Trends in Earnings Guidance

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1 April 2006 THOMSON FINANCIAL Trends in Earnings One of the most frequently-asked questions by companies is: how do my peers handle earnings guidance? Further, the question has expanded beyond simply whether to give guidance, to how to give guidance. Qualitative or quantitative? GAAP or pro forma, or both? Annual or quarterly? EPS or revenue? This report provides insight into the guidance practices of S&P 500 constituents, providing a benchmark for your company s practices. For more information about this report, please contact Kara.Newman@thomson.com. Overview Thomson Financial analyzed 472 component companies from the benchmark S&P 500 Index to determine trends in how companies provide forward-looking guidance to analysts and investors. We examined guidance issued by companies during the first quarter of 2006, reflecting expectations for the current and next fiscal quarter as well as the current and next fiscal year. All data was sourced from Thomson StreetEvents. Key findings include: Most S&P 500 companies (84%) provided some form of financial guidance during the period studied. Even companies that have been held up in the media as moving to a "no guidance" policy continue to provide guidance on the annual profit outlook. Most S&P 500 companies tend to provide either quantitative or qualitative (non-numeric or "color") guidance, not both. Apparently, companies' comfort level increases when providing guidance over a longer time frame: both qualitative and quantitative guidance increase when companies provide a full-year outlook vs. a quarterly outlook. On an annual basis, twice as many companies provided numeric guidance as those providing non-numeric guidance; on a quarterly basis, the ratio is about 8:1. GAAP is clearly the measure of choice across the board, for both EPS and revenue guidance. A diminishing percentage of Information Technology, Energy, and Financials companies still provide only pro forma EPS guidance. Fig. 1: S&P 500 Providing EPS Provide EPS in Sample Number Percentage Consumer Discretionary % Consumer Staples % Energy % Financials % Healthcare % Industrials % Information Technology % Materials % Telecommunications % Utilities % Of S&P %

2 GAAP vs. Pro Forma Earnings Per Share Of those companies providing EPS guidance, more than half provide only GAAP earnings, and more than 42% provide both GAAP and pro forma EPS. Very few companies -- fewer than 7% -- provide only pro forma guidance. Information Technology and Energy companies are the sectors most likely to provide only pro forma guidance, but still it's a relatively small proportion, fewer than 15% of each sector. By a wide margin, Healthcare companies are most likely to provide both GAAP and pro forma earnings - more than three-quarters of Healthcare companies in the S&P 500 sample offered both, followed by Utilities (69%). In large part, this reflects the frequent buying and selling of assets (such as a line of drugs) and one-time write-offs that makes pro forma a better indication of ongoing earnings for these sectors. Revenue Turning to revenue guidance trends, GAAP is clearly the measure of choice across the board. Most companies provide only GAAP revenue guidance. No S&P 500 companies provide only pro forma revenue guidance. A handful of companies provide both GAAP and pro forma revenue guidance. Nearly 7% of Information Technology companies provide pro forma as well as GAAP numbers, and smaller percentages (representing one or two companies per industry) provide both in the Consumer Discretionary, Consumer Staples, Healthcare and Industrials groups. Nearly 93% of S&P 500 companies provide revenue guidance on a quarterly basis, compared to 84% of S&P 500 companies that provide EPS guidance figures. Clearly, companies see value in releasing sales numbers. In addition, investors have clamored for more insight into revenues, which some judge to be a better predictor of future financial performance than EPS. Fig. 2: Earnings Per Share : GAAP vs. Pro Forma GAAP Earnings Pro Forma Earnings Provide Both GAAP and Pro Forma Earnings Consumer Discretionary % % % Consumer Staples % % % Energy % % % Financials % % % Healthcare % % % Industrials % % % Information Technology % % % Materials % % % Telecommunications % % % Utilities % % % Of S&P % 5.51% 35.59% Of Those Providing 51.13% 6.55% 42.32% 2

3 Qualitative vs. Quantitative In general, most S&P 500 companies tend to give either quantitative or qualitative guidance, not both. That said, quantitative guidance is the single measure most companies opt to provide, particularly when providing quarterly guidance. Apparently, companies' comfort level increases when providing guidance over a longer time frame: both qualitative and quantitative guidance increase when companies offer full-year guidance. On an annual basis, S&P 500 components are more likely to "add color" in the form of non-numeric guidance such as expectations about sales conditions, new products, long-term objectives, etc. On average, when providing full-year outlooks, companies are twice as likely to provide quantitative as qualitative guidance. However, this varies widely across industries. Among notable industry trends: Utilities companies are among the least likely to provide any type of quarterly guidance, yet all offered annual guidance. In particular, 48% provide quantitative guidance on an annual basis, and other 41% offer both qualitative and quantitative guidance - the greatest percentage of any industry group to offer both. When quarterly and full-year guidance data is studied together, a number of broader industry trends become clear. Energy companies are most likely to provide only qualitative EPS guidance, with over 71% of S&P 500 companies doing so. Materials companies are most likely to provide both quantitative and qualitative guidance (nearly 62%), while Healthcare and Industrials companies are most likely to provide only quantitative guidance (68% and 67%, respectively). Types of Qualitative Provided Among the types of qualitative, or "color" guidance provided most often by S&P 500 companies: Business Outlook Operating Expenses/Operating Profit Revenue (factors that will affect revenue, and by what degree) Industry Outlook Cash Flow (including share repurchase, changes to dividends, and capital expenditures) Stock-Based Compensation Long-Term Debt/Leverage on Industry-Specific Inputs, including: --Research & Development Expenses --Subscribers --Sales Trends 3

4 Fig. 3: Earnings Per Share : Qualitative vs. Quantitative (Quarterly View) Note: Incorporates Quarterly Only Qualitative EPS Quantitative EPS Provide Both Qualitative and Quantitative EPS Consumer Discretionary % % % Consumer Staples % % % Energy % % % Financials % % % Healthcare % % % Industrials % % % Information Technology % % % Materials % % % Telecommunications % % % Utilities % % % Of S&P % 86.34% 2.48% Of Those Providing 11.18% 86.34% 2.48% Fig. 4: Earnings Per Share : Qualitative vs. Quantitative (Annual View) Note: Incorporates Annual Only Qualitative EPS Quantitative EPS Provide Both Qualitative and Quantitative EPS Consumer Discretionary % % % Consumer Staples % % % Energy % % % Financials % % % Healthcare % % % Industrials % % % Information Technology % % % Materials % % % Telecommunications % % % Utilities % % % Of S&P % 54.95% 17.45% Of Those Providing 27.60% 54.95% 17.45% 4

5 Looking for more in-depth earnings guidance information around a particular company, peer group, or benchmark? Please contact tfcorporate@thomson.com to learn more about: Thomson s Corporate database product Benchmarking studies - How do best-in-class companies provide guidance? Perception studies - What do investors think about your company s practices? Innovative Solutions to Build and Maintain Shareholder Value Thomson Financial is the partner of choice for corporations around the world, offering the industry's most comprehensive range of content, technology, and analytics to meet the dynamic needs of financial professionals. Thomson works with 4,500 public companies to refine their investment story and competitive positioning, analyze broker research and adopt best practices for corporate governance and shareholder communication. Only Thomson Financial can truly support every step of your workflow: Understanding stock movement Maximizing management's effectiveness Knowing and responding to your stock holders Developing IR message and strategy Satisfying disclosure regulations Increasing market awareness Distributing investor information To learn more about this report or how Thomson Financial can help you achieve your IR objectives, please contact Kara Newman at Kara.Newman@thomson.com. Contact us at: tfcorporate@thomson.com North America: Europe: Asia: