An earnings release is issued after the end of a quarter to communicate a company’s performance during the quarter. It can be a narrative companion to the financial statements, highlighting the achievements of the company and setting the overall tone the company wants to convey to investors. In addition to putting out an earnings release, companies usually hold a conference call for analysts and investors.
The Role of the Board of Directors
- The board’s role in writing the earnings release may depend on the size and experience of the management team. A smaller, or newer, company may want the board’s involvement more than a more established company might.
- Regardless of how involved the board becomes, it should have guidance over the earnings release before it is issued. Guidance given by the board should reflect the working forecasts and be supported by the internal documents.
- The tone of the earning release should reflect the tone that was presented at board meetings. In no part of it should it overstate or hype the reality of the results. Content should be meaningful, appropriate, and representative.
- At the very least, board meeting protocol will typically state that the board review the earnings release to ensure the members know what will be announced and that they technically agree with the content.
Structure of the Release
- A review of the financials is done by the audit committee, and then full board. There should be a review of the 10K/10Q and the associated updates to the disclosures before anything is said to anyone outside the company.
- Your earnings release will lead with GAAP financials. It will then include non-GAAP financials and a reconciliation between the two. Be careful not to be misleading. Be realistically conservative if you quote operational metrics.
- Be consistent with the information you provide in each statement. Be careful about issuing a new metric because you are then setting yourself up to a precedent you will need to continue.
Earnings release in the COVID era
- COVID is affecting how companies are dealing with disclosures, specifically in updating risk factors and making projections of the financial impact on certain metrics.
- Include your legal counsel when drafting these disclosures.
- It is important to address liquidity/financing (potential limits to accessing funds). Some companies focus on operational issues as well.
- The key is to exercise caution – be cautious in your commentary and have a heightened awareness to risk. Be transparent with the factors affecting the company.
- Be mindful that the risks are widespread and not just financial. For example, risks could include employees, product development, sales, etc.
