Earnings Press Release: 10 Best Ways To Really Ruin It - Part 1
Earnings releases are the backbone of the financial year of a listed company and much more than just another disclosure requirement. They play a critical role in supporting your valuation over the long term.
I have written over 500 earnings press releases for companies of all sizes and industries across the world. I identified at least 10 fatal mistakes that are guaranteed to ruin your next results announcement.
Ignoring the power of sequential analysis is the first such pitfall in my list.
Sequential analysis is about comparing your financial and operational performance in the fourth quarter to that of the third quarter, or the earnings of the first half year to those of the second half in the previous year. And so on and so forth. Yet most companies all around the world still focus on the -year-on-year analysis, that is looking at their latest quarter and comparing it to the same period in the prior year. While companies are legally required to ensure the comparability of data, nothing prevents them from looking at their numbers the way analysts and investors do and commenting on what these numbers are saying.
I discovered the power of sequential analysis the hard way, twenty years ago: one of my clients in the automotive industry was reporting what management thought was a good set of full year numbers, bang in line with expectations. We had put a lot of work in the press announcement that had been dutifully released before market hours. But, as the analyst meeting was in progress, with the CEO and CFO on stage, a whisper ran through the room: the shares were tanking despite the good announcement, taking us by surprise. In these early days of the internet, it took us a few minutes to find out the reason behind the sell-off: the leading sell-side analyst on the company had just issued a report focusing… on the second half of the year that was being reported upon. Indeed, the company’s results for the full year were in line with the objectives set, but they were made of two very different-looking semesters. The analyst wrote that a poor second half indicated a weak beginning to the new financial year. We just had not seen it coming.
It is one of the very few benefits of the Covid-19 pandemic that started rocking the work a year ago: it makes little sense to try and compare 2020 with 2019, unless it is for the better. Like, your profit margin is back to pre-Covid 19 levels or above. The sequential analysis then allows you to emphasize resilience in only a few quarters. While management is most certainly aware of the gradual recovery, the glitch often comes from the fact that internal reporting systems are usually not geared towards producing it automatically. They are structured to assess the performance against the prior year period and budget. A limited understanding of disclosure requirements may also cause companies to miss the communication opportunity: I cannot think of a jurisdiction that actually bans sequential analysis, as long as the year -on – year metrics are provided and the comparability of data effective.
Two recent examples come to my mind: a NYSE-listed media & entertainment company asked me to provide recommendations on how to improve their Investor Relations presence. It had just reported a 7.0% decrease in third quarter 2020 net sales versus the prior year. When I did my own number crunching, I quickly realized that these very third quarter earnings were actually up 7% versus the second quarter and were showing growth for the third consecutive quarter. Had the IR teams used these lenses, the message could have been more positive.
The second example comes from one of FINEO’s clients in sub-Saharan Africa that was reporting first-half results for the period ended 31 December 2020. The first draft that was sent to me mentioned a 30% decrease in revenue versus the year ago period and heavy after-tax losses. I took a deep dive into the financials and suggested to highlight the 1.5% revenue increase over the second half of the previous year, including a gradual recovery in the second quarter over the first, the double-digit EBITDA margin, and much lower losses compared to the previous 6-month period.
I maintain excel spreadsheets with the quarterly and semi-annual KPIs for FINEO’s clients to supplement their internal reporting, showing year-on-year and sequential comparisons, in percentage terms and absolute values. This allows me to save a lot time for my clients by spotting messaging opportunities early on in the earnings release production process, while creating the graphs that will best support the narrative.
More fatal mistakes (and how to avoid them) tomorrow….
If you want to make sure you don’t miss out on the next items in my list of 10 fatal mistakes (and how to avoid them), I will be happy to send them to you via email. Simply click here to register. Don’t worry, you will be able to unsubscribe at any time.