In this article, I dissect the structure of a US-listed company’s earnings call, share some of the behind-the-scenes and tips on getting most value of it. Please note that I don’t pay much attention to near-term data points such as monthly trends that quarterly trading-style investors care about.
Typically, three company personnel are present on the call (example below): CEO, CFO and Head of Investor Relations (“IR”). For a larger-sized company, additional senior management could be there to answer questions about a specific aspect of the business (eg. Chief Science Officer for a biotech company.)
Most calls flow as follows:
Operator kicks off, and then the company IR welcomes everyone to the call and reads a Safe Harbor statement about how past results don’t mean future outcomes and how forward estimates are company’s judgment. It’s boilerplate stuff - no need to pay attention and go grab a coffee.
The CEO comes on, and makes a statement about how their company had another remarkable quarter, even if they missed consensus on all metrics and issued bleak guidance. Just pointing out: if the company didn’t have revenue decline, it achieves “record revenue” every quarter. Keep that in mind the next time you see such language on an earning release or during an earnings call.
The CFO reads numbers and compare things in percentages year-over-year and quarter-over-quarter ("sequentially”), which are hard to follow if the CFO is a fast talker. It is mostly pointless because you can find the numbers in the press release (hello, we all have spreadsheets in front of us!). Focus on things not mentioned in the press releases. Anything incremental that helps you fine tune forward expectations financially and strategically.
Sometimes, CEO comes back after the number reading to iterate how the future is so bright for the company and then asks the operator to open up the lines for questions. This is where the fun part begins.
Have you ever wondered who decides which sell-side analyst gets to ask questions first? I only knew of two ways (any sell-sider who knows other ways, please let me know so we all can be enlightened):
First-mover: Sell-siders are told to dial in 15 minutes before an earnings call officially begins. Of course, Analysts will always instruct Associates to dial in 30 minutes to an hour before the call. After getting connected with the operator, Associates need to provide Analyst’s name and firm’s name and then press “*1” (star-1) on the phone keypad to enter the question queue. For some companies, sell-siders get a phone number undisclosed to the general public in order to ask questions (Not the phone number shown on the company’s IR website). As you see, it’s a speed race of headless chickens.
IR decided: IR pre-determines the order in which Analysts ask questions. Then the Analysts will rotate order next quarter. This paradigm reduces so much stress for the Associates.
The operator will enthusiastically announce: “Our first question comes from the line of Dick Toad from Toad Capital Markets.” Unless the company had an atrocious quarter, the Analyst will start with “Congrats on a great quarter” and then asks a question. This goes on until the management decides to stop taking questions and end the call.
Investors know that only 2-3 factors drive a stock in the near-term. Once the questions around the key factors are exhausted by the first few Analysts, the remaining in the queue are merely asking questions for the sake of publicity and management schmoozing, or worse, asking management to do their jobs (my most memorable question was when an Analyst asked the CEO “If you had to summarize the quarter in 3 key points, what would they be?”). With that said, I understand sometimes Analysts ask bad questions because they are on concurrent earnings calls and are still pressured to build relationships with all of their covered companies, so they were hopping between calls without having reviewed the company’s earnings results.
I have the following tips for getting value out of earnings calls:
Pay attention to what the smart Analysts are asking: Brand name bank and elite boutique (think Wolfe and Bernstein) Analysts ask RELATIVELY better questions. After a while, you know who asks strategic questions and who are just on the call for the sake of it.
Focus on questions around the components that impact future free cash flow generation because they drive business value:
- Market (if you follow the entire sector, pay attention to how the competitors’ results impact the company you are studying, this is known as the “read through”)
- Gross Margin
- Costs that impact Operating Margin: Sales & Marketing, Research & Development (R&D), General and Administrative (G&A) expenses
- Capital Expenditure - capex
- Outlook (guidance)
- Bad / dumb questions that you can tune out (or skip if reading the transcript):
- Macro: whether macro matters depends on your investment style. My point is it’s futile to ask others for a macro prediction. Neither you nor the company management is George Soros or Ray Dalio. I give you an example: There is a global shortage of car inventory, Analysts don’t stop asking management of auto dealers about when inventory level will normalize. Unless you can ask management the same question every day, you are better off relying on alt data to get a better day-to-day sense of the supply situation. What management can tell you on the call is either point-in-time data or a wild guess, which should not be useful for any purposes.
- Data points that management won’t disclose: Analyst won’t give up, they will have infinite ways to ask for what management already said they will not disclose for competitive or regulatory reasons. I respect that Analysts have asses that won’t quit, but it’s still unpleasant to the audience. Similarly, Analysts love to ask management to quantify things that cannot be quantified.
Things that don’t move needles (eg. asking about a nascent business segment, tax rate or interest rate): this typically happens toward the end of call when higher quality questions are exhausted. So the Analysts are just asking something for the sake of exposure.
If you are interested in learning more about professional equity investing (the "buy-side"), I have two other great articles for you:
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