Guidance can be a powerful thing: Mastering communications across the earnings cycle

Missing expectations ‘can be brutal,’ said Melissa Otto, head of technology, media and telecom research at Visible Alpha, now a part of S&P Global Market Intelligence, talking about a recent stock ‘mismatch’ that saw a company deliver 8 percent growth where 11 percent was expected. That company took a 20 percent hit to its share price.

Otto was sharing that example as part of an IR Magazine Webinar titled How to master your communications across the earnings cycle, alongside Mark Kinarney, vice president of IR at Lantheus, and Michael Nikov, IR manager at Definity Financial. The panelists talked in detail about how they manage communications quarter by quarter and how communications fit in around key conferences or Labor Day weekend, for example, giving examples of the depth of management involved and how often they might hold an investor day.

On the topic of missed expectations, though, Otto – a former buy-sider – added that avoiding such a situation or managing the fallout all comes down to deep company intelligence: ‘Understanding what is driving the stock, what is getting baked into expectations – why and how that is affecting the longer-term assumptions of the valuation story – is absolutely critical,’ she said.

Then it all comes down to managing those expectations, she continued, using AI as an example: ‘Everybody’s talking about AI. So if AI is suddenly attached to your business model, people are going to start adding zeros to your estimates. As an IR manager, that’s a nightmare, because you have to meet or beat those expectations. When that becomes unrealistic, the IR manager has to reel that in [and] control the message.’

Guidance is very powerful

Kinarney said that while he’s lucky to have never had to tackle missed numbers at Lantheus, he maintains the importance of setting guidance – ‘even if the Street is disappointed with the guidance you set’. What is important, he stressed, is that guidance is not over-ambitious: ‘If you report numbers and you miss your guidance – even by a little – you’ll get punished much more [by the Street than if the guidance was lower]. It’s a credibility standpoint.’

Nikov told listeners he had always done yearly guidance. ‘As long as it’s a true and honest view of what the business can actually do longer term, I think [guidance is] very powerful,’ he said, adding that it is also about building up ‘an important’ track record: if you have a Q1 miss, for example, will the yearly estimates be unchanged? It’s important to understand the impact any missed expectations are having within the investment community, he stressed.

Something he likes to do is to ‘just have a conversation with our analysts’ to find out what they’re telling the company’s investors. He asks analysts: ‘When someone calls you up and asks, Hey, what do you think about Definity?, what do you say?’ That feedback is helpful in understanding the narrative on the buy side but it also serves a purpose internally, showcasing the efforts of IR as well as helping to refine messaging.

A question from the audience took the guidance conversation into longer-term targets.

‘It really has to come from your understanding [of] what’s driving the company [and] what metrics are going to be most helpful for your analyst,’ responded Nikov, adding that you should have a ‘very honest and frank conversation internally’ about what goes into any longer-term plan or forecast. ‘Maybe even do a model yourself and just try to figure out, using public data, what the intrinsic value of your stock is and where the pain points are,’ he suggested, pointing out how such modeling can help IROs narrow consensus, too.

Boring or dynamic

While Nikov had earlier noted that his firm operates in a ‘boring’, reliable sector, Lantheus is at the cutting edge of radio-pharma, which results in a different approach to longer-term outlooks. Investor days are typically where the firm will do a longer-term look ahead, with Lantheus putting one on every couple of years or so. ‘You have to time it right, though,’ advised Kinarney. ‘You can’t just make it ‘advanced earnings’: people are going to fly in and you want it to be a worthwhile event.’

Given the fast pace of change, he explained that the company will provide a market outlook for the current year as well as through the end of the decade – with as many as two updates a year: the first at a key industry conference each January and potentially a second after Q2 results.

What each approach highlights is Otto’s original point on understanding the drivers of your valuation. Without that, you simply can’t be the master of your earnings cycle.

To view an on-demand version of this webinar, which was sponsored by Visible Alpha, on BrightTALK, please click here.