Investors hungry for news about their investments can now feast with abandon on la nouvelle quarterly earnings cuisine. The fare is fresh – instantaneously delivered by internet and wire services – and robust – heartily seasoned by SEC regulations, Sarbanes-Oxley, NYSE and Nasdaq requirements, Niri guidelines, and a renewed commitment on the part of public companies to provide the fullest disclosure possible. Indeed, stuffed with income statements, balance sheets, cash flow statements and management’s discussion & analysis statements, today’s corporate earnings announcements have grown quite corpulent.
Some argue that greater girth doesn’t necessarily tantalize. ‘I like to have lots of data,’ confides Peter Arender, vice president and portfolio manager at Acker Finley Asset Management and president of the Toronto Society of Financial Analysts. But the information should be succinct enough so it has meaning, he adds: ‘We need to be careful of not getting fooled into thinking that lots of data equals more meaningful reporting. You can have very long, apparently very complete earnings reports that don’t necessarily tell you what you want to know.’
Public companies can deliver their quarterly earnings ‘without excruciating detail,’ says Mark Aaron, vice president and director of investor relations at Tiffany & Co. People aren’t necessarily looking for 20-page releases that describe every part of the business, he says. According to Aaron, ‘The press release should be only as long as it takes to paint an accurate picture of the company’s performance.’ And one shouldn’t have to be a CPA or CFA to understand the financials.
Still, preparing a fully disclosed earnings announcement so investors can find what they need – and want – is a daunting order. Companies differ. Industries differ. Investors differ in their preferences, too. Some investors prefer to sample only a tidbit or two of quarterly results, while others devour the entire earnings spread with non-stop gusto. As earnings announcements expand, IROs must rethink how they present their results. All investors, from institutional holders to individual investors, from finicky gourmets to ravenous gourmands, must quickly and easily locate the information they seek.
Most earnings releases don’t run uninterrupted from the first word to the last, comments Tom Enright, president and CEO of Canada NewsWire. ‘What we’re seeing now is a mini annual report approach to reporting,’ he says. Companies are capturing the essence with a highlights section on top and then using section headings. ‘This allows an investor, or another viewer of that news release, to navigate fairly quickly to get to the points they want to look at or skim an entire release.’
Showcasing financials
Like categories on a menu, descriptive headings point readers to the specials du jour, or rather to earnings highlights and quarterly business drivers. Headings also help investors locate data and select what to ignore, sample or consume.
About a year ago, Placer Dome, a gold company in Vancouver, changed its earnings format to include a financial table up front showcasing relevant statistics (sales, mine operating earnings, net earnings, cash flow, EPS, return on net assets, gold production in ounces and production costs per ounce, et al). Bulleted listings of financial highlights and operational highlights follow, facilitating easy identification of salient points.
It seemed to be what people were looking for, recalls Lorne Stephenson, Placer Dome’s vice president of corporate relations. With several peer companies often reporting earnings on the same day, ‘the appetite to have highlights available to everyone is ferocious,’ he says. ‘We wanted to be able to put something out which was easily adaptable and instantly communicable.’ The new format pulls important disclosure items forward so investors can find the information they need ‘right up front’ as soon as earnings are out.
Similarly in 2002, Protection One, a large electronic security company in the US, began highlighting several key indicators of its business – customer attrition, cash flow, net income and debt reduction – at the beginning of its earnings announcements. ‘We’re trying to get investors to understand the business a little bit better and explain what metrics they need to be looking at when they look at our company,’ explains Richard Ginsburg, president and chief executive officer of this Kansas-based firm. Ginsburg explains the company’s future earnings announcements may place more emphasis on the cash it takes to run the business, and possibly show more of an income statement breakdown.
Telling a story
Just as ambience contributes to dining pleasure, well thought out earnings disclosure may well determine whether investors will come back again. Montreal-based BCE’s vice president of investor relations, Maarika Paul, faces the challenge of presenting a large, complex business in a way that is easy to understand. But before she can do that, Paul has to aggregate a lot of information about her company’s ‘many moving parts.’
Just throwing out a whole bunch of numbers, data, and facts doesn’t help anyone, Paul explains. ‘What investors are really looking at is the relationship between the numbers and what’s happening in the operations,’ she adds. ‘You have to be able to analyze it and synthesize it.’ Then you have to lay it out so people can pick and choose what they want.
BCE’s comprehensive earnings release begins with highlights of growth drivers and net earnings. As the release unfolds, it adds supplementary operational and segment information presented in tabular data form and augmented by bulleted items. Detailed notes follow the financial statements.
Investors who want what Paul calls ‘the whole, full smorgasbord’ can delve into the special ‘investor briefing’ on the company’s web site. This additional document, containing charts and graphs, expanded financial statements with percentage changes, and more discussion of key business drivers, takes two to three weeks each quarter to develop.
The investor briefing began as an interim supplement because the company’s MD&A statement was filed quite a bit after results were released. Now that timing of the MD&A closely parallels that of company earnings, Paul may merge the two together as she strives to further enhance and clarify her company’s disclosure.
As investor relations officers dish out their quarterly results, they’re very mindful of current earnings etiquette – and regulatory mandates – that dictate the first course should begin with Gaap. ‘The SEC has made it very clear that, first of all, you have to have Gaap earnings,’ says Chuck Hill, director of research at Thomson Financial’s First Call.
‘Not only does it have to be in there, it has to be up front and discussed, not just a passing reference,’ cautions Hill. ‘You also need to leave an explicit trail from the Gaap earnings to whatever else you may be using.’ For example, if earnings were affected by an asset sale gain, a restructuring charge and an inventory writedown, investor relations officers should quantify how much each of those items was. That information would enable investors to ‘make their own adjustments’ if they differ with what the company has done, notes Hill.
