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.