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How many sets of interim results is too many?

The pros, the cons, the UK’s about-face and why Trump wants to change the US system.

Many companies with March year-ends are releasing their interim results at the moment.

This is a set of financial figures published at a specific interval within the standard financial period; if an entity’s financial year-end falls on March 31, its half-year interim figures will represent its year-to-date performance up to September 30.

Publicly owned companies in the United States are required to report earnings quarterly (around every 13 weeks or 65 business days) and annually. 

Add Apple’s recent change to the way it reports quarterly earnings (saying that it will no longer release iPhone, Mac and iPad sales numbers), and US president Donald Trump’s reference to potentially switching the current US system of quarterly reports to a six-month system, and you have ‘interesting times’.

Questioning ‘short-termism’

The bottom line is that many thinkers point somewhat disparagingly to the short-term outlooks created by short or multiple reporting periods.

JPMorgan Chase CEO Jamie Dimon and Berkshire Hathaway chair Warren Buffett are among them, penning a letter titled ‘Short-Termism Is Harming the Economy’, published by the Wall Street Journal on June 6, on behalf of the Business Roundtable (a group of CEOS of major US corporations formed to promote pro-business public policy).

In it, they said that short-term earnings guidance yields an unhealthy focus on short-term profits at the expense of strategy, growth and sustainability.

Short-termism – also known as ‘quarterly capitalism’ – is defined as companies’ fixation on managing for the short term, with decisions driven by the need to meet quarterly earnings at the cost of long-term investment.

Then there’s the cost-saving argument. According to the Wall Street Journal earlier this year, a change from quarterly reporting to semi-annual reporting could mean significant savings for smaller companies (but not for large companies).

Why publish interims?

So why publish interims at all? Well, publicly listed entities are legally required to post interim reports because they are answerable to a large number of stakeholders who rely on the receipt of more frequent information.

Additionally, businesses release interim results to give the market an indication of their performance for the current year.

Investors can make more informed decisions around the marketability of a company, and the company can manage the narrative behind operational performance; perhaps giving an idea of what to expect when year-end rolls around, perhaps to smooth the volatility of the share price.

As we saw in the case of Netflix, whose share price jumped 12% off the back of their published results for Q3, interims can exert a large influence relative to the share price. For instance, positive performance above expectations sees increases in the market value of the share, and vice versa.

The cyclical business

But what if your business is cyclical? Your interim results might be skewed as a result of seasonal patterns in, for example, clothing retail.

Things begin to get even more complex when a business is not fully cyclical, but elements of its environment are not fully understood. In these cases, it can be difficult to determine how to extract reliable information from interims.

Take, for example, entities with exposure to the public sector; to South Africa’s municipal space. The market may not know that municipalities receive most of their funding in two separate tranches, known as equitable share. The heavy reliance of local and district municipalities on the receipt of equitable share means that they often cannot pay creditors until June or December.

But if your interim results are produced and distributed prior to equitable share, the market could negatively construe your ability to collect on debts, where in fact what you face is a sector-specific timing issue.

A word of caution

The UK, which in 2007 had mandated quarterly reporting, changed back to semi-annual reporting in 2014, and Europe followed suit. But as it turned out, companies in the UK and Europe continued to put out quarterly reports, egged on by investors, analysts and portfolio managers.

In my opinion, interims remain a beneficial tool for stakeholders but do not necessarily offer a realistic or holistic view of an entity’s performance. Further, there is an argument to be made about balancing the obligation to stakeholders and the optimum capital allocation for companies.

In a 2017 report titled Moving Beyond Quarterly Guidance: A Relic of the Past, FCLT Global argues that companies should stop giving quarterly guidance and instead provide investors “with a long-term road map focused on the fundamental economic drivers of the business tied to management’s outlook on critical key performance indicators” known as KPIs.

Greg Morris is CEO of Sebata Holdings.

COMMENTS   1

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the quarterlies in US are not audited but must still be a pain doing full accounts 4 times a year.

What might be more useful than full accounts is like parts of Asia – companies release monthly revenue numbers???

If our JSE wants to change things up they should have a look at US 10 filings. None of this nonsense where there is 100 glossy pages of social this and marketing blah blah blah. The US companies give VERY detailed info, have to disclose a LOT more about things like major contracts, how certain parts of business works. Also management has to give very specific risk evaluations on some really obscure parts of the business.

Anybody that is interested, go pull this Apple 10K for example. If Steinhoff has done this kind of report…

https://d18rn0p25nwr6d.cloudfront.net/CIK-0000320193/68027c6d-356d-46a4-a524-65d8ec05a1da.pdf

End of comments.

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