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Category: Investor Relations

My thoughts on the process of investor relations

Non-Deal Roadshows – what happens on them?

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On March 22, 2016

In CFO, Investor Relations, Working With Investment Banks

Last week I covered investor conferences, this week I will discuss non-deal roadshows (NDR). In a typical company, NDR are the second highest source of in person meetings with investors (conferences tend to have the most meetings).

In many ways, NDR are very similar to investor conferences, they are another form of corporate access run by the banks that being management to meet with clients of the banks. Their difference is that the meetings are in the offices of the investors instead of at the conference site, but otherwise the meetings are similar in format to those at investor conferences. They are either questions and answers directed by the investor, a review of the standard investor relations presentation by the company or usually a combination of both. Regulation FD (fair disclosure) is still in full effect, so no material, non-public information can be discussed. You need to be extra cautious on any answers related to disclosure as you cannot confirm guidance as the SEC considers that as giving new guidance.

The main reason for doing a NDR is that it greatly increases the chances of you talking directly to portfolio managers or other key decision makers. These are the people that make the buy or sell call on your stock and they normally do not go to conferences on a regular basis. Normally they send their analysts to conferences. Another important advantage is that the larger firms with multiple funds often send multiple analysts or portfolio managers to your meetings where in a conference they normally only get one slot. So you directly access more decision makers at once. For the large companies, who and how many attend can be a good indication of how deep and broad the general interest at the firm is.

Logistics

Banks normally ask you to do a NDR for them. If there is significant demand, you may even get requests from banks that do not cover you. I recommend sticking to the banks that cover you as a courtesy and payback for the effort they make, but there might be a specific reason to use another bank. If no one has asked you and you want to do one, reach out to your covering analysts yourself or the investment banker that covers you.

Meetings are normally arranged by the sales force with the assistance of the analyst. If you remember from my blog on working with investment bankers, the sales force works for “the desk”, so your banker can help give a push inside the bank. So even if the analyst asked you to go out for them, there is no harm in mentioning it to your covering banker.

You can arrange your own meetings or suggest investors that you are targeting or that have requested a face-to-face meeting. The bank will want to limit the meetings to their clients and different banks have different tiers they service (large banks do not have many small clients while smaller banks will have more small clients). Even if you are suggesting a meeting, it is good practice to tell the investor to contact the bank and ask as well. The sales force may appreciate a chance to pitch to a client and start a relationship.

You are expected to make your own travel arrangements and pay your own hotel and meals expenses. The bank almost always provides local transportation at the city where the meetings are happening. Meetings are typically booked in 1.5 slots with 1 hour of meeting time and 30 minutes of travel time. In some cities the travel time is reduced and sometimes when there is big demand for meetings the meeting time gets crunched down to 45 minutes. Expect a long and tiring day, so try and get rest before the meetings. If demand is really large, expect a group lunch or dinner. Otherwise, make sure you eat.

Typical cities

This will vary, and I am writing as a USA-listed company CFO. I have lived in Asia, so I have more experience there, but not as much in Europe and none in the Middle East.

New York and Boston

These two have the most funds and have the most investment dollars available to invest in US companies. When you are offered an NDR, the analyst, who is at least partially paid based on trading volume run through his firm, will wants to do meetings in these two cities. I don’t mean this to be a travelogue, and I would assume that most people are familiar with the cities. NYC is bigger and even with the high density of funds, there can be lots of travel time from place to place. Very often you will get to a meeting faster if you walk. Traffic can a very, very bad. When the UN is opening a session or the President is visiting (or another major leader like the Pope), bad traffic can turn into a nightmare. Boston is a little easier to navigate as the central core where most of the funds are is smaller. There are several very large funds in Boston where you could draw a large crowd if they are interested.

There are a few pockets of investors outside in the greater NYC area, but normally the time it takes to get to New Jersey, Connecticut or Philadelphia is not worth it. NYC tends to have more hedge funds. Boston a bigger concentration of more traditional mutual funds. Both cities draw lots of management teams and the funds are not as excited about that as other cities are.

