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𝗕𝗲𝘁𝘄𝗲𝗲𝗻 𝗧𝘄𝗼 𝗘𝗮𝗿𝗻𝗶𝗻𝗴𝘀 𝗖𝗮𝗹𝗹𝘀 𝘄/ 𝗠𝗿 𝗜𝗻𝘃𝗲𝘀𝘁𝗼𝗿 𝗥𝗲𝗹𝗮𝘁𝗶𝗼𝗻𝘀
𝗙𝗶𝗻𝗮𝗻𝗰𝗶𝗮𝗹 𝗚𝘂𝗶𝗱𝗮𝗻𝗰𝗲: 𝗧𝗵𝗲 𝗚𝘂𝗶𝗱𝗮𝗻𝗰𝗲 𝗥𝗮𝗻𝗴𝗲

Video Number 7 in Our Financial Guidance Series

The Financial Guidance Range includes four primary components:

• 𝗧𝗵𝗲 𝘁𝗿𝗮𝗻𝘀𝗹𝗮𝘁𝗶𝗼𝗻 𝗼𝗳 𝗢𝗽𝗲𝗿𝗮𝘁𝗶𝗼𝗻𝗮𝗹 𝗙𝗶𝗻𝗮𝗻𝗰𝗲 (𝘄𝗲𝗲𝗸𝘀 𝗮𝗻𝗱 𝗺𝗼𝗻𝘁𝗵𝘀) 𝗶𝗻𝘁𝗼 𝗖𝗮𝗽𝗶𝘁𝗮𝗹 𝗠𝗮𝗿𝗸𝗲𝘁𝘀 𝗙𝗶𝗻𝗮𝗻𝗰𝗲 (𝗾𝘂𝗮𝗿𝘁𝗲𝗿𝘀 𝗮𝗻𝗱 𝘆𝗲𝗮𝗿𝘀).

• 𝗔 𝗻𝘂𝗺𝗲𝗿𝗶𝗰 𝗿𝗮𝗻𝗴𝗲 𝘁𝗵𝗮𝘁 𝗶𝗻𝗰𝗼𝗿𝗽𝗼𝗿𝗮𝘁𝗲𝘀 𝗮𝗹𝗹 𝗸𝗻𝗼𝘄𝗻 𝗶𝗻𝘁𝗲𝗿𝗻𝗮𝗹 𝗼𝘂𝘁𝗰𝗼𝗺𝗲𝘀 / 𝘀𝗰𝗲𝗻𝗮𝗿𝗶𝗼𝘀

• 𝗔 𝘀𝘂𝗺𝗺𝗮𝗿𝘆 𝗿𝗮𝗻𝗴𝗲 𝗼𝗳 𝘁𝗵𝗲𝘀𝗲 𝗼𝘂𝘁𝗰𝗼𝗺𝗲𝘀 𝗰𝗼𝗺𝗽𝗿𝗶𝘀𝗲𝗱 𝗼𝗳: 𝗮 𝗵𝗶𝗴𝗵, 𝗹𝗼𝘄, 𝗮𝗻𝗱 𝗺𝗶𝗱𝗽𝗼𝗶𝗻𝘁, 𝗮𝗻𝗱

• 𝗙𝗶𝗻𝗮𝗻𝗰𝗶𝗮𝗹 𝗘𝘅𝗽𝗲𝗰𝘁𝗮𝘁𝗶𝗼𝗻𝘀 𝗠𝗮𝗻𝗮𝗴𝗲𝗺𝗲𝗻𝘁: 𝗴𝘂𝗶𝗱𝗮𝗻𝗰𝗲 𝗿𝗲𝗽𝗿𝗲𝘀𝗲𝗻𝘁𝘀 𝘁𝗵𝗲 𝗽𝗿𝗶𝗺𝗮𝗿𝘆 𝘁𝗼𝗼𝗹 𝗮 𝗰𝗼𝗺𝗽𝗮𝗻𝘆 𝗵𝗮𝘀 𝘁𝗼 𝘀𝗲𝘁 𝗲𝘅𝗽𝗲𝗰𝘁𝗮𝘁𝗶𝗼𝗻𝘀 𝗮𝗻𝗱 𝗱𝗶𝗿𝗲𝗰𝘁𝗹𝘆 𝗶𝗺𝗽𝗮𝗰𝘁 𝘀𝘁𝗼𝗰𝗸 𝘃𝗮𝗹𝘂𝗮𝘁𝗶𝗼𝗻.

𝗧𝗵𝗲 𝗙𝗶𝗻𝗮𝗻𝗰𝗶𝗮𝗹 𝗚𝘂𝗶𝗱𝗮𝗻𝗰𝗲 𝗥𝗮𝗻𝗴𝗲

What is the Financial Guidance Range?

