ehud helft ccg israel
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www.ccgisrael.com New York Los Angeles Beijing Shanghai Hong Kong Frankfurt Tel Aviv London
Ehud Helft | March 2011
GUIDANCETo Give or Not to
Give?
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Guidance provides investors and analysts a view on future performance of the company• Reduces chances for surprising the
market and by that, reducing stock volatility
• Increase transparency, openness and confidence in management and future performance
• Gain analyst coverage• Comply with Reg. FD and reduce
legal exposure
The main argument against giving guidance:• Promoting short-term goals over
long-term• Loosing credibility if guidance not
met• Having to issue a warning or
chasing deals at the end of the quarter to meet guidance
ISSUE 1: To Give or not to Give
90% of companies provide some form of forward looking
information
Over half provide financial targets
Provide ‘general’ targets
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NIRI Survey
Why do you provide guidance?
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Management philosophy
Increased volatility/economic uncertainty
Senior management/Board request
Industry trends
Senior management/Board request
NIRI Survey
Why do you not provide guidance?
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Revenue or sales
Tax rate
Oper. expenses/margins
EBITDA or EBIT
SG&A or G&A
Other, please specify
Working capital
NIRI Survey
What financial measure do you provide guidance on?
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NIRI Survey
What non-financial forward looking statements do you provide?
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Conventional wisdom: In tough times, it might be better to stop guidance. Alternative view: “Guidance stoppers are primarily troubled firms.”* In the midst of the last recession, December 13, 2002…..
ISSUE 2: Guidance in Tough Times
*Source: Houston, Lev & Tucker, 2008. “To guide or not to guide.”
McDonalds was going through very troubled times.
Declared it would also post its first quarterly loss in its history, delayed its conference call and provided little further information.
In the subsequent PR on January 23, 2003 discontinued guidance.
40%
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Conventional wisdom: In tough times, it might be better to stop guidance.
Alternative view: “Guidance stoppers are primarily troubled firms.”* In the midst of the last recession, December 17, 2002…..
ISSUE 2: Guidance in Tough Times
*Source: Houston, Lev & Tucker, 2008. “To guide or not to guide.”
23%
Stopped providing investors with any specific guidance, due ‘short-termism’.
Remained open with investors with regard to the decision and shared long-term goals and strategy with the market.
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NIRI Survey
Since discontinuing guidance, has there been a change in the spread of estimates?
No change Narrowed Widened Unclear No Coverage
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Conventional Wisdom: “Yearly promotes focus on long term performance, I can be more conservative and it leaves me more time and flexibility to achieve the guidance”
Alternative view: “As the end of the quarter is only 2 months away, I have a better idea of what I can achieve and therefore more likely to be accurate.”
Case Study: Nova Measuring Instruments (NVMI), had a good 2009 and the share price appreciated. At the start of 2010, the company embarked on a secondary and their bankers and new investors convinced/insisted that
they issue guidance because there was no coverage or consensus for the market to count on As a compromise, the decided to take the annual guidance route…
ISSUE 3: Quarterly Guidance or Yearly
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Nova Measuring Instruments (NVMI), fourth quarter 2009 results and conference call, February 17, 2010:
ISSUE 3: Quarterly Guidance or Yearly
* which in Q1 subsequently raised to $61-66 million, in Q2 to $78-85 million, said it would “meet or beat” the top-end in Q3 and achieved $87 million in Q4
Q4-09 was fantastic: record profit on strongly growth (+34% seq.) in revenues, reaching: $15m.
For the first time, provides FY 2010 revenue guidance* of: $58-63m.
Investors were disappointed
Secondary Q4-09 Q1-10 Q2-10 Q3-10 FY-2010Analyst Day
Nova used Q309 to make a subtle switch to quarterly guidance and formally switched to quarterly guidance in Q410.
15 x 4 = 60→Flat year
Share price dropped but recovered quickly as investors felt management was being overly conservative.
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NIRI Survey
Over what time period does your guidance refer to?
Long-Term Annual Quarter Monthly Other
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NIRI Survey Summary
90% of companies give some type of forwarding looking information or guidance
66% of these provide EPS guidance (61% of which provide a range, 2% an exact figure and 3% directional information)
70% of these provide revenue guidance (56% of which provide a range, 2% an exact figure and 8% directional information)
Only 37% of guidance givers provide guidance on a quarterly basis
Two-thirds have made recent* changes to guidance policy
No Change
* Past two years
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Two-thirds give guidance, and out of those:All have sell side coverageA third give quarterly projectionsAll provide revenue projections and just under half provide earnings projectionsAlmost all provide guidance in the form of a range
The smaller clients are more likely to give guidanceA need to generate more interest amongst investors and analysts
The main reason for not giving guidance is the exposure and the worries from the implications if not meeting guidance
What our US-listed Israeli clients our doing
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Any guidance is better than no guidance Unless you have good annual visibility, quarterly guidance is better The “no guidance approach” won’t solve your problems:
Market will still judge you on quarterly results You will still be expected to meet expectations (you don’t control), and will be
“punished” for a miss If you have analysts, they will still expect you to guide them “off line” and you
are legally exposed to Reg-FD If you don’t have analysts, you are unlikely to gain many (unless you are Coca
Cola)
The “no guidance approach” may only save you the “embarrassment” of issuing a public warning if you miss guidance –
Often times, this consideration gets too much weight in our view as the market is forgiving to management teams which are open & transparent
In our view, missing once-in-a-while is better than never having given guidance!
Our View
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Summary – What Investors Want from a Company
Openness
Transparency
Honesty
Predictable
Stability
Clarity
Simplicity
Expectations
LT Goals
Results
Communication No SurprisesResponsible
Consistent
Performance
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Thank You