March 9, 2006
Google’s shares tumbled after it released its fourth quarter 2005 results, largely because the company’s tax rate turned out to be higher than analysts had projected (and to some extent because revenue fell short of the more optimistic analysts’ forecasts). While the company still will not offer revenue and earnings guidance, on the earnings conference call management did provide its outlook for its 2006 tax rate, recognizing that analysts have no way to estimate this number accurately regardless of their skills at sizing up the business prospects.
This is a necessary but insufficient step, in our opinion. Google has been among a minority of public companies that do not provide earnings guidance. While we are mindful of the company’s intention to avoid the gaming that goes around providing guidance, Ventana Research believes such a policy is misguided. Boards of directors of public companies fail to exercise their fiduciary duty if they do not demand that executives prepare a plan for the future that includes a financial forecast. Managers expect their direct reports to set objectives and meet them. Investors should expect no less than management and the board. Companies need a planning and budgeting process (and, of course, IT systems to support it) that can provide shareholders with a reasonably reliable indication of where the business is heading over the short (current quarter) and intermediate (fiscal year) term. Not providing guidance when one’s competitors are presenting theirs can suggest that the company has a more limited ability to control the business. As this Google episode illustrates, not providing guidance exposes shareholders to the risk of price gyrations that can ensue when analysts miss the mark.
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© 2006 Ventana Research
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