Ehud helft ccg israel

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Ehud Helft | March 2011

GUIDANCETo Give or Not to

Give?

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Guidance provides investors and analysts a view on future performance of the company• Reduces chances for surprising the

market and by that, reducing stock volatility

• Increase transparency, openness and confidence in management and future performance

• Gain analyst coverage• Comply with Reg. FD and reduce

legal exposure

The main argument against giving guidance:• Promoting short-term goals over

long-term• Loosing credibility if guidance not

met• Having to issue a warning or

chasing deals at the end of the quarter to meet guidance

ISSUE 1: To Give or not to Give

90% of companies provide some form of forward looking

information

Over half provide financial targets

Provide ‘general’ targets

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NIRI Survey

Why do you provide guidance?

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Management philosophy

Increased volatility/economic uncertainty

Senior management/Board request

Industry trends

Senior management/Board request

NIRI Survey

Why do you not provide guidance?

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Revenue or sales

Tax rate

Oper. expenses/margins

EBITDA or EBIT

SG&A or G&A

Other, please specify

Working capital

NIRI Survey

What financial measure do you provide guidance on?

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NIRI Survey

What non-financial forward looking statements do you provide?

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Conventional wisdom: In tough times, it might be better to stop guidance. Alternative view: “Guidance stoppers are primarily troubled firms.”* In the midst of the last recession, December 13, 2002…..

ISSUE 2: Guidance in Tough Times

*Source: Houston, Lev & Tucker, 2008. “To guide or not to guide.”

McDonalds was going through very troubled times.

Declared it would also post its first quarterly loss in its history, delayed its conference call and provided little further information.

In the subsequent PR on January 23, 2003 discontinued guidance.

40%

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Conventional wisdom: In tough times, it might be better to stop guidance.

Alternative view: “Guidance stoppers are primarily troubled firms.”* In the midst of the last recession, December 17, 2002…..

ISSUE 2: Guidance in Tough Times

*Source: Houston, Lev & Tucker, 2008. “To guide or not to guide.”

23%

Stopped providing investors with any specific guidance, due ‘short-termism’.

Remained open with investors with regard to the decision and shared long-term goals and strategy with the market.

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NIRI Survey

Since discontinuing guidance, has there been a change in the spread of estimates?

No change Narrowed Widened Unclear No Coverage

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Conventional Wisdom: “Yearly promotes focus on long term performance, I can be more conservative and it leaves me more time and flexibility to achieve the guidance”

Alternative view: “As the end of the quarter is only 2 months away, I have a better idea of what I can achieve and therefore more likely to be accurate.”

Case Study: Nova Measuring Instruments (NVMI), had a good 2009 and the share price appreciated. At the start of 2010, the company embarked on a secondary and their bankers and new investors convinced/insisted that

they issue guidance because there was no coverage or consensus for the market to count on As a compromise, the decided to take the annual guidance route…

ISSUE 3: Quarterly Guidance or Yearly

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Nova Measuring Instruments (NVMI), fourth quarter 2009 results and conference call, February 17, 2010:

ISSUE 3: Quarterly Guidance or Yearly

* which in Q1 subsequently raised to $61-66 million, in Q2 to $78-85 million, said it would “meet or beat” the top-end in Q3 and achieved $87 million in Q4

Q4-09 was fantastic: record profit on strongly growth (+34% seq.) in revenues, reaching: $15m.

For the first time, provides FY 2010 revenue guidance* of: $58-63m.

Investors were disappointed

Secondary Q4-09 Q1-10 Q2-10 Q3-10 FY-2010Analyst Day

Nova used Q309 to make a subtle switch to quarterly guidance and formally switched to quarterly guidance in Q410.

15 x 4 = 60→Flat year

Share price dropped but recovered quickly as investors felt management was being overly conservative.

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NIRI Survey

Over what time period does your guidance refer to?

Long-Term Annual Quarter Monthly Other

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NIRI Survey Summary

90% of companies give some type of forwarding looking information or guidance

66% of these provide EPS guidance (61% of which provide a range, 2% an exact figure and 3% directional information)

70% of these provide revenue guidance (56% of which provide a range, 2% an exact figure and 8% directional information)

Only 37% of guidance givers provide guidance on a quarterly basis

Two-thirds have made recent* changes to guidance policy

No Change

* Past two years

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Two-thirds give guidance, and out of those:All have sell side coverageA third give quarterly projectionsAll provide revenue projections and just under half provide earnings projectionsAlmost all provide guidance in the form of a range

The smaller clients are more likely to give guidanceA need to generate more interest amongst investors and analysts

The main reason for not giving guidance is the exposure and the worries from the implications if not meeting guidance

What our US-listed Israeli clients our doing

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Any guidance is better than no guidance Unless you have good annual visibility, quarterly guidance is better The “no guidance approach” won’t solve your problems:

Market will still judge you on quarterly results You will still be expected to meet expectations (you don’t control), and will be

“punished” for a miss If you have analysts, they will still expect you to guide them “off line” and you

are legally exposed to Reg-FD If you don’t have analysts, you are unlikely to gain many (unless you are Coca

Cola)

The “no guidance approach” may only save you the “embarrassment” of issuing a public warning if you miss guidance –

Often times, this consideration gets too much weight in our view as the market is forgiving to management teams which are open & transparent

In our view, missing once-in-a-while is better than never having given guidance!

Our View

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Summary – What Investors Want from a Company

Openness

Transparency

Honesty

Predictable

Stability

Clarity

Simplicity

Expectations

LT Goals

Results

Communication No SurprisesResponsible

Consistent

Performance

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