Cautionary Alert on Earnings
What Is a Profit Warning?
A profit warning is an alert issued by a company to shareholders and the public, indicating that its upcoming earnings report will fall short of analyst forecasts. Typically, this warning precedes the formal announcement of the company’s financial results.
Profit Warnings Explained
Companies often release a profit warning at least two weeks ahead of their earnings disclosure. This preemptive action aims to cushion the impact on investors, providing them and the market with time to adjust. Failure to issue a profit warning results in what is known as a negative earnings surprise.
A profit warning is typically triggered by poor performance, external challenges, or operational setbacks within the business. While downturns in the business cycle can contribute, it is usually a signal of underperformance.
During a profit warning, companies may address various issues such as sales, margins, supply chain concerns, customer acquisition, and more. The level of detail can vary, from specific financial aspects to a more general overview of potential performance shortfalls.
Example of a Profit Warning
In January 2018, the prominent U.K. outsourcing firm Capita issued a profit warning citing the absence of central government contracts. This announcement caused a £1 billion drop in its market value within a day. Capita’s dependence on such contracts for significant revenue was evident, alongside a notable pre-tax loss increase from £90 million in 2016 to £535 million in 2017.
Profit Warning and Earnings Announcement
Subsequent to a profit warning, companies proceed with their official earnings announcement. This typically involves a management call that shareholders and the public can join. Following the call, the investor relations team releases a detailed transcript, including Q&A sessions.
The earnings announcement after a profit warning elaborates on the reasons for missing expectations, often discussed within the management discussion and analysis (MD&A) section.