If you are traveling between the two cities, I suggest the Amtrak Express train. Much less affected by weather and the stations are right in the middle of where your meetings are. One major fund company is a cross the street from South Station in Boston.

Give yourself extra time, especially in NYC, to show ID to enter every building. Security can be tight. Make sure you bring picture ID.

London and Europe

This is probably the location with the largest concentration of investors. A few other cities like Zurich and Frankfurt have a good amount as well, but London is the biggest. My experience here is much more limited, but I have been to both conferences and NDR in London. Not too different than NYC where the concentration is good but traffic and the sheer size of the city means that getting from meeting to meeting can add delays. I was stuck behind the Queen in a horse drawn carriage once in London as some ceremony in the Parliament had her traveling and the traffic loop in from of Buckingham Palace is a main route to and from the City. You can end up with a few meetings pretty far apart and the Tube is the best bet to avoid traffic in that case.

Zurich, Geneva and Edinburgh are other cities that may be worth a visit. I have not been to Frankfurt or Paris but both have fund managers there as well. If you are already in Europe anyways, it may be worth an extra day or two to visit cities other than London.

Hong Kong

Like NYC, this is the city with the highest concentration of investors and probably the one where you are most likely to walk from meeting to meeting. The walking is through a maze of shopping malls, so a local guide is good. A lot of American and European funds have their Asian office here, so if there is an Asian connection to your company it is a good place to visit. Many hedge funds here that are either local money or branches of other Western hedge funds.

Singapore

I lived here for a few years and was CFO of a company listed in the USA but HQed here, so I did quite a few NDR there. You probably will not do too much walking here because of heat and humidity but the central core with most of the funds is not that large. For the most part, the funds here also have an Asian theme so not as much demand for pure American companies but if you have flown to Hong Kong it is not that far to Singapore. The sovereign wealth funds here can be good, long term shareholders if they are interested.

Smaller USA cities

One you get out of NYC and Boston, it does get harder to fill a whole day with meetings in most other cities. However, there are probably 10 other cities that have enough funds that a visit is worthwhile. One big benefit is that management teams do not travel to these cities anywhere near as often and you are much more likely to meet with a portfolio manager or other investment decision maker in a smaller city than a larger one. Smaller cities tend to have smaller accounts and make a good match for any smaller banks that cover you.

The meetings themselves

As always, I suggest that you do not go to the meetings alone. Running around NYC or other cities can be a logistical nightmare, and having a friendly person in the room with you can help protect you should strange trading happen while you are doing the NDR and people wonder what you said.

Your covering analyst will often go to meetings with you. They will write a report after the NDR, usually after giving their clients a couple of days to act themselves. This is a good chance to make sure they know you story better and can articulate the points you were making in the meetings. You also will get to spend more time and develop a better and more personal relationship with your analyst. I have never met one that was not overworked and understaffed, and spending 2-3 days with you on an NDR is a pretty big commitment. Understand that and try and return the favor, even if it is a few kind words about the analysts to the accounts they cover.

The other person that may attend your meetings in the sales person that covers the account. It might be tempting to think they are not as important as the covering analyst, but they are the ones with the day to day relationship with the people that may be buying and selling your stock. Many are very experienced and meet management teams all the time. Saying a thank you for their help and asking them what their clients are worried about might give you a good tip or two. I do know a good sales team makes a difference for your covering analyst and it doesn’t take much effort to show appreciation for the meetings you set up. If you ask in advance, the sales force will print your standard presentation out and make sure that their accounts have a copy. When they can’t attend the meeting, they might give you a copy to leave with their client.

Some accounts, especially in Boston, do not allow banks to attend unless on a deal roadshow.

