All CFOs find themselves grappling to some extent with economic challenges as a result of the COVID-19 crisis. Effective cost management is now a matter of existential importance for many companies, as revenue will be challenged and unpredictable for the foreseeable future. Communicating this new, uncertain outlook to investors remains equally challenging for CFOs and their investor relations teams.
From January to March 2020, the number of companies that withdrew earnings guidance soared over 20 times, from eight to 198
“CFOs are dealing with a range of impacts right now, from quantifiable impacts within range of their original guidance to the need to completely withdraw guidance and start from scratch,” says Stephen Adams, Directory, Advisory, Gartner. “Mentions of COVID-19 on S&P 500 earnings calls increased greatly in the first quarter of 2020. CFOs should understand some common best practices to follow to ensure their communications don’t make things worse.”
These references to COVID-19 fall into three broad camps with regard to their earnings guidance: Those still assessing the situation, those quantifying the impact on original guidance using a range, and those that will miss or need to fully revise guidance.
In S&P 500 earning calls in January 2020, just 28% mentioned COVID-19. By February, over half (53%) referred to the coronavirus, and in March that number reached 88%. Notably during the period from January to March 2020, the number of companies that withdrew earnings guidance soared over 20 times, from eight to 198.
“This data suggests that first, we are dealing with unprecedented levels of uncertainty in the marketplace,” says Adams. “Second, it says that finance teams are, by and large, incapable of building a reliable forecast of business performance. Lastly, it suggests that corporate leaders aren’t willing to stick their necks out and get punished for the uncertainty in the market.”
Corporate leaders will need to update their investor communications practices
For the many organizations facing earnings guidance revisions, Adams shares best practices for communicating new information to investors.
- Do not rush. Ensure you are confident in the revised numbers you provide the investment community, as a second revision tends to provoke a much more negative reaction than just one.
- If the revision comes intra-quarter, make the announcement by press release. If full-year guidance update is needed and the timing is suitable, the announcement can be made on the earnings call.
- Feel free to use a range or minimum value. Investors understand that corporate leaders don’t have a crystal ball and this unprecedented situation makes pinpointing expectations nearly impossible.
- Avoid superfluous content. Acknowledge the headwind and clarify how it’s impacting numbers. Investors appreciate brevity.
- Immediately following the announcement, speak with your sell-side analysts and top shareholders to explain the impacts in greater detail.
While organizations facing an earnings revision need special guidance, Adams notes that nearly all corporate leaders will need to update their investor communications practices as a result of the ongoing economic uncertainty.
“The economic environment is difficult enough without compounding challenges by issuing poorly conceived investor communications,” says Adams. “Corporate leaders addressing the investment community should align their messages with those of PR and marketing teams, avoid making bold short-term forecasts and clarify mitigation efforts that the organization is taking to survive this crisis.”
Adams notes that this is not the first disease outbreak that has impacted investor communications, nor is it likely to be the last. He notes that the organizations that excelled in investor communications during previous crises excelled in five key areas:
- Developed a crisis response team early.
- Made a public statement quickly.
- Maintained consistent messaging across the enterprise.
- Closely monitored impacts across the supply chain.
- Gave periodic updates to investors to keep them informed through earnings calls, press releases, teleconferences and one-on-one updates.
The COVID-19 crisis is an uncontrollable event for most organizations, but they do have control over how they address the situation with investors — and by doing so, have at least some influence over how their investors will react.