Earnings Guidance Best Practices: To Guide or Not to Guide?

The Earnings Guidance Dilemma

Few topics in investor relations generate as much debate as earnings guidance. Should companies provide it? How detailed should it be? What timeframes are appropriate? Is it driving short-term thinking at the expense of long-term value creation?

The practice of providing forward-looking financial guidance has evolved significantly over the past decade. While quarterly EPS guidance was once the standard, companies now employ diverse approaches ranging from comprehensive multi-year outlooks to no formal guidance at all.

This article examines the strategic considerations behind earnings guidance decisions and provides a framework for developing an approach aligned with your company's specific circumstances and objectives.

The Current Guidance Landscape

Before diving into strategic considerations, it's helpful to understand the current guidance landscape:

Guidance Prevalence

According to recent studies, approximately 60% of S&P 500 companies provide some form of earnings guidance, though practices vary widely:

• ~25% provide quarterly EPS guidance
• ~45% provide annual EPS guidance
• ~70% provide revenue guidance (quarterly, annual, or both)
• ~80% provide guidance on non-GAAP metrics specific to their industry

Industry Variations

Guidance practices vary significantly by industry:

• Technology and Consumer Discretionary: Tend to provide more detailed guidance, often including revenue, margins, and EPS
• Financials and Utilities: Often focus on industry-specific metrics rather than EPS
• Healthcare and Materials: Often provide longer-term guidance frameworks with less quarterly detail
• Energy: Frequently focus on production and capital expenditure guidance rather than financial metrics heavily influenced by commodity prices

Recent Trends

Several notable trends have emerged in guidance practices:

• Shift from quarterly to annual guidance: Many companies have moved away from quarterly guidance to reduce short-term pressure
• Increased use of ranges rather than point estimates: Providing wider ranges acknowledges inherent uncertainty
• Focus on operational metrics: Greater emphasis on business drivers rather than bottom-line results
• Long-term frameworks: More companies providing multi-year targets for key metrics alongside shorter-term guidance

The Case For and Against Guidance

Potential Benefits of Providing Guidance

• Reduced volatility: Well-managed guidance can reduce earnings surprises and associated stock price volatility
• Analyst alignment: Helps ensure analyst models reflect management's view of the business
• Valuation support: Provides a foundation for forward-looking valuation models
• Management credibility: Consistent delivery against guidance builds trust with investors
• Disclosure control: Proactively shapes the narrative rather than reacting to analyst estimates

Potential Drawbacks of Providing Guidance

• Short-term focus: May encourage management decisions that prioritize meeting near-term targets over long-term value creation
• Reduced flexibility: Creates pressure to meet publicly stated targets even when business conditions change
• Resource intensity: Requires significant time and resources to develop, track, and communicate
• Legal exposure: Increases potential liability if results differ materially from guidance
• Competitive disadvantage: May provide competitors with insights into business trends and strategies

Strategic Framework for Guidance Decisions

Rather than viewing guidance as a binary decision, companies should develop a tailored approach based on their specific circumstances. Consider these key factors:

1. Business Predictability

The predictability of your business model should significantly influence your guidance approach:

• High predictability (e.g., subscription businesses, regulated utilities): Can provide more detailed guidance with narrower ranges
• Moderate predictability (e.g., established consumer products): May benefit from annual guidance with wider ranges
• Low predictability (e.g., early-stage companies, cyclical industries): Consider operational metrics, directional guidance, or no guidance

2. Investor Base Composition

Different investor types have different information needs and time horizons:

• Growth investors: Often focus on revenue growth and market expansion metrics
• Value investors: May prioritize margin trends, cash flow, and capital allocation
• Income investors: Often interested in dividend sustainability and payout ratios
• Index funds: Less focused on short-term guidance, more on governance and long-term strategy

3. Industry Norms and Peer Practices

While you shouldn't blindly follow peers, significant deviation from industry norms may require explanation:

• Benchmark against direct competitors: What metrics do they guide to and on what timeframe?
• Consider analyst expectations: What metrics do sector analysts focus on in their models?
• Evaluate disclosure effectiveness: Are peers' guidance practices resulting in better valuation or reduced volatility?

4. Growth Stage and Business Transformation

Your company's growth stage and strategic situation should influence guidance philosophy:

• High-growth companies: May benefit from revenue guidance but avoid EPS guidance during investment phases
• Mature companies: Often provide more comprehensive guidance across multiple metrics
• Companies in transition: May need to adjust guidance practices during business transformations or leadership changes

Guidance Best Practices

Regardless of your specific guidance approach, these best practices can help maximize benefits while minimizing risks:

Select the Right Metrics

Focus on metrics that:

• Drive long-term value creation rather than short-term results
• Management can reasonably predict and influence
• Align with how you manage the business internally
• Provide insight into underlying business trends rather than accounting outcomes

Choose Appropriate Timeframes

• Consider a multi-tiered approach: Annual guidance for financial metrics with quarterly updates, plus longer-term strategic targets
• Align guidance horizons with business cycles: Longer for businesses with extended sales cycles or development timelines
• Be consistent: Avoid frequently changing guidance timeframes without clear rationale

Develop a Robust Guidance Process

• Establish a cross-functional guidance committee: Include finance, operations, sales, IR, and legal
• Implement rigorous forecasting methodologies: Use multiple approaches to validate projections
• Build in appropriate buffers: Account for known unknowns and potential volatility
• Document assumptions: Clearly track the basis for guidance to explain variances later

Communicate Effectively

• Clearly articulate assumptions: What market conditions or operational factors does your guidance assume?
• Provide context: Explain how guidance relates to long-term strategy and value creation
• Use consistent formats: Maintain consistent presentation of guidance across communications
• Explain changes: When guidance changes, clearly communicate why

Special Guidance Situations

Initiating Guidance

When initiating guidance for the first time (e.g., following an IPO or as a strategic change):

• Start conservatively: Build a track record of meeting or exceeding guidance before becoming more aggressive
• Educate investors: Explain your guidance philosophy and how to interpret your projections
• Consider a phased approach: Begin with fewer metrics or wider ranges, then expand as you build confidence

Withdrawing or Suspending Guidance

If circumstances require withdrawing or suspending guidance:

• Clearly explain the rationale: Tie to specific business conditions or strategic changes
• Provide alternative information: Offer other metrics or qualitative insights to help investors understand business trends
• Outline the path forward: When possible, indicate when you expect to reinstate guidance

Guidance During Crises or Uncertainty

During periods of significant uncertainty:

• Consider scenario-based guidance: Provide outcomes under different potential conditions
• Widen ranges: Acknowledge increased uncertainty with broader guidance ranges
• Increase frequency of updates: Consider more frequent, less formal updates as conditions evolve
• Focus on controllable factors: Emphasize metrics less impacted by external uncertainty

Conclusion: A Strategic Approach to Guidance

Earnings guidance should not be viewed as a compliance exercise or market expectation to be followed without question. Instead, it should be approached as a strategic communication tool that, when used thoughtfully, can enhance investor understanding of your business and support long-term value creation.

By developing a guidance approach tailored to your specific business model, investor base, industry context, and growth stage—and by implementing robust processes for developing and communicating projections—you can maximize the benefits of guidance while minimizing potential drawbacks.

Whether you choose comprehensive guidance, limited guidance, or no formal guidance at all, what matters most is that your approach aligns with your business reality and supports your long-term strategic objectives.