Anyone’s guess At times, a significant part of the communication in an earnings release is left for the reader to surmise. For instance, instead of mentioning the exact number, a release can say ‘the business grew in high single digit’. The reader is left to guess whether the growth is 7%, 8% or 9%. This tactic serves little purpose. It also goes against one of the basic tenets of communication: making it easier for the recipient to receive information.
Selective slicing’n’dicing To show earnings at their best, companies often break down performance numbers selectively, instead of in conventional terms. This results in new accounting nomenclatures such as ‘adjusted EBITDA‘, ‘net profit before exceptional items’, ‘gross merchandise value’, ‘one-off items’, and ‘revenues excluding non-recurring business’.
Another tactic is to compare quarterly performance with a low base or weak quarter. For example: ‘In this quarter, the volume growth slowed down, but for the nine months of this fiscal, the volumes grew in double digits.’ Here, the bigger picture of nine months’ performance is expected to taper down the impact of slower volume growth in the last three months. This may leave investors wondering if the latest quarterly performance is an exception or beginning of a bad phase.
Almost all is well There are instances where if the performance isn’t good, a large part of the earnings communication ends up alluding to the positive performance metrics, rather than providing an explanation about what caused adverse performance.
Bad news, like declining market share or a cash flow problem, may be buried deep in the release amid less critical details. Rampant use of this practice may result in investors not trusting the company’s take on its performance, and be forced to look elsewhere for a more objective analysis.Power words There are some choicest words that are unique in a corporate dictionary: resilient, innovative, transformational, strategic, empowering, growth driver, robust, accelerated, optimising, enhancement, industry-beating, agility, synergistic, unprecedented, catalytic, headwinds, tailwinds…. These are power words for a reason.Used in a measured way in the right context, they bring gravitas to what’s being said. But overuse of jargon in a corporate communique can make it sound fake.
Fault is in the stars External factors like consumer demand, high input cost, regulatory glitches and natural calamities often appear in earnings communications. But internal factors like inadequate technology adoption, M&A integration issues, loss of competitive edge, slower product innovation or financial mismanagement often don’t find mention.
Some would argue that this is the natural thing to do. But corporate governance standards would expect management to present a clear picture of its performance to stakeholders.
Future over present If current performance is bad, some companies shift their focus to highlighting optimistic future projections. These projections often rest on best-case scenarios rather than any realistic one. Stakeholders have to be smart not to take these projections at face value.
Point to the greenery There are instances when companies follow this strategy: if the financial performance is a bit disappointing, no worries – let’s talk about what we do for Mother Nature. Corporate initiatives towards the environment are commonly leveraged to make the company appear a good corporate citizen. However, to use it to compensate for poor financial performance may be stretching things too far.
At the end of the day, the most efficient communication tends to be direct, simple and genuine. Admission of an adverse event or issue may adversely impact the stock in the immediate term. But suppression of a critical fact may give rise to a long-term overhang on the stock.
One of the biggest mistakes a CXO can make is to undermine the acumen of investors to read between the lines. The more a stakeholder is strained to ‘read between the lines’, the more likely it would create mistrust.
Read More: Quarterly earnings: How some companies use selective slicing’n’dicing to show performance