Handling a revenue shortfall while protecting management credibility
A client was weighing whether to preview its quarterly revenue in light of an anticipated 30% shortfall to the guidance it had provided Wall Street. Management believed revenue would rebound the next quarter, but had not yet finalized its forecast for that period. Although the company’s guidance policy called for providing a quarterly revenue estimate supplemented by qualitative statements about variances in financial metrics and trends in demand, management had resisted pre-announcing revenue shortfalls in the past. In fact, when management elected not to pre-announce a 17% shortfall three quarters earlier, its covering analysts and shareholders had accepted the shortfall without complaint.
The client’s stock price had been drifting down for the past three months on industry weakness and deteriorating economic conditions, and it had dropped sharply earlier in the week after an analyst downgraded the stock.
The LHA account team and management held a conference call to evaluate options:
- Do not pre-announce the quarterly revenue.
- Pre-announce the quarterly revenue but withhold commentary about the next quarter’s revenue.
- Pre-announce the quarterly revenue along with qualitative commentary about the next quarter’s expected revenue.
- Pre-announce the quarterly revenue along with an estimate of the next quarter’s revenue.
Our strategic counsel took into consideration the likely reaction by investors and analysts; management’s standing with its external stakeholders, in particular its sterling reputation with Wall Street for candor and integrity; and the company’s track record of improved financial results and market share gains. Against the backdrop of weak economic and industry news, a declining stock price and an analyst downgrade, we reasoned that Wall Street was anticipating softer-than-forecast revenue for the quarter. Nevertheless, we made a case that sharing the revenue shortfall would preserve, if not enhance, management’s credibility with Wall Street – a factor that, in our opinion, outweighed other considerations. To address concerns about ‘whip-lash’ – reporting soft quarterly revenue followed by a strong revenue recovery – and limited visibility, we offered management a choice of approaches to commenting on the next quarter’s revenue ranging from very conservative to more aggressive.
Our client decided to issue a pre-announcement that included qualitative commentary about current sales trends and management’s assessment of next quarter’s revenue. After falling on the day of the announcement, the client’s stock stabilized and the slide that had started two months earlier was stemmed. Otherwise, investors and analysts reacted with equanimity to the news, and the eight publishing analysts maintained their ratings on the stock.