But every company is different and not all of them find Gaap best illustrates their business. At IDX Systems Corp, for example, pro-forma results come first. ‘For now, we have elected to report pro forma first because we believe it is the most accurate portrayal of our results,’ says Margo Happer, IR director at the Vermont-based company. ‘However, we are very careful to point out exactly what that includes and excludes through a reconciliation table which is also part of the release.’
‘Consistency is very important,’ she emphasizes. ‘We would never look at Gaap one quarter and pro forma the next – even though there have been some quarters when Gaap numbers would have been more favorable.’ Happer continues: ‘Over the past year we’ve been especially sensitized to the whole pro forma versus Gaap controversy.’ As a result, IDX will probably adopt the Gaap-first format during 2003.
Niri’s October 2002 earnings release guidelines recommend that companies ‘include both a complete income statement and a complete balance sheet; put Gaap earnings up front and before pro-forma results,’ and ‘include key information in the earnings announcement such as a summary MD&A or other key information.’
These are merely guidelines, not a ‘one size fits all’ mandate, explains Tiffany’s Mark Aaron, chairman of Niri’s regulatory affairs and media relations committee, which drafted the guidelines. Companies differ in terms of earnings drivers, dynamics and their industries and ‘what’s important and what isn’t,’ suggests Aaron. ‘This is all about quality of information and relevance rather than quantity,’ he adds.
As the ingredients of good disclosure pile higher and higher on investor plates, there may be some relief in sight for investors bedazzled by data. ‘There is a realization that there is only so much text that one human being can read,’ says David Armon, president of PR Newswire Americas. Armon sees multimedia links emerging as a best practice as IROs strive to ‘humanize’ their releases.
With just a dash of multimedia, investor relations officers might add considerable zest – and palatability – to otherwise ponderous earnings pronouncements.
Perhaps that’s why Protection One executive Richard Ginsburg recently added video Q&A to his earnings report. ‘It was important to put a face behind the numbers,’ says Ginsburg. ‘Sometimes you just want to look in eye of the CEO and size them up, and hear in their own words what they thought of the quarter, and see if they know what they are talking about.’
Featured in earnings releases of Fortune 500 companies
| (%) |
2001
|
2002
|
||
|
Q1
|
Q1
|
Q2
|
Q3
|
|
| Balance sheet |
47
|
55
|
60
|
60
|
| Income statement |
84
|
85
|
94
|
86
|
| Cash flow statement |
17
|
22
|
26
|
24
|
| Historical comparisons |
85
|
83
|
93
|
92
|
| Notes on financials |
46
|
60
|
66
|
51
|
|
Source: PR Newswire, December 2002
|
||||
| Note: Total companies reporting earnings: Q1 2002 (462); Q1 2002 (464); Q2 2002 (465); Q3 2002 (460) | ||||
Featured in earnings releases of S&P/TSX
Composite Index companies
|
(%) 2002
|
|||
|
Q1
|
Q2
|
Q3
|
|
| MD&A |
23
|
22
|
28
|
| Three statements (income and cash flow statement and balance sheet) and notes |
33.7
|
52.4
|
40
|
| Two statements, notes (income statement and either a balance sheet or a cash flow statement) |
39
|
3.6
|
2
|
| Income statement & written summary only |
4.7
|
4.4
|
2.5
|
| Written financial summary only |
9.4
|
9
|
2.5
|
|
Source: Canada NewsWire, January 2003
|
|||
Fatter financials
‘I sometimes cringe when I see the length of some of the things we’re going to put out,’ admits one IRO. In the old days, before Reg FD and Sarbanes-Oxley – and well before investor confidence dwindled – earnings releases were much slimmer. Thin was in. A two or three page earnings announcement satisfied most discriminating investor palates. Now the profile of earnings disclosure is expanding beyond portly proportions. Fortunately newswire services carry the hefty earnings load, unimpeded by the added weight. The average word count in earnings releases issued between January and November 2002 by PR Newswire’s clients rose 25.87 percent compared to 2001. David Armon, president of PR Newswire Americas, doesn’t see any kind of slowdown in sight. ‘The pressure’s on,’ he says. ‘Lawyers are advising our clients to get it out there – when you know it, disclose it.’ And corporations are clearly heeding the call for more information. In Canada, the average length of earnings releases issued by S&P/TSX Composite companies rose by almost 90 percent in Q3 2002 compared to Q1 2001, according to a Canada NewsWire study. During that same period, average word count grew from 2,666 (Q1 2001) words to 5,060 words (Q3 2002). ‘We are seeing quite a substantial increase in what companies are including in their earnings news releases,’ reports Tom Enright, Canada NewsWire’s CEO.
Companies are, in fact, explaining their results with more financial and operational disclosure. A recent PR Newswire study of Fortune 500 companies indicates that more companies now include balance sheets, cash flow statements, historical comparisons and footnotes in their earnings releases. However, there are still some stragglers. Officials at Business Wire see similar trends with their publicly traded clients increasing earnings release content as well.
Commenting on the quantity of earnings data now available, Michael Lissauer, Business Wire’s senior vice president of marketing and strategic planning, points out, ‘The more information that people have, obviously the better.’ According to Lissauer, there is never too much information but investors have to know what to do with it and be able to evaluate the company’s big picture, not just one part of its performance. Just how corpulent will corporate earnings get? Canada NewsWire’s Tom Enright offers an ounce of hope for leaner, trimmer quarterly results. ‘The earnings release is a living, breathing, dynamic animal,’ he comments. ‘If we looked at earnings releases ten years ago, we’d see the content is very different.’ Enright predicts that in a couple of years earnings releases will most likely have ‘different content again.’ But, he adds, ‘not necessarily more.’
