Thursday, July 14, 2016

Non-GAAP Financial Disclosure in Earnings Releases

Astute readers of the WSJ and accounting geeks from coast-to-coast have no doubt heard that on May 17, 2016, the SEC issued a new and revised set of best practices for public companies regarding non-GAAP financial measures.  

The first lesson is that the SEC IS paying close attention to where, when and how you utilize non-GAAP measures, and they should be used to augment your disclosures - not as a replacement for GAAP reporting.  

Two of the top ways for Issuers to avoid an SEC comment letter are;

1.  Use good judgment to ensure GAAP and non-GAAP measures are equally prominent in quarterly earnings releases - both headlines and release text and tables. 

2.  Quotes from the C-Suite should not promote ‘record’ non-GAAP measures if the comparable GAAP measure is not in lockstep.

Rather than summarize the findings, Catalyst invites you to read a very well written memo from our friends at Skadden, Arps (and there are others publicly available from other prominent law firms.) 

The Skadden brief can be found via the following URL;

Additionally, NIRI National hosted a conference call last week on the same topic and it's replay can be found here;

Catalyst has always been a proponent of transparent disclosure and communication and helping investors to look through some of the "noise" in financial reporting to get at recurring, sustainable trends trends.

 The use of non-GAAP financial measures helps provide this very service and continues to be a valid tool to help investors analyze income statement measures and cash flows.  The SEC edict, however, is a smart reminder that there are some fairly clear guidelines on what is and is not appropriate.  This were of course developed in response to a relatively small set of public companies that were pushing the envelope a bit too far - and ultimately used such measures to paint pictures that were not sufficiently reflective of the actual financials.

Investors deserve a consistent and easy to understand framework in this complicated era of financial engineering and reporting requirements.  ‘All things in moderation’ is a great slogan to help markets avoid the volatility and excesses of the last twenty years.  It works for us and we hope this note and accompanying brief will be helpful in your disclosure efforts. 

The Catalyst Team

Thursday, March 31, 2016

We Offer a Snippy Response to IR's Three-Peat Dismissal of Social Media

Responding to an informed blog post by PR Newswire about the black-balling of social media with the halls of IR-dom, we vented our spleen a bit in embarrassment of the position being taken by a majority of IR professionals.
Investor relations and social medi(um) to luke warm

Last week, the shareholder communications sphere experienced the hat trick of “IR and social media” reports coming from three independent studies. No surprise to anyone in the niche – all reports were aligned.... 
Our Snippy Response - Posted on the blog:
Bless you for covering this topic and taking the risk of coming to a different conclusion than the IR pack – the same group that has standardized on “XYZ Enterprises, Inc. Reports Fiscal 2016 Results of Financial Operations” as the preferred headline template for optimizing exposure of their Company and 1/4ly financial performance or the headline template “XYZ Enterprises, Inc. Board of Directors Declares Regular Quarterly Dividend” to turbocharge visibility of this capital allocation strategy (and decides the actual amount of the dividend should remain hidden like a present in the release body). 
That the conversation is going on and a meaningful base of investors are engaged in social media of various types should certainly not dissuade those charged with investor relations to try to shape that dialogue with company prepared and vetted communications and disclosures. Far better to just ignore it and pretend that everything is just fine – certainly the market can take care of our reputation better than we can. 
I can certainly see the comfort of being completely satisfied with the breadth of your visibility and the clarity of investor perceptions, such that you needn’t lower or burden yourself with putting a toe into a new medium. Unfortunately, in my unsightly career – I’ve been saddled with fabulous clients that weren’t in such a great position – and so we have utilized this scary medium in a prudent way to help raise their visibility. 
Finally – how can the investors who’s opinions the surveyed IR practitioners value ever become more engaged in social media if 73% of IROs refrain from engaging? Nice work – hold them off at the pass. And we wonder why the IR profession is not held in the esteem we all think our role deserves – perhaps if we all try harder to lead than to follow – our perceived value might receive a boost.