At the basic level, financial guidance is simply translating the Operational Finance numbers into an appropriate summary for the Capital Markets.

The guidance range becomes the guardrails for financial expectations management with public investors. Ultimately, management will be judged on how the group executes on the guidance provided.

Financial Guidance drives investor models, but more importantly directly drives and impacts stock valuation.

• 𝗚𝗼𝗼𝗱 𝗴𝘂𝗶𝗱𝗮𝗻𝗰𝗲 = 𝗖𝗿𝗲𝗱𝗶𝗯𝗶𝗹𝗶𝘁𝘆 = 𝗩𝗮𝗹𝘂𝗲 𝗖𝗿𝗲𝗮𝘁𝗶𝗼𝗻

• 𝗕𝗮𝗱 𝗚𝘂𝗶𝗱𝗮𝗻𝗰𝗲 = 𝗟𝗼𝘀𝘁 𝗖𝗿𝗲𝗱𝗶𝗯𝗶𝗹𝗶𝘁𝘆 = 𝗩𝗮𝗹𝘂𝗲 𝗗𝗲𝘀𝘁𝗿𝘂𝗰𝘁𝗶𝗼𝗻

𝗞𝗲𝘆 𝗖𝗼𝗺𝗽𝗼𝗻𝗲𝗻𝘁𝘀 𝗼𝗳 𝗚𝘂𝗶𝗱𝗮𝗻𝗰𝗲

There are four components of financial guidance to consider if the goal is to create value:

Start with setting the appropriate range, which involves setting the high end and low end of the expected outcome for a given period e.g. quarter or full year.

Second, ensure the range you set incorporates all internal forecasts and scenarios.

If you fail to consider all outcomes, then you will find that the frequency of change to guidance will be more than optimal.

Why?

Investors like stasis around expectations.

Investors believe that valuation is built over several quarters and several years, not during a single earnings period.

Therefore, initial guidance, in a best case scenario, should only be updated mid-year, given the stasis preference.

The less a company changes its financial guidance the better and more credible the guidance becomes.

Too frequent change signals a lack of competency or control over forecasting.

At a minimum, the company must provide revenue and adjusted EBITDA.

Then add appropriate operational KPIs.

𝗛𝗼𝘄 𝗖𝗮𝗻 𝘁𝗵𝗲 𝗚𝘂𝗶𝗱𝗮𝗻𝗰𝗲 𝗥𝗮𝗻𝗴𝗲 𝗖𝗵𝗮𝗻𝗴𝗲

There are two ways the guidance range can change.

• 𝗗𝗶𝗿𝗲𝗰𝘁𝗶𝗼𝗻𝗮𝗹: 𝘁𝗵𝗲 𝗿𝗮𝗻𝗴𝗲 𝗰𝗮𝗻 𝗴𝗼 𝘂𝗽, 𝗱𝗼𝘄𝗻, 𝘀𝘁𝗮𝘆 𝗳𝗹𝗮𝘁, 𝗻𝗮𝗿𝗿𝗼𝘄, 𝗼𝗿 𝘄𝗶𝗱𝗲𝗻.

• 𝗙𝗿𝗲𝗾𝘂𝗲𝗻𝗰𝘆: 𝗼𝗳𝘁𝗲𝗻, 𝘀𝗲𝗹𝗱𝗼𝗺, 𝘀𝘁𝗮𝘀𝗶𝘀.

The greater the frequency of change and the direction of change directly impacts stock valuation.

The goal is to eliminate the possibility of negative surprises!

𝗣𝗿𝗲𝘀𝗲𝗿𝘃𝗶𝗻𝗴 𝘁𝗵𝗲 𝗢𝗽𝘁𝗶𝗼𝗻𝗮𝗹𝗶𝘁𝘆 𝗼𝗳 𝗚𝘂𝗶𝗱𝗮𝗻𝗰𝗲

The primary goal is to preserve optionality in your guidance; avoid backing the company into a value destructive corner.

The primary drivers are accurate internal data and forecasts plus managing the frequency of change to guidance.

𝗕𝗮𝗱 𝗗𝗮𝘁𝗮 + 𝗙𝗿𝗲𝗾𝘂𝗲𝗻𝘁 𝗚𝘂𝗶𝗱𝗮𝗻𝗰𝗲 𝗖𝗵𝗮𝗻𝗴𝗲𝘀 = 𝗩𝗮𝗹𝘂𝗲 𝗗𝗲𝘀𝘁𝗿𝘂𝗰𝘁𝗶𝗼𝗻