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What are Earnings Calls and How to Prepare, Listen and Analyze Them

Almost all publicly listed companies have calls. Listed companies are required by law to provide detailed regular reports on the business and corporate performance. This is done through 10-K (Annual Reports) or quarterly filings (10-Q). In addition, most of the times companies have earnings-calls as well.  These calls occur on a quarterly basis after the company release their quarterly or yearly numbers. This gives the management an opportunity to present the results from their reports. It also allows the management to give their perspective on the general corporate landscape and how things are developing. Furthermore, it also gives investors, analysts and other parties a chance to ask the management teams questions.

Fundamental Analysis Highlights

How to Listen to the Call

Historically earnings calls were only made available for institutional investors and analysts covering the company. However over the last 10 years or so they have become more accessible to the public. Usually, information about upcoming calls is available on a company’s investor relations website. Just as one can as an investor read the company’s other filings (such as 10-K or 10-Q), information about earnings calls tends to be available on the site. Often there are play-backs of old earnings-calls which one can listen to, and dial-in (on phone or webcast) for upcoming earnings-calls. For example for Apple, all this information is available on its Investor Relations website. Usually, the company will publish and upload supporting material ahead of the call. This can be press-releases which they outline and highlight the main numbers and topics from the previous quarter. Most companies will make available a presentation which for each earnings-call. Recently websites such as EarningsCast have popped which one can find and listen to all upcoming earnings calls.

Structure of the Call

Most calls tend to have the same structure. They being with a conference operator/host welcoming listeners to the call. This is followed up with the host introducing the participants from the company that will be on the call. Most of the time it is the full management team. This is followed-up with either the investor relations or someone from the company’s legal team mentioning that there will be some “future-looking-statements” and projections (also known as “Safe Harbor” disclosure). They will remind the listeners that they should not assume all things discussed on the call with happen but are general discussions about the future.

General Performance: Next item of order the CEO or someone else from management will present the overall performance of the company during the previous quarter. Here they discuss how different divisions or products performed during the quarter. Here the CEO talks about the company’s strategic vision, new product launches and other general commercial topics. They will also discuss the positive and negatives the company experienced during the quarter. In addition, the management team will give further colour on the market environment and how they see things progressing.  Generally, the CEO will also go through upcoming events and what investors should expect from the company in the coming quarters.

Financial Overview and Performance: This section is led by the CFO. He/she will go through the financial data from the quarter. The CFO will present key financial information, let it be top-line, margins and bottom-line. He will discuss developments on the balance sheet and capitalization. The CFO will also, share some more commentary about the numbers so investors will get a better understanding the development. The majority of the information the CFO will present in this section will already have been released ahead of the call through either the 10-Q or press-release.

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Summary from various division heads:  If the presenting company is a big one, sometimes they will have a division head present more in detail how that specific division fared during the quarter. The presenter will additional color about developments the division.

Question and Answers Segment: The call ends with a Q&A segment. Here analysts (those that cover the company) and potentially major shareholders get the opportunity to ask the management questions. This is by far the most important segment of the call. Analysts get the opportunity to ask questions in more detail about various divisions, the whole company and generally get a better understanding how management view things. This is basically the only opportunity analysts and investors have to question the management about their performance and future guidance. Please note, as retail investors it is highly unlikely one will have the opportunity to ask any questions. These calls tend to have thousands of people listening in and management tend to only allow analysts that cover them and some rare occasions big institutional investors ask questions.

How to Prepare for Earnings Calls to get most of them

For an investor to be able to get the most of the earnings-call it is good to do some preparatory work.

First and foremost as an investor, go through previous earnings and earnings-calls to read and listen in to what management has said previously. Beyond the fact that previous reports are available on the companies’ investor relation websites, one can often not only find replays of previous calls, but also transcripts.

In addition, make sure you have read up and understood the industry-specific jargon and KPIs (Key Performance Indicators) for the company you are analyzing. This can be same-store-sales (SSS) for retail companies, or unit-sales or subscriber acquisition costs (Telco, Media and Tech companies). You can go through how these KPIs have developed over previous quarters and how management commented them on earlier as well. It gives you a good understanding of how management has been able to actually meet/beat what they themselves discussed earlier.

The next step is the read the earnings announcement prior to the earnings call. Here review both the financial metrics and other metrics and compare them to previous quarters. See how these numbers compare to previous guidance the company have given. In addition, look at the future guidance the company is giving and compare that to previous guidance.

How to Listen and Analyze to the Earnings-Call

The most important thing to listen for in the earnings call is to see how the management addresses potential differences in performance and guidance compared to their previous statements. Major differences compared to previous statements can be a cause of concern. Why did things change? Is it due to the company and the management could not deliver, or due to some one-off events. Listen to the management tone and delivery. How does it compare to previous calls? Are they more confident or cautions. All these things will give good indications on their guidance and confidence in it. It has become more prevalent in recent years, with managements low-balling their guidance so they can beat them. Listening to the earnings-call and their comments can often give a good sense of how confident management is of actually beating their own guidance.

The Q&A session will give further depth on the company’s performance. Listen carefully to what type of questions are asked. Are there “simple and congratulatory” lay-up questions, show that analyst is not only satisfied with the quarter but also trusts management. If they are a bit tougher, means the analyst community have less trust in the management. The voice, demeanour and general composure of the management when they respond to questions will give further insight into the company’s current and more importantly future performance.

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During the earning-calls, there will usually be 5-15 analysts asking questions. Often the most important analysts which most investors listen to are the ones that are allowed to ask questions first. The questions and tone of these analysts will give a good indication of the market’s assessment and reaction of the earnings. If it appears these analysts are happy, that often translates to positive notes which will push the stock higher.

There have been various cases in the past in which management teams have not been able to answer questions. Have sounded stressed and generally disoriented as part of the Q&A segment. Often the stocks have been severely punished after that with investor confidence in the management team and company dissipating. Notable examples have been how Enron’s management could not properly answer some questions from some analysts (note Enron went bankrupt shortly thereafter as it became clear it was a fraud). Other examples are when management teams blame the poor performance of their company or in particular their stocks on the markets and “evil short-sellers”. These are all warning signs that things are not good with the company.

Earnings- calls as sources of Info on Industries and Other Companies

Earnings-calls also work as an excellent opportunity to listen in to get a better sense and understanding of how an industry is doing. For example on GM call, on top of discussing their own business, they will talk about the auto industry in general. How they see things developing, and also how they view their competitors and their performance. If one is an investor of Ford, this information can be very useful as well.

Other instances, management teams might talk about m&a and in general, discuss that they are looking at potential targets. This will give investors a heads-up to look at companies that could potentially be a target and do some more work on analyzing them.

Conclusion:

Conclusion

In the end, earnings-calls are a good way to get a good sentiment on the company’s management how the company is doing. They give more colour about the company’s performance, and also helps investors’ sanity check their own analysis. Like everything else within investing, the more calls you listen to the better you will become to analyze them and being able to distil useful information from them.