To which we add here:
Yes - we know social media is new, different, not in our control and potentially scary.  No one ever got fired for a Tweet they never made - yet...  But when you review the medium and its potential to expand the reach of your communications, it's hard to come to the decision that it's not worth a few minutes a day of your IR team's time to reach the investors AND JOURNALISTS & BLOGGERS that are active in social media. 
Social media solves the perpetual problem of pushing your news out to the very same people who are already watching.  You issue a release and it goes into a "digital drawer" with your company name and symbol on it.  Few will every see it if they don't know your name or symbol.  Social media is a way to drive traffic to that drawer; to find new investors and others who are passionate about elements of what you do, and to demonstrate a willingness to invest in all channels of communication - not just the ones that you control 100%. 
Finally - the party is going on with our without you.  How long will you be able to ignore how they are characterizing you at the party?  Is there any other global medium that you are able to ignore or not seek to influence with your perspective and disclosures?  
Abstention is likely due one or more factors:  1) Don't understand the medium and/or are afraid; 2) concern about potential negative feedback; 3) Just say nothing legal/disclosure posture; 4) Too busy already - no bandwidth for another task; 5) would have to figure out how to do it and put in place procedures and policies; 6) don't want to get sued or fired for a Tweet; 7) too much work to convince management and I won't get paid more for extra effort, etc.  
Upon closer examination - these fears / issues can be solved - and most rational managements can be persuaded that engagement at a prudent level - is better than abstinence - and frankly lowers the risk of social media damage - rather than increase it.  

Tuesday, February 9, 2016

Mr. Fink, Don't Blame Corporate Profit Guidance for Wall Street Short-termism

Wall Street Short-Termism – Companies and Their Guidance are Not to Blame 

While we applaud Larry Fink and other Wall Street leaders’ speaking out on the dangers of investment short-termism in Wall Street, we are not convinced that the corporate profit guidance practices he critiques are the cause of short-term thinking in Wall Street. We also find no small amount of irony in Wall Street pointing the finger at companies. We do share his concern about a dearth of longer-term thinking and capital allocation in Corporate America, as that does seem largely missing from Wall Street yet critical to long-term growth and success.

In theory stocks are valued based on the expected future financial performance of the underlying company. Management guidance – profit or otherwise – is an attempt to help investors understand where the company thinks it is going, and who should know better than the company itself? Absent corporate guidance on where the financial chips are expected to fall, Wall Street picks up the slack and provides its own estimates to shape investor expectations. Headlines and post-reporting trading activity tend to focus heavily on results vs. the expectations codified in consensus estimates, and sales calls go out encouraging investors to react to this short-term progress measure.

In this context, Mr. Fink’s suggestion to reduce or eliminate company-provided data-points and perspective regarding where it is going and the anticipated impact on its financial performance does not appear to benefit to anyone. In fact, the less guidance companies provide, the more likely Wall Street expectations can become off kilter. Such a divergence can only reduce investor confidence in the visibility of future financial performance, with a corresponding reduction in the company’s valuation – an unfavorable feedback loop resulting from Mr. Fink’s suggestion.

In our view, the real problem is not profit guidance but the Wall Street business model that makes active trading far more profitable than buy-and-hold investing. The whip-sawing of capital in and out of various investments generates commissions on each transaction, and in the case of funds offered by Mr. Fink’s firm, their fees/loads are higher the more frequently assets are moved from one fund to another.

So it seems to us that the structure of asset management and performance fees, along with fund advertising/marketing that highlights short-term performance to attract new investment (or defend existing investments) is a principal driver of short term thinking, not corporate profit guidance. We also believe that the genesis of activist investing is principally rooted in the growing pressure to accelerate shorter-term investment returns.

Wall Street has set up the rules of the game of current markets. It is this ecosystem that must take responsibility for the pressure to deliver short-term performance – as well as the corporate response to dealing with this very apparent set of rules.

The rapid growth of the volatility and short-term focus that Mr. Fink seems to critique is not unrelated to the corresponding decline in average Wall Street commissions. Increasing transaction activity has been required to make up for lower commission rates, but this trend creates clear disincentives for supporting long-term investment strategies.

So rather than blaming corporate guidance and disclosure practices, perhaps Mr. Fink and his cohorts should ask whether they have done all they can to create business and compensation models that support a longer term investment view.

We would guess that there is much that BlackRock could do to refine its methodologies, business model and communications to focus its teams and customers on long-term results. That effort would help foster an environment where companies could feel more comfortable to do the same with their strategies and investments.

