Giving guidance the silent treatment offers Street a chance to tell it like it is
EmptyThe sobering upshot from the latest quarterly earnings season is this: Hardly any management team in the media and entertainment industry can or is willing to predict how 2009 will play out financially.
Traditionally, fourth-quarter earnings calls are the time for guidance for the new year. But this time around, most CEOs and CFOs used the worst recession in decades as the backdrop for not providing even the roughest of stabs at how their businesses might play out this year — or even this quarter.
To be sure, Hollywood is part of a broader trend in corporate America that has seen more firms stay away from projections because of what usually is referred to as "a lack of visibility."
It is evidence of how difficult it is for even the most highly paid sector executives to forecast business trends in choppy waters and how little they can do, beyond reacting to a downturn by cutting costs to avoid even more damage to the bottom line. Or, if you take a more cynical approach, it is evidence of how scared executives are to alienate investors with forecasts that could prove too negative or optimistic.
Generally, a lack of guidance is something investors read as a sign of risk, which puts entertainment stocks — many of which already trade near multiyear lows — under more pressure.
"Less guidance is a negative for investors and the market since uncertainty breeds valuation discounts," Miller Tabak analyst David Joyce says. "I would prefer companies to still take an educated guess and provide a range of guidance, just to help give some confidence, when they can, that they're not driving off a cliff."
It's why shares of Discovery Communications soared 13% last week on the day it reported fourth-quarter earnings: The company's numbers were solid, and it gave a detailed outlook.
"Discovery is the only entertainment company providing 2009 guidance for revenue, operating income before depreciation and amortization and earnings per share," Barclays Capital analyst Anthony DiClemente wrote, also lauding the firm's "fastest growth in the sector."
Still, a lack of financial guidance from most sector players can be an opportunity. After all, it gives investors and analysts more room to reach their own conclusions about companies and their stocks. The old guidance game "created a cottage industry of 'robot' analysts (and investors) who didn't have to do any hard work or think too deeply," Vogel Capital Management president Hal Vogel says.
UBS analyst Michael Morris raised doubts about the attainability of Discovery's guidance last week, showing his will to challenge management's assertions. "The guidance does not leave enough margin for error should domestic and/or international advertising pull back more than the company expects," he says.
All of this debate is helpful and stimulating.
Overall, what the lack of guidance seems to help with most is bringing down Wall Street forecasts that have been too optimistic for too long. In other words, this quarterly earnings season could mark an important turning point in which media and entertainment CEOs can fess up fully to how bad the current downturn is.
Sure, the financial crisis has made things worse than anyone could have predicted, but the signs of economic challenge were there.
Nearly a year ago, The Hollywood Reporter wrote about how industry executives were behind the curve in admitting the likely pain from what wasn't officially a recession but already was looking like one.
News Corp. chairman and CEO Rupert Murdoch had just said he was "more pessimistic" about the economic outlook — back then, they were some of the clearest words from an industry luminary about the recession risk. At the same time, Viacom CEO Philippe Dauman assured investors that most of his firm's big traditional advertisers were in "recession-resistant" industries, and other media companies were similarly hopeful.
What a difference the past year has made.
In his latest earnings call, Dauman warned analysts that the ad-market slump likely will get worse before improving, citing weaker trends during the current first quarter. Murdoch, meanwhile, called the current climate "grim," adding that "the downturn is more severe and likely longer-lasting than previously thought."
It seems nearly everyone finally is on the same page, and Wall Street's financial expectations for 2009 have moved lower to keep pace. Pretty much every media and entertainment analyst repeatedly has cut estimates for key industry players.
This more cautious and realistic view is important because economic indicators in January and February seemed to point to a deepening recession and a first-quarter earnings season that could be at least as bad as the fourth quarter.
A second-half economic rebound looks less likely these days, but so does false hope of a quick turnaround in the media and entertainment business.
Georg Szalai can be reached at [email protected]