I was reading a transcript the other day of a company whose stock had collapsed. When I read the CEO's remarks, there were no clues as to why the company had blown up. According to him, business is great, their market opportunity is huge, and they're taking share.
Even the CFO's commentary was bullish. Revenues and earnings had beaten the guide and revenue growth had even accelerated.
The press release was similarly bullish. And yet the stock opened the next morning down 20%.
So what happened?
The blow-up was about what they didn't say; they didn't reiterate their previous guidance for the following fiscal year in which they'd originally told people they'd achieve profitability.
Doh!
That's a massive shift. Not just because today's market is punishing unprofitable companies… but because it's a downgrade from what they'd said earlier and they weren't forthcoming about it. Double-whammy!
Inconceivably, management thought that by simply eliminating this "small fact" from their prepared remarks, the Street would overlook it and reward them for the good quarter they'd just reported. But this isn't how it works.
I tell my clients all the time that a quarterly report consists of at least three major things: 1) the published numbers from the quarter, 2) management commentary, and 3) guidance. And every time investors prepare for a quarterly report, they review the previous quarter's numbers, commentary, and guide. So if there are any inconsistencies, they're going to see them right away. You can't "pull a fast one" on investors simply by being silent.
So what should they have done? Well… if I had been their investor relations consultant, I'd have advised them to describe in detail the reasons for the adjustment to their profitability outlook in the first few paragraphs of the CEO's prepared remarks. This is because bad news is so much more easily digested and accepted (and credibility retained) if it's delivered proactively.
If you don't tell investors the bad news right away, then investors think you're trying to sneak something past them. And once they see this behavior, all of your subsequent behaviors become suspect. Management teams that get this kind of reputation are punished with lower multiples and ultimately, shorter tenures in their jobs.
Instead, tell investors everything they need to know right away. That way, you maintain your credibility and they're able to listen to the rest of what you have to say - a lot of which will be important. You don't want investors spending their time searching for the reasons why the stock is down 20% in the after-market. You want them listening and paying attention to any of the strategic stuff you want them to know. You also want to be known as a manager that doesn't sugar-coat the truth.