The meetings with the investors themselves are quite different than at conferences, if only because they are in their office. You probably are meeting with some of the most senior people at the firms you are visiting, so listen to what questions they ask and ask a few questions back to them as well. I have always found the very big funds in Boston are the most courteous and respectful but they are also super professional. The notes from your meeting will go into a database and they keep track of what you say and what happens. The meetings are very much part of judging you as well as the company and the person that could be pulling the trigger on very big investments in you is asking you questions.

Like any marketing speech, you need three to five key points you want to leave at each meeting. Make sure you know what they are and deliver that message each time. You really only have time to do a few NDR a year at most, so make it count. Unlike investor conferences and talking to analysts, talking to portfolio managers at their offices can lead to quicker decisions.

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Investor Conferences

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On March 15, 2016

In CFO, Investor Relations

A pretty standard press release from most public companies is an announcement that their executives will be attending a conference sponsored by a bank where they will be meeting investors. I’ll try and use this blog entry to describe what goes on at a typical conference and how to get your company invited to one. Unfortunately, these conferences tend to be invite only for the investors and they invite professional investors that manage money for mutual or hedge funds for the most part. There are conferences to meet angel investors or other forms of venture capital, but that is not what I’ll discuss here. Some conferences invite some private companies as well, but usually the presenting companies are all public companies.

You normally will want to go to a conference because it is a chance to directly talk to existing or potential investors. Almost every single potential investor will have evaluating management as one of their investment criteria and meeting in person is important. A non-deal roadshow is typically better because you meet more portfolio managers or other top decision makers, but conferences are an efficient way to meet many different investors all on the same day.

The first thing you need to do is get your company invited to the conference. These are run by the research division of the bank and legally they are separate from the investment bank services. So the banker you may have a relationship with can ask that you get invited but there is no guarantee (it almost always will be honored). If you are covered by the research group, you will almost automatically get invited to their relevant conferences. One service they offer to their customers is access to management and the conferences they run are very important to their marketing.

As coverage on your company grows, the number of invites to conferences also will grow. You will get invitations by banks that do not cover you. At a certain point, you will start to have to make choices about which conferences you will attend because you will get invited to more than makes sense, but that is a good problem to have. I tend to focus on and choose conferences held by the banks that cover my company to try and repay the resources they are spending on us, but you may also be building a relationship with a bank in the hope of getting coverage so that is just a rule of thumb.

Once you are invited, you need meetings. Normally, these are arranged by the sales force, sometimes with your analyst pushing. The investors that are attending have the list of attending companies and they normally request the companies they are most interested in. I generally try and be as efficient as possible and only sign up for one day if there are multiple days available. If demand is high, then you end up with some meetings of smaller investors that are 2 on 1 or 3 on 1. If demand is very high, the bank will ask for another day.

Conferences are a good opportunity for you to bring other staff along to learn something about investor relations. If your Controller has a goal to be more involved in IR, a conference can be good training. Since you are not doing a deal and because the meetings are a little more controlled and private, a conference is a good place to do some training and allow more staff to answer some questions. For local conferences, I have brought along the staff analyst who helped prepare the presentation. It is a good opportunity for them to see what questions you are asked and helps for the next version of your IR presentation.

I always try and have at least one other friendly person in the room with me. I do this for two reasons. The first is so that you have someone to help by giving you a break and answering a few questions or who can handle logistics like the presentation slot prep work. Although I have not actually had this happen, it is defensive as well. In case there is any doubt what was said in the meetings, you have another witness with you.

Conferences typically have two different ways of talking to investors. The first in private meetings, usually in one of the hotel rooms. They remove the bed and replace it with a small table and chairs. Most of your day will be sitting in that hotel room at the table talking. In a conference with normal demand, you will be answering questions from 8 AM to about 6 PM with the investors changing every 30 to 45 minutes. When I first started, it used to be common for management and investors to be constantly changing rooms and often dashing from floor to floor, but now the organizers tend to keep the companies in one room and the investors rotate.