The securities industry and the financial media could go a long way to helping in this endeavor as well, to wit – one of our clients recently reported very impressive year over year improvements in its business – and yet the Wall Street response was to ignore the 44% revenue improvement year over year – and the $7M positive swing on the bottom line.

Instead, the media coverage and trading activity ignored the impressive improvement and instead focused on the Company having “missed” the revenue estimate and the bottom-line estimate of just one analyst covering the stock. The company in question provides no profit guidance, is making long-term investments in its business that Mr. Fink would applaud – but the market reaction was the same. 

Given this orientation toward the precise predictions of near term results – with or without a company’s help – is a company to blame for trying to help shape Wall Street expectations with profit guidance? Who takes the reputational hit when a company “misses” expectations set by Wall Street? From our experience it is the Company, NOT Wall Street. We’ve never seen a headline that stated that analysts “missed” the quarter.

For these reasons, we believe it is an investor relations imperative that companies do all they reasonably can to inform investors on their plans, outlook and financial expectations. This effort helps ensure that third party expectations are as in-line with those of management as possible. Explicit earnings guidance is one such means of achieving this goal, however there many less granular ways of achieving the same thing.

Lest small or microcap companies take Mr. Fink’s advice to heart – their plight is even more challenging as their limited visibility, sponsorship and liquidity create even greater volatility in their share price around financial results – and greater vulnerability to perception risk. These factors provide a solid real-world rationale for working to shape investor expectations around financial performance in the near term – the next few quarters - as well as the long term.

While we completely agree that allocating capital and resources toward long term strategies and goals makes the most sense, as long as Wall Street gets to “vote” on our clients’ success in real time over 23,400 seconds of each trading day, 5 days per week and is not compensated based on a long term performance, we find it hard to counsel our clients to buy into his vision.

Instead, we believe companies should do an excellent job of explaining their vision, their goals and plans for the long term, as well as preparing investors for the consequences of those decisions in their near term results. The more helpful detail they provide, the greater comfort and confidence investors will have, and the more likely (not less likely) that investors will be motivated to hang on for the long run too. Though we set out to drive 2,000 miles to a distant city, does that mean that we must ignore the guideposts and gauge readings along the way that help us understand how we are doing in our journey and how well resourced we are to get there.

But kudos for at least raising the topic – as more and better longer term thinking and capital allocation will lead to better long term investment outcomes, which is good for all. But we are concerned his prominence might unduly influence companies to follow his lead, particularly those in the small or microcap realm - and find themselves in a worse position.

David C. Collins
Managing Director, Catalyst Global
New York City

February 9, 2016

Thursday, January 28, 2016

Risk vs. ROI in Providing Embargoed Material News to Media

In response to an IR community inquiry about providing an embargoed copy of an earnings release to the media an hour prior to its issuance, we wrote the following advice on such practices that we are sharing here as well. 

The specific inquiry said that the Company's CEO had been invited to appear on a "well-known" financial news program just after they report quarterly results. The producers also asked if the Company would provide them an embargoed copy of the earnings release about an hour early so the host could digest the news, the program could produce graphics, etc. to support the segment. 

Here's what we said: There is no one size fits all answer to this question - but you are free to share the news with them in advance - but it does expose you to a modest risk should they act on the news (trading) or report the news in some way in advance. Working with reputable news organizations - that risk is virtually nil and therefore not one that would inhibit my proceeding - but like everything - you have to consider the ROI - does the expected benefit outweigh the modest risk? 

And from a legal standpoint, you can protect yourself by asking the journalist to confirm in advance - email would be fine - that they acknowledge they are receiving material news in order to help their interview preparation - and that they understand they cannot disclose any of this data to any parties and that any trading or other action using the provided information would be in violation of Federal Securities laws (and that in the event of any inquiry, you would disclose to authorities that you have shared this information with the media source under embargo, along with the related communications. 

The bigger question would be - to what extent do you think the content of the release will help them in developing interview questions that well best support the messages you seek to tell? If you think more time with the release will lead to a far more effective interview - then I would proceed with sharing an embargoed release.

Are there issues or themes that require more time to consider - such as charges or other surprises vs. market expectations or other new data that would take time to digest?

Is the source of the outperformance or underperformance easy to discern - if they don't have an advance look? 

