Wall Street analysts say CFOs give off red flags during earnings calls when they say — or don't say — certain things. Virtually all of those things have to do with transparency.
Based on input analysts shared with CFO Dive, these are the most common red flags.
Dodging acquisition impact
The number one mistake CFOs make, according to Scott Berg, a Needham analyst who covers the application software and human capital management industries, is sidestepping acquisition impact on revenues.
"Not disclosing inorganic revenues when a company is first acquired creates an information vacuum on the performance of the original business and gives those shorting the stock extra firepower," he said.
Less egregious but still problematic is CFOs' limited communication skills when it comes to explaining their company's products or services. "I find a lot of the CFOs are great with the numbers, but they cannot articulate well enough what their company's products are," Berg said.
Overly optimistic projections
Terry Tillman, managing director of equity research at Truist Securities for the application software and SaaS sectors, said most CFOs are excellent at what they do, but occasionally they'll try to paint too rosy of a picture when a darker forecast is called for.
"A scenario I have seen play out is, when a company has either a company-specific execution issue or the macro dynamics in the demand environment change in a material way, the CFO is not doing enough in terms of revising the growth outlook in a more conservative fashion," he said.
A conservative revision is needed, he said, to reset the bar. That's the only way "the company can execute and begin rebuilding confidence by meeting or beating the revised estimate," he said.
Being too optimistic, he added, can make it seem like the CFO lacks sufficient insight to more effectively reset the outlook or is worried that a notable reset of the guidance could cause investor backlash.
The best solution, he said, is to meet a change in demand dynamics head-on and adequately de-risk the financial outlook all at once. Trying instead to right-size the outlook over multiple quarters creates angst among investors.
Getting surprises right
CFOs often struggle to navigate unexpected events. These include things like when revenue recognition isn't sufficiently elongated after a company signs a large new business, for example, or when a large customer doesn't renew or has to temporarily downside or has another issue impacting the company's model.
"In these situations, I believe it's better to specifically quantify the impact as opposed to not being very specific," Tillman said. "In the latter situation, investors and analysts will often be left to make their own assumptions, which could be wide-ranging and, frankly, far off the mark."
His advice to CFOs: be as transparent as possible quantifying a financial situation that quite likely could be temporary in nature.
It's all about transparency
The bottom line to Gerard Cassidy, an RBC Capital Markets analyst who covers the SaaS, application software and human capital management industries, is to be upfront. That doesn't just mean being open when there's negative news, but cooperating as a matter of courtesy.
A pet peeve of his, he said, is when CFOs try to avoid answering a question by saying there's enough information in the release for analysts to figure out an answer for themselves.
"CFOs need to be transparent, and that answer is not transparent, in my view," he said.