I cannot emphasize it enough that you need to be prepared to be talking pretty much non-stop the entire day. Some meetings with just be you reviewing your standard presentation. Usually that is for investors that do not know your company or your sector very well. It can be a little frustrating to realize that you have potential investors in front of you that know little to nothing about you. You would think that they would do so,e homework before getting in front of a senior executive or that the covering analyst would have prepared them. However, many analysts use conferences to develop new ideas on companies or areas that they may become more interested in. Quite often they do not know your covering analyst as they have not really started to do any work yet. They have not done a lot of research on you yet either because they have not decided if you are worth it. So this initial meeting is your chance to make a good first impression. Of course, some people just randomly take a meeting to fill up their day and really should have done more work in advance, but you do want to talk to potential new investors so a few meetings like that can be good.

The other style of private meeting is just questions and answer. You never quite know what questions you’ll be asked and exactly what the topic will be. Time passes a lot quicker because you’re answering questions instead of doing your prepared pitch (which can get dry and boring if you do it often enough). You need to be careful when you answer questions because reg FD is in full effect – you cannot reveal any material, non-public information. You need to be particularly careful about guidance. You cannot reiterate guidance or change guidance. The SEC views both as new material, non-public information. Any past guidance needs to be treated as a historical fact, and you cannot express a current opinion on it.

The whole private meetings content is somewhat ironic. You are not supposed to reveal anything new that is material. You can give out some explanatory color around your public statements, but you need to be extra careful about what you say. That means in your scheduled meetings and in social events at the conference. Essentially the meetings should be about assessing management and filling in tiny holes in the public disclosure.

As an aside, it is not uncommon that someone does not show up for one of your meetings. Things happen and plans sometimes get changed. Let the event organizers know and ignore it. If there are a lot of cancellations maybe the demand was not too high and the sales staff tried to stuff a few meetings in but their clients changed their minds. Nothing you can do about it at the conference, so don’t let that effect your other meetings.

The other event that usually happens is some form of presentation. This is either you doing you pre made presentation or some form of fireside chat or panel in which the covering analyst asks you questions. If the conference offers the opportunity to webcast these, then take it. Each person at your individual meetings probably invests an order of magnitude more than any retail investor, but your retail investors are usually the largest investor, in aggregate. They are usually starved of any direct contact with management and the earnings call and anything you webcast from conferences is the only chance they will have to hear you speak.

No matter what, whether in one-on-one meetings or in the presentation, you need to have your key talking points decided before the conference even begins. Like a politician, not matter what the questions are, make sure that you deliver your message. This is an absolutely key feature of the conference. It is a chance to hammer home a specific message over and over.

When you are done, you might be thinking if what you just did will impact the stock price. There might actually be a big move around a conference but that is normally caused by groupthink of all the investors there. They tend to know each other and talk. If there is a good and positive vibe that comes from the conference they get excited. If they pick up a lot of negative body language from a lot of management teams they may get down on your sector or the market as a whole. Otherwise, as a general rule, you are talking to an analyst at the investor fund and they need to get back to the office and do a report to their boss, the portfolio manager. If they like you and convince their boss to invest it might be a week or two before any decision is made. If there is an immediate move in your stock at a conference you need to consider if you have out material non-public information.  If you did, involve your lawyer right away and there is a good chance that you need to put out a press release.

The final advice I would give is that other covering analysts often ask you to meet with their clients while you are in town, or even do an NDR and you should say no. As a general rule, it is considered to be impolite to book client facing activities around the conference. So meeting with the analyst themselves is ok, but if you do client meetings you will distract attention from the conference you are at. So unless there is a very compelling reason, politely decline client meetings except at the conference.

(picture taken at Dana Point, CA at the one conference a year with that type of scenery)

How I approach the outlook section in an earnings release

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On February 2, 2016

In CFO, Finance, Investor Relations

Every quarter, investors pour over actual results and react to a company’s guidance. Before it appears in the press release, I have to work out what is should be. I often see retail investors wonder where the numbers come from and if companies sandbag or otherwise fool around with guidance. So I decided to write a post on the process I have followed to first support the process when I was a Controller and then to help decide as a CFO.

