates, you may need to rethink your guidance practices. Providing the right building blocks can help carefully steer the sell side toward more accurate and realistic numbers. Qualitative guidance can also help the sell side more accurately model the business. Consider including reminders of seasonality or a recovery that will pick up as the year progresses.
5. Preparation always pays off. If you are debating changes to the earnings process, the more work you can do in advance, the more smoothly the transition will go. For example, if you are tightening up prepared remarks, consider creating a supplemental slide presentation to help facilitate, clarify, and streamline the message. Visuals and graphs can make the data pop, allowing the remarks to focus on impact instead of rehashing the numbers. The key here is for the remarks and the visuals to supplement rather than repeat each other.
Another effective tactic is to pre-record prepared remarks. This helps executives stick to the script, perfect the tone, and ensure points of particular significance are properly emphasized. It also helps eliminate the nerves factor.
At a minimum, make sure investor relations always has a seat at the table during monthly and quarterly business reviews in order to stay abreast of company performance. It’s a great idea to reserve a few minutes of each business review to specifically discuss business results and how they will be framed in external conversations so the IR team can begin preparing materials, while also training your business leaders to think about their results with an IR lens. Ensuring management and investor relations are on the same page facilitates a smooth earnings process and promotes the success of any changes you are making to what and how information is presented and released.
An updated earnings process can be well received, if you get the timing right
Whether you want to make major changes to your earnings release process or minor tweaks, now is the time to plan your approach and give investors and analysts a heads up. Tell your stakeholders what you are doing and why. Then unify your entire team for a successful roll out in Q1 2023. If you have questions or need help getting your new process right for the new year, give us a call. We can assist in creating an earnings release process that sends the right message in a way investors and analysts will appreciate.