An earnings call is a quarterly touch-base for publicly-owned companies to provide an inside look at their performance and expectations for the future. Outside of company announcements, press releases, and planned analyst meetings, earnings calls provide a rare movement to make significant information public to the investing community.
Analysts are trained to closely follow such calls and oftentimes participate on them via a Q&A session. For the everyday investor, understanding the language used during an earnings call can require some education. We highlight some of the basics below.
Are earnings calls required?
Earning calls are not legally mandated, so a company doesn’t actually have to have one. Public companies are required to release the details of their financial performance, but their earnings don’t have to be amongst the details released. Some publicly traded companies don’t even have earnings calls. It’s also not unheard of an earnings call getting canceled because of a forthcoming announcement, possibly about an acquisition or merger.
How often do earnings calls take place?
Earning calls tend to take place on a quarterly basis. Oftentimes, a company will announce the date and time of its call several weeks out. Closer to the call itself, the company will issue a press release with a high-level summary of the quarterly financials and any other relevant news items, such as leadership changes, product updates, and major partnerships.
Why are earnings calls important?
Earning calls inform how potential and existing investors feel about the company and, as a result, what to do with their potential and existing investments. Earning calls can be so important that they may have an immediate impact on stock prices.
Why investors follow earnings calls
If an investor wants to decide whether or not to invest or continue investing in a company, the earnings call is among the first places they look for relevant information. Earnings calls tend to include robust financial data and other insights that might factor in an investor’s decision-making process. Some investors will even consider the tenor of how an earnings call unfolds, paying attention to how leadership explains key pieces of information and how they navigate analyst questions at the backend of the call.
What is the structure of an earnings call?
Earning calls are open to the public. You can easily listen in via phone using a number or web-based dial-in made available within the earnings release or on the company’s website. There are usually four parts to the call: an introduction, a welcome and overview, a detailed overview, and a Q&A segment whose length is dictated by the host company.
Safe harbor statement
A call usually begins with a safe harbor statement, which just lets everyone know that financial results may include predictions about the future that may not necessarily come true. This disclaimer limits the company’s liability if the predictions about the future differ wildly from what the future actually brings.
Presentation and discussion of the financial results
The welcome portion of the earnings call is sometimes called a “commercial” because it’s functionally a sales pitch for the company. This portion is generally delivered by the CEO or President, and typically outlines a narrative designed to coach listeners about the company’s position in the market and how they should think about the subsequent information released during the call in the context of that story. In this section, listeners can gain a deeper understanding of how the company is positioning themselves in the market, and how optimistic they are about competitors and external market forces.
In the detailed financial section, the CFO is likely to take the baton and dive into numbers that will give investors a sense of the relative health of the business and how that compares to past periods. This section will introduce financial terminology that might sound confusing to everyday investors.
The Q&A is usually the longest part of the call because it’s the time when analysts and sometimes even an investor will have the opportunity to dig into the financial details. Some listeners will research the analysts asking the questions, as their past coverage of the company and others in its space will help offer an added layer of context to the conversation. The host company is not required to answer all questions and can call upon analysts in their preferred order, prioritizing the most relevant individuals and deprioritizing the rest.
How should I listen to an earnings call?
There are a few things to keep in mind when reviewing earnings releases and following along on the conference call. First, there are the ways in which generally accepted accounting principles (GAAP) are highlighted relative to non-GAAP. So, while a company must provide GAAP results such as revenue, it may choose to emphasize non-GAAP results like traffic acquisition costs that provide what they believe to be an important metric to track when assessing the overall health of the business. Just like journalists must piece together their stories from various sources, investors will also treat earnings calls as a single source that has valuable information on a company but does not necessarily offer the complete picture.
As stated above, some investors pay close attention to the tone used when delivering information. Is the information being delivered with energy and optimism? Or do the presenters seem sheepish and concerned? Of course, these reads are not scientific, but some investors will factor them into their overall read of an earnings call.
You might hear the word “guidance” on an earnings call, which is a term used to describe how the company orients analysts and investors around their projected future performance. Guidances are often given in ranges and with the caveat that they are directional only. For this reason, this type of information is often called “lowball guidance.” Lowball guidance may include promising too little or too much in regards to the future. However, do listen to this portion of the call closely because sometimes the changes made to the guidance do provide important insight into the company’s future.
How long are earnings calls?
Expect the call to last between 45 and 60 minutes. Although, there’s no requirement for how long the call should be. The Q&A session can be a big factor when it comes to the length of the call, although hosts will generally aim to keep this portion within a time constraint, especially once the priority analysts and investors have been given the opportunity to ask their questions.
What is the earnings release?
The earnings release contains the actual financial content that will be disclosed during the call. It’s usually delivered, at a minimum, an hour before the call itself. Sometimes, the earnings release is accompanied by slides that are presented alongside the overall call script. This is especially useful for companies with a range of metrics that can be difficult to visualize as a voiceover.
How should I analyze an earnings call?
There are a few tactics that investors employ to glean the most possible insight out of an earnings call and release.
Study up on the history
To understand the present, we study the past. So, listen to or read a transcript of the previous quarter’s earnings call for historical context. Next, look through relevant analyst reports to see how the company has been covered as of late and to understand how analysts are guiding investors.
Track the experts
Seek out content and commentary from trusted authorities in the relevant industry. This might include analysts, journalists, and other thought leaders who are known for having industry or company-specific knowledge. Some investors might find it helpful to browse articles over time to see how sentiment or coverage has shifted, if at all.
Investors might comb through these public sources to get a more robust picture of the company’s health prior to the call. Past business metrics made public, major announcements, business updates, and regulatory investigations are some examples of data points that can be researched in advance of an earnings call.
Read the earnings release
The earnings release is usually made available at least an hour prior to the earnings call itself. Sometimes the earnings are released after the market is closed, and the call is held the morning after. The press release about the earnings should be available on the company’s website, where it’s often accompanied by supplemental materials. Financial news websites are also likely to syndicate the release, and some will ever share call transcripts after the call ends.
Earnings release can be chock full of information. Investors will often pay close attention to financial benchmarks and guidance. They will also look for any major announcements, including leadership changes, product updates, and partnerships, as those could stand to influence the future of the business in a specific direction.
Lastly, it’s important to note changes in the financial position that are included in the balance sheet. This may include fluctuations in cash, short-term investments, inventory, debt, sales, and share count.
After the call, investors can study the impact of the call on the market. What are analysts and trade journalists saying about what they have learned? You might also consider what the company disclosed to what prior research suggested they would disclose. Which topics did they emphasize, and which did they de-emphasize? These are the types of questions investors can ask to arrive at their point-of-view on the company’s future following an earnings call.
Earnings call and SEC forms 10Q and 10K
SEC form 10-Q and 10-K refer to the quarterly and annual reports, respectively. Federal securities laws dictate that companies that are publicly traded make particular information that’s in these forms available to the public. This includes detailed financial information and a substantive discussion thereof. The discussion portion of the call is typically where the most robust analyses of a company’s financial status will occur. This may include a close reading of why the company’s finances are the way they are.
After the earnings call
Earnings calls provide a rare opportunity to receive a large amount of information on a public company within a condensed time frame. This information ranges from black-and-white financials that allude to the relative health of the business today and growth prospects over time, to more esoteric information that orients the listener around how leadership is telling the company’s story and positioning in the market. Taken together with publicly available content produced by trusted journalists and analysts, the quarterly earnings call can be a valuable touchpoint for individual investors to re-educate themselves on companies they invest in and potentially based their investment decisions on new insights gleaned.