Helping to decide is important to remember. It is easy to get a little ahead of yourself as CFO during the earnings and forecasting process. Take a deep breath and remember that you are part of a senior management team. Remember that there are two types of forecasts, lucky and wrong, and that the longer period of time being forecasted the higher chance you have of being wrong.

I start my outlook process by asking questions and listening. Of course, I keep up with the business as best I can during the quarter, but the reporting process is where you get to ask questions and explain. Take advantage of that and start to form an idea of the opportunities and threats that are coming up.

I am going to assume that you have a reasonable forecasting system for revenue and cost that you are able to rely on to make management decisions. How the actual forecasting is done is not really relevant (Gaussian Cupola or whatever wizardry is used), you just need something that has proven it works in the past. Units, ASP, expected costs, any expected deviations from your normal SG&A spending. Some form of view on what effect foreign currency is likely to have.

You should use the information from your forecasting system to build a draft forecasted financial statement. This is the raw and preliminary numbers that I rely on to start the judgment process of the outlook I eventually publish. Using that first set of numbers, I start to work through a standard checklist of accuracy items (not judgment yet):

1) Revenue – usually the internal forecast is good at predicting when the goods will ship. What is not considered is when you can recognize it. Double check that. Look at the terms being used and any carry-over from the prior period. Be careful with percentage of completion and double check the reasonableness of the calculation. Make sure that items that require contract analysis have been reviewed and that the terms allow revenue recognition as hoped for. Make sure any inter-company sales are properly treated.
2) COGS – usually you get the latest cost numbers from the factory, but that probably is not what will show up in GAAP. Very often their numbers do not include warranty reserves, equity compensation, inventory reserves and potential equipment write-offs (which may need to go into COGS). If costs are rising or falling there will be a lag as production runs through inventory so make sure that is accounted for. Any inter-company profit in inventory that needed to be eliminated? Inter-company items are often overlooked, so check that again.
3) SG&A – talk through the numbers and see if there are unusual things happening this quarter and make sure the numbers are there. If there is a risk of a large A/R write-off or a large fee that is being paid that quarter that needs to be expensed, make sure it is included. Think about bonus accrual catch-ups, if you are beating or missing bonus targets is there a risk that an adjustment to the accrual will be triggered this quarter. Are there large asset write downs, big A/R wrote-offs that could happen or other such one time items? If so, are they in the forecast (of course, if you are so sure that it will happen, ask why is it not recorded in the about to be reported quarter). These type of forecasts are often just run-rate extrapolations, so make sure any effect of adding or selling a business recently was thought through and recorded.
4) Interest and other charges – normally this should be about the same as prior quarters. Double check to make sure any changes or expected changes are reflected in the numbers. Usually companies do not forecast specific foreign exchange swings but if there already has been a large one or a large one is likely you probably should be modeling here.
5) Taxes – typically this is just a forecasted percentage, but work through the logic of the forecast. Did the country mix change since the prior quarter or since the percentage was last set? If so, you may need a different rate and should let people know to change their rate.
6) EPS – double check the diluted EPS calculation. If you recently added convertible bonds, check to make sure the EPS is on an “if converted” basis. Most people just assume that there only is dilution if the bond is in the money and that is not the way the share count is determined for convertible bonds. If you are close to a trigger point for a large tranche of options to go in the money, consider reminding the reader of that. If they have been outstanding long enough to be vested and around for several periods there may be enough added in to swing the EPS calculation.

That is not an exhaustive list. Companies that sell software and other service type contracts need a robust revenue recognition review process for both actuals and forecasts. The list above is all for accuracy before discussing with the greater team. It is all fine and nice to be a strategic CFO but if the base numbers are all wrong then no one will listen to your business ideas.