Will their advance preparation enable them to dig deeper, perhaps on industry issues or other elements on which you would prefer to not be in focus? 

You also have the ability to share with them the qualitative commentaries in the release - and perhaps the conf. call script - rather than the numbers - that would get them on message without providing them with material earnings data. 

IR is all about building relationships and credibility. Demonstrating trust and working with the media to help them do their job can have long term benefits in terms of future coverage and their willingness to listen to your perspective.  Saying no to the request will not help your being considered for future media opportunities.  

Lastly, we would argue that the smaller your company is, the harder you have to work, the more such risks you need to take, to position your company for media coverage. Larger companies can get away with doing less (not that we recommend that!) because they are more likely a "must cover" story.

Hope that helps!

Catalyst Global

Thursday, October 15, 2015

Initial Thoughts on Goldman, Sachs' Q3 Reporting Experiment

We’ve provided some screen captures of Goldman, Sachs quarterly results reporting as it appears on TD Ameritrade this a.m. The same analysis can be performed on other financial portals to judge the success and efficacy of the alternative approach. 

Clearly the financial community was poised for the report and the news flow was seemingly unimpeded by the change in disclosure methodology which eliminated paid wire service dissemination in favor of a website led disclosure supplemented by Twitter communications. 

Note that in order to achieve broad instantaneous disclosure of its financial results outside of its website and Twitter activity, we have been told by reliable sources that Goldman provided its news release in advance to certain financial media, such as (we presume) Dow Jones, Reuters, Bloomberg etc. so that they could prepare the content and report it simultaneously with the web release. 

A few cursory observations on how it went (from TD Ameritrade's news sources - example screen grabs provided below):

  • In our observation, Goldman’s release appeared on their website at 7:35am ET – possibly 7:34am ET however, Dow Jones' headlines started reporting the results at 7:33am ET. 
  •  From our observations, the Zack’s coverage, while it says 7:06am ET, did not appear prior to the Dow headlines and seems to have been “post dated” in its posting to 
  • None of the Goldman headlines on TD Ameritrade provide direct links to the full content of the Goldman release – whereas in the Q2 reporting cycle the full text of the release is accessible by clicking on a series of Dow Jones headlines.
  •  The absence of a broad, simultaneous distribution of the entire news release to financial portals such as TD Ameritrade remains our principal critique of the website-driven disclosure.
  • Even the advance notification of certain major financial media such as Dow Jones did not achieve the same level of access to the source content (the actual release) as did Goldman's previous paid wire service distribution.
  •  Also, anecdotally, the first MarketWatch Clip today was at 7:40am ET vs. 7:37am ET for Q2 reporting.  
Again, while we do appreciate the attempt to innovate, we do hold innovation to a standard of efficacy and relevance and for that reason we've gone out of our way to raise caution about this new approach for Companies considering it. 

The analogy that comes to mind is that if we needed a document to "absolutely, positively" be somewhere the following morning, we would utilize one of the major overnight courier services, rather than to construct our own distribution channel of fast cars and fast drivers to achieve the same goal.  It just does not seem that safety or efficacy were served in this experiment, but we welcome any evidence that in fact this is a far better idea. 

The Catalyst Global Team

Goldman Sachs Q3 Reporting Headlines
as Appeared on TD Ameritrade on October 15, 2015

Goldman Sachs Q2 Reporting Headlines From July 16th as appear today on TD Ameritrade (Release issued via a Newswire Service at 7:35 a.m. ET)


    Looking at other disclosure sources we find the following issues:

    Goldman's Q3 results are not listed in the Press Release section for Goldman on - not a terrible issue given that some coverage of the results appears on the website - but not an ideal result for 1/4ly results. 

     Similarly, on TD Ameritrade when searching on press releases, Goldman's Q3 results are nowhere to be found - again not a desirable outcome.

    Goldman's Q3 results are discussed in a news item on Reuters but the full text of the results is not available on Reuters news page for Goldman.

    Here's the news item attributed to Zacks but we don't believe was issued until after the release was posted to the website around 7:34 or 7:35 - it's time stamp of 7:06 am therefore appears to be incorrect.  While not a major issue, it does raise a question as to the accuracy and reliability of data that gets reported and then consumed by investors.