Investor Relations insights
“It is important for every company to have a policy on guidance, including the level of detail and the frequency of updating it”
Providing guidance in the current market requires a tailored approach
Navigating the minefield of guidance has become increasingly complex during COVID-19. Lois Hutchings summarises the role and purpose of guidance and explains how to use it effectively in the current market
- There is no ‘one size fits all’ approach to guidance, as different business models will suit different levels of visibility.
- Some companies may wish to focus on revenue targets, others should focus on KPIs or scenario outcomes.
- The COVID-19 pandemic has highlighted the need for companies to assess their forecasts, both in terms of short- and long-term impacts.
A company’s public guidance to the market is simply the latest expectations for financial performance in the upcoming reporting period, full year or medium term. Issuing guidance is not a legal requirement but it has become common practice, as it substantially improves visibility for investors and analysts.
Drawing on the guidance, analysts will reach their own conclusions about the company’s value and the visibility in market forecasts can help support a higher valuation.
Gauging the right level of detail for guidance
Across our client base, there are a number of different approaches to guidance, to suit different business models. Clearly, the correct level of detail to disclose depends on the degree of visibility regarding forward-looking revenue and costs. A company with predictable, recurring revenues (eg, a subscription model) will be in a very different position to one whose results can be volatile or lumpy. Indeed, the main downside of providing guidance is that predicting earnings accurately can be difficult and time-consuming.
Nonetheless, it is important for every company to have a policy on guidance, including the level of detail and the frequency of updating it. This provides clarity to the market, avoiding misunderstandings or ‘reading into’ any inclusions or exclusions. Analyst models will anticipate the content of the updates and providing consistent information will reduce unnecessary questions.
The timing of updates is key for two reasons. Firstly, this can set a precedent for further updates in the future. And secondly, should a company’s forecasts drift from market expectations, it is essential to update the guidance to realign expectations.
Styles of guidance
In terms of types of guidance, there are a number of different options available, such as:
- Specific revenue or profit targets – often used by companies which have strong visibility over recurring revenues and limited business disruption.
- Ranges for targets – a good approach when there are uncontrollable impacts on performance which are hard to predict, such as seasonality.
- Scenario outcomes – over the past six months, this has been particularly helpful, given the high level of uncertainty and potentially very different financial outcomes due to business disruption.
- KPIs rather than absolute figures – allowing investors and analysts to overlay their own assumptions on market conditions into a ‘simple model’ which then gives the financials as an output.
Peer group analysis is also a consideration. Giving too little information versus others in the sector