If you do find errors during the forecast review, go back and fix what did not work in your process. Double check the actuals as the same people usually work on actual and forecast and if the forecast has an error, the actuals might as well. Reporting is a process and you need process controls and feedback into the process.
I am sure that some people started reading this blog and we’re hoping that I would talk about what system to use, what IT tool I recommend relying on. I am always concerned about over reliance on tools and not enough review and finance judgment being applied. A good tool poorly used just gets you the wrong answer faster. There are quite a few good tools out there and I generally recommend that you use one that works well with your existing accounting and consolidation system. Most of my experience is using the Hyperion suite of tools (Oracle product now but used to be independent), but I have used others as well. Even simple excel spreadsheets can work depending on your business. I do think that if the Excel spreadsheets get too big, the risk of formula errors also grows too much.

So now you have a forecast (I tend to have an income statement and balance sheet ready with a cash forecast from another process as well). You now move to the validation and judgment phase. Share the forecast with a small number of senior executives and start the discussion with them. Do not over rely on email. Call them up and talk through the forecast.

Go through each section with them and make sure they understand what assumptions are being used. Then listen. They know their area of the business better than you. The COO probably just heard that there is a part shortage and production will not be able to hit the cost target or the volume target. The SBU business head might have just come from a customer meeting as has good news. Take notes and ask clarifying questions but now is not the time to be pushing back or disagreeing. If you go into target mode and start arguing why results need to be better, you probably will shut down conversation and miss something.

One of the people you should be talking to now is your boss. The CEO will have even more insights into business conditions and the two of you will be making the public commitment. Review the different options from the management team, weighing factors like personalities, some people are too conservative and some are too optimistic. Reach a conclusion about what you will commit to in the quarter or year to come or whatever period the public outlook will be. Make sure the targets needed to hit the goals are rolled out to the people that need to execute.

One of the last things you need to decide on is the range of expected results you will disclose. You need to pick a range that is typical for the metrics you will be disclosing. I get asked very often if I set the range lower so we can easily achieve it and then “beat” the numbers. In my whole career I have not followed that strategy. It becomes very obvious over time if you do that consistently and analysts will start setting their own much more aggressive expectations. You are essentially lying to your investors about your real expectations and trust in management is often a key metric for investors. You also are advertising less than what you can do and if your competition does not under call as well, you will suffer in comparison.

Never set expectations you know you cannot meet or that would take perfect execution, but do not be afraid to set your own internal goals as the public expectation. If you miss or beat them, know why and explain it. If you set reasonable expectations that a good effort should have achieved and you miss, do not try and hide the fact that you missed. Be honest and outline what will happen in the future to avoid surprises and underperformance. If your internal process to arrive at the number was bad, fix that process. If you set expectations that are way too high, you may get a short term bump in share price but you will be reporting actuals in 3 more months and you will lose in trust much more than what you gained in the short term. Be confident, but not overly rosy or arrogant.

Pay attention to the text explaining the numbers to ensure that there is no disconnect.  If you expect conditions to be tough, make sure the text reflects that.  If you are setting another record, acknowledge it.

In the end, there is no magic formula. You need to do your best and make your best judgment. Make sure your process is robust and repeatable. Be inclusive of your finance team and the senior management team. Don’t sweat it too much, a miss or beat is news for maybe ½ a day if it is a slow news day.

When would I do a pre-release/preannouncement?

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On January 19, 2016

In CFO, Investor Relations

Earnings pre-releases always generate some excitement.  Normally they are bad news but mainly because they often are a surprise.   Sometimes the actual earnings are a surprise in some way and yet there is no prerelease.  Choosing when to do a pre-release is a judgment call and I’ll try and explain my thought process behind it.  I am not a lawyer, so this is not legal advice.  If I am considering my options on this topic I always check with our lawyers to confirm my decision, and I highly suggest that any finance professional trying to make that decision also check with their lawyer.

First, as a general rule, there is no need to do a pre-release/preannouncement (I’ll stick to pre-release from now on) even if the actual numbers are obviously different than what was guided in the prior earnings release.  Companies need to formally state that in their earnings release and there is even the technically that until a quarter is done even if you do update guidance there is no requirement to do an 8-K (6-K for Foreign Private Issuers).

