Giving Up on Giving Guidance

More companies are no longer dispensing quarterly earnings guidance in order to focus on longer-term goals

by Karyn McCormack

Dan Warmenhoven saunters into a dining room at the Grand Hyatt Hotel in New York, with a broad smile on his face and hearty handshakes all around. And why not? It's analyst day for Warmenhoven and Network Appliance (NTAP), and the tech storage company has been on a tear. As NetApp's stock has gone from $15 a share to $38 over the past five years, Warmenhoven and his team have made loads of money for the company's largest shareholders, Fidelity Management & Research, AllianceBernstein (AB), and TCW Asset Management.

There's one issue that could disrupt the lovefest, however: guidance. Like many companies, NetApp gives financial analysts explicit guidance about what kind of financial performance it is expecting in the months ahead. Asked whether he would ever consider discontinuing the practice, Warmenhoven stares, grimaces, then laughs. He admits he has "mixed feelings" about guidance. "But if you stop, then investors are going to automatically think that there's something wrong," he says.

He's in an unusually complicated position. That's because his own boss, Don Valentine, the chairman of NetApp, has been prodding Warmenhoven to give up on guidance for years. "Look," says Warmenhoven, pulling out his BlackBerry and scrolling through his messages. "He just sent me an e-mail saying what kind of idiot would stand up in front of a roomful of people and predict something that they can't possibly know." When Warmenhoven reads part of the e-mail, it's worded much more diplomatically. But the point is essentially accurate—Warmenhoven and his chairman, two of the most respected executives in technology, are in open disagreement about the proper policy on guidance.

Many Pulling Back

It's a reflection of the intense debate going on inside U.S. companies these days. Supporters of corporate guidance, including major institutional shareholders, say that more information is better for investors and that a lack of regular guidance creates uncertainty. On the other side are critics like Valentine who argue that guidance, especially quarterly guidance, creates pressure to focus on the short term, opens companies up to litigation risk, and can be a distraction for management. "Issuing [quarterly] guidance is a fool's game," says Robert Pozen, chairman of MFS Investment Management in Boston and member of a U.S. Chamber of Commerce group that recently examined the issue.

Some companies are starting not to play. While the number of companies providing financial guidance increased sharply over the last 12 years, these numbers are now leveling off and appear to be pulling back. Since beverage giant Coca-Cola (KO) stopped giving quarterly and annual earnings guidance in 2003 (see BusinessWeek.com, 5/3/03, "Commentary: With Earnings Guidance, Silence Is Golden"), other big names have followed suit, including AT&T (T), Mattel (MAT), and McDonald's (MCD).

There has been a rush of companies joining them in recent weeks. On Apr. 26, Beazer Homes USA (BZH) and Pulte Homes (PHM), two homebuilders battered by the housing downturn, said they would provide no guidance for the rest of the year because the weak market made it too difficult to predict earnings (see BusinessWeek.com, 4/26/07, "Big Homebuilders Button Up"). On May 1, Blackstone Group, the private equity firm that plans to go public later this year, said it would not provide earnings guidance.