Profit Warning

What Is a Profit Warning?

Profit warning occurs when a company advises shareholders and the public that its earnings results will not meet analyst expectations. A company generally issues a profit warning prior to the public announcement of its official earnings results.

Profit Warnings Explained

A company usually announces a profit warning two or more weeks before an earnings announcement. Some companies do this to soften the blow to investors, allowing both them and the market as a whole more time to adjust accordingly. This ideally takes some of the sting out of the expected price adjustment. If a company does not issue a profit warning, its earnings announcement is called a negative earnings surprise.

A profit warning may occur if the company is in a down business cycle; however, since this event is more expected it is often due to poor performance or a single challenging incident either internal to the company or external from the industry or business environment.

During a profit warning the company might mention issues related to key growth drivers like sales and margins, its supply chain, new customers, and more. As with regular earnings reports, a profit warning can get into granular detail or can remain more general, noting only a few places in its financial statements where its performance could fall below what shareholders anticipate.

Example of a Profit Warning

One of the largest outsourcing companies in the U.K., Capita, issued a profit warning in January 2018, noting it had not been awarded any central government contracts. (Capital supplies a wide variety of public services, including assessments for disabled benefit claimants, electronic tagging for offenders, facilitating the administration of teachers’ pensions and more.) The announcement erased £1 billion off its market capitalization in a single day.

While Capita had received contracts from the BBC and Northern Ireland authorities, its lack of government contracts represented a large gap in a major source of revenue. The company also noted a pre-tax loss of £535 million in 2017, which was up from £90 million in 2016.

Profit Warning and Earnings Announcement

Following a profit warning usually comes the company’s official earnings announcement. The format of this is often a call with management that shareholders and the public may dial into. A company’s investor relations team subsequently publishes a transcript of this call, including questions and answers from those listening in.