Public Cos. Navigate The Guidance Game
For public companies, determining what to tell investors about earnings expectations for upcoming quarters or fiscal years can be a tricky proposition, especially when the economy is as volatile as it is now.
But taking a look at the revenue guidance issued by IPG Photonics of Oxford, Cognex Corp. of Natick and American Super-conductor Corp. of Devens provides a glimpse into the strategies involved in the effort.
Crystal Ball
To a certain degree, setting guidance is an exercise in managing expectations. However, under-promising and over-delivering only holds so much water with investors and fund managers who count on corporate guidance statements as part of the investment decision-making process.
Gene Cassis, vice president of investor relations at Waters Corp. in Milford, said the laboratory equipment company’s earnings are “amenable to trend analysis,” which makes it relatively easy to forecast.
“Almost half of our business is recurring in nature,” Cassis said. “Of the remaining half, a significant portion is replacement of instrumentation that is aged, and we can look and make estimates on how many.”
About 25 percent of Waters’ remaining business is more unpredictable, and the 50-year-old company, which provides many quality control testing instruments to the pharmaceuticals industry, must consider “what’s going to happen with production of pharmaceuticals in the future, especially for the underserved in the developing world,” Cassis said.
Waters’ age is an advantage. Cassis said the company has a seasoned field management structure that provides a healthy dose of conservatism to financial forecasts.
“The reality is you get severely penalized if you make a guidance and fall severely short,” he said. “It has to be managed carefully. There has to be credibility to the forecast.” Investors “want to have information from us that can allow them to create their own models internally.”
No surprise then, that Waters predicted a sales decrease between 3 percent and 5 percent for 2009 and finished the year with a 3 percent decline.
Laser Focus
Oxford-based IPG Photonics, a developer and manufacturer of industrial lasers, provides perhaps the most telling example of how companies balance the need to manage expectations with the need to publish accurate information.
The company reported revenue of $45.2 million in the first quarter of a tough 2009. Its revenue guidance for the fiscal year varied between $39 million and $49 million throughout the year, and in the fourth quarter, the company surpassed that guidance by taking in $54.3 million.
In that quarter, IPG issued a guidance of $48 million-$53 million for the first quarter of 2010 and came in at $51.2 million.
But something was afoot. The economy was beginning to stabilize, if not turn around, and IPG customers, especially those in Germany and Japan, were looking to buy. The company had also undertaken an aggressive cost-cutting effort that slashed operating costs by nearly half. It said it expected revenue between $57 million and $62 million for the second quarter, an increase of nearly 20 percent.
When second quarter earnings were reported, the company had brought in $67.3 million, exceeding the high range of its guidance by 8 percent.
Charging Forward
American Superconductor Corp. in Devens is half Waters’ age and turned its first full-year profit last year.
Every quarter, AMSC adjusts its revenue guidance for the year. At the end of 2008, it estimated that it would take in between $225 million and $235 million in 2009. It wasn’t until Nov. 19 that the company told investors it was likely to report revenue between $300 million and $310 million for the year.
AMSC finished 2009 with $316 million in revenue. It predicted that 2010 would bring more than $400 million. In the first quarter, it increased its guidance for the year from between $415 million and $425 million to between $420 million and $430 million.
But the company isn’t being coy with its newfound success, said Jason Fredette, a corporate spokesman.
“We have to provide a reasonable guidance. We don’t want to overpromise and we don’t want to drastically underestimate where we come in,” he said.
In 2009, Fredette said the process was gradual. “We believed entering the year that we would post record results, but we were not originally anticipating 70 percent year-over-year revenue growth.”
Blindside
For Cognex Corp., a developer of machine vision sensors used on assembly lines, the recession made 2009 almost completely unpredictable.
It issued no revenue guidance in all of 2009 and said only that it expected an increase of as much as 5 percent over 2009 in 2010.
Early this year, things started to come back around for the company. It reported revenue of $58.9 million for the first quarter, a 39-percent increase over the $42.3 million and falling it reported a year earlier.
Then in the second quarter, the company reported revenue of $71.8 million, a 75- percent increase over the $40.9 million it brought in during the second quarter of 2009.
At the same time, Cognex began issuing its financial outlook again, predicting that it expects revenue between $65 million and $68 million for the third quarter, a decrease of between 5 percent and 9 percent from the second quarter.
The company said the predicted revenue decrease would be the result of typical seasonal softness in the markets it serves.
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