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 in 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.
This blog will break down key aspects of earnings calls, their importance, how to listen to earnings calls, and what investors should look for during these events.
What is an earnings call?
An earnings call is a conference call that the public business’s management, analysts, investors, and journalists attend to talk about the financial outcomes of the firm for a specific reporting period, like a quarter or a fiscal year. An earnings report, which includes a summary of the financial performance for the period, typically comes before an earnings call.
How do earnings calls work?
An “earnings call” combines a companys report on its financial performance, such as net income or earnings per share, with a conference call to discuss these results.
Earnings calls typically start with the moderator delivering a safe harbor statement, which warns that the call may include forward-looking statements. Most publicly traded companies hold these calls to review their financial outcomes, though smaller firms with limited investor interest might be an exception.
Many companies also provide a recording or presentation of the earnings call on their corporate websites for a few weeks afterward, allowing investors who missed the live call to catch up on the information.
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 companys 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.
1. Safe harbor statement
A call usually begins with a safe harbor statement, letting everyone know that financial results may include predictions about the future that may not necessarily come true. This disclaimer limits the companys liability if the predictions about the future differ wildly from what the future actually brings.
2. Presentation and discussion of the financial results
The welcome portion of the earnings call is sometimes called a commercial because it is functionally a sales pitch for the company. The CEO or President generally delivers this portion, and typically outlines a narrative designed to coach listeners about the companys 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 itself 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.
3. Q&A session
The Q&A is usually the longest part of the call because its 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.
4. Operational highlights
Beyond the raw financial data, management may discuss the companys operational performance, including significant accomplishments, challenges, and strategic shifts. This might include updates on product development, market expansion, cost-cutting efforts, or competitive pressures.
5. Future outlook and guidance
Management typically offers insights into future expectations during this portion of the call. This might include guidance on expected revenue growth, profit margins, or industry trends that could impact the companys performance in the coming quarters.
How do earnings calls affect stock prices?
Earnings calls may have a noticeable effect on stock prices, as they offer insights into a company’s financial performance and outlook. Heres how they may influence stock movements:
Positive earnings surprise:
When a company reports better-than-expected earnings, revenue, or growth, it may lead to an increase in stock price as investors gain confidence in the company’s performance.
Negative earnings surprise:
If earnings fall short of expectations, stock prices may drop as investors reassess the companys future prospects.
Forward guidance:
Company executives often provide guidance for the upcoming quarters. Positive guidance may boost the stock, while cautious or negative outlooks may weigh on prices.
Management commentary:
Statements from executives about business strategies, industry trends, or economic conditions can affect investor sentiment, driving the stock price up or down.
Market reaction to Q&A:
The question-and-answer session during the earnings call may also move stock prices, especially if new information or unexpected disclosures emerge.
Earnings calls offer a glimpse into the companys future, making them key events that may trigger short-term volatility in stock prices.
Why do 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 into 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.
How to 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 companys future.
Earnings call analysis
There are a few tactics that investors employ to glean the most possible insight out of an earnings call.
1. Study up on the history
To understand the present, we study the past. So, listen to or read a transcript of the previous quarters 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.
2. 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 companys 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.
3. 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 companys website, where its 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, its 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.
4. Post-call
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 companys 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 thats 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 companys financial status will occur. This may include a close reading of why the companys finances are the way they are.
How to use earnings calls in your investment strategy?
Validate your research: You may use earnings calls to confirm the findings from your own analysis. If the management’s outlook aligns with your expectations, it may reinforce your confidence in your investment choices.
Spