The Rise of Non-GAAP Revenue Guidance: Implications for Companies and Investors
In recent years, companies have increasingly adopted non-GAAP revenue guidance, reflecting a shift in corporate reporting practices. Now a new study from the University of Georgia has identified how this shift has influenced investors.
The big picture: While investors derive critical information from non-GAAP guidance, it can be associated with unduly optimistic forecasts.
Go deeper. Key findings of the study include:
Increase in Non-GAAP Revenue Guidance: The use of non-GAAP revenue guidance among S&P 1500 firms has dramatically increased over time, rising from 1.5% in 2005 to 22.7% in 2021, with a peak of 30.2% in 2015. This aligns with regulatory and economic changes, such as the SEC’s 2010 interpretive guidance and the recent M&A wave.
Most Common Non-GAAP Metrics: Firms usually issue guidance on "organic" and "constant-currency" revenues. These metrics are often used by larger firms with growth opportunities, special items, or mergers, and are associated with “less persistent future GAAP revenues” and lower future revenue growth.
Impact on Analysts’ Forecasts: The study found that non-GAAP revenue guidance improves the precision of revenue and earnings forecasts, especially when it disaggregates complex growth drivers (M&A or FX effects). However, "organic" guidance is linked to more optimistic forecasts, especially after negative revenue surprises, raising concerns about potential misuse.
Influence on Investor Responses: Investors respond better to non-GAAP revenue guidance issued alongside earnings reports, indicating its pricing relevance. This persists over time, suggesting that it’s not just an overreaction by investors to initial guidance.
Bottom line: The report comes at a critical moment. The SEC recently held an Investor Advisory Committee meeting on the pros and cons of non-GAAP disclosures, including the risk that they present an overly rosy outlook. Committee members suggested that increased transparency is necessary, since the nature of non-GAAP adjustments makes them difficult to standardize, and the SEC will likely consider this in the months ahead.
Ani Huang
Senior Executive Vice President, Chief Content Officer, HR Policy Association
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