A disclaimer looks something like this “Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates.”   You also need to identify what a forward looking statement is and the more specific to that quarter the better you are.  If you do that, you can claim the SEC safe harbor and be safe if you do not update even if your numbers end up being different than you guided.

You may not have to, but your investors certainly will think you should.  You may actually expect to come in close to your forecast but others in your space missed badly and investors may be assuming you will to.  You may want to do an offering of some kind and your bankers want you to remove any doubt about the likelihood of you making your quarter.

It may seem simple, any material difference from your forecast and you update.  However, even that is not so simple.  You would think that such a common concept as materiality would have a very specific definition that you could just rely on.  Unfortunately, it doesn’t.

The SEC has a long discussion of materiality in Staff Accounting Bulletin #99:

https://www.sec.gov/interps/account/sab99.htm

“Question: Each Statement of Financial Accounting Standards adopted by the Financial Accounting Standards Board (“FASB”) states, “The provisions of this Statement need not be applied to immaterial items.” In the staff’s view, may a registrant or the auditor of its financial statements assume the immateriality of items that fall below a percentage threshold set by management or the auditor to determine whether amounts and items are material to the financial statements?

Interpretive Response: No. The staff is aware that certain registrants, over time, have developed quantitative thresholds as “rules of thumb” to assist in the preparation of their financial statements, and that auditors also have used these thresholds in their evaluation of whether items might be considered material to users of a registrant’s financial statements. One rule of thumb in particular suggests that the misstatement or omission2 of an item that falls under a 5% threshold is not material in the absence of particularly egregious circumstances, such as self-dealing or misappropriation by senior management. The staff reminds registrants and the auditors of their financial statements that exclusive reliance on this or any percentage or numerical threshold has no basis in the accounting literature or the law.”

So the SEC clearly says you cannot rely on a numerical formula to determine materiality.  One example given as to why not is that even a small intentional misstatement by management may be deemed very material by investors even is the absolute amount is small.

I could post another long paragraph from the SAB, but if I suggest that you just click the link I provided and go read it.  The short answer is that management has to look at all the facts and circumstances available to them and then make a determination of materiality.  You are supposed to consider the different audiences that may see the news with investors always being a primary concern.

You would also think that the FASB would have a specific definition of materiality.  Well, it doesn’t either:

http://www.fasb.org/cs/ContentServer?pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176157498129

That is the new guidance but it is an update to the old Concept Statement 2.

What does that statement say?  It says that management and auditors have to consider everything, not just the magnitude of the item and then decide if it is material.  So, again, no magic formula, completely a judgment call.

So there is no real escape, you have to decide if you should do a pre-release or not.

Since this is about when I would do a pre-release, here is what I think about as I make the decision:

  • I do not have to. I have a safe harbor.
  • Many investors do not invest for the quarterly earnings. So a one time item that does not change the business may not even be worth pre-releasing
  • Is the news or results different enough that your investor base will doubt your integrity when they find out later?
  • Would I personally make a different investing decision if I knew?
  • Is the stock trading in sympathy to news from competitors that does not apply?

In my experience, most investors trust you less if they think you are hiding bad news and are more forgiving if surprised with good news.

As an aside, I have done many bets with the reporting team on what the stock will close at the day after earnings.  The results of the bets over the years show that we never really know what will happen.  Report very good news and guide up and the stock goes down sometimes.  Report what you think is disappointing news and it goes up.  Some days the stock moves on no news and I get a call from NASDAQ and have to tell them there is no news that I know of.

So, unless there is an offering that my bankers want investors to not be asking questions about the guidance around it, it takes pretty bad news or a big change in trading before I would want to do a pre-release.

It eventually comes down to if I can face myself in the mirror or face investors and not feel bad if I do not do a pre-release.  And if I was wrong, then it was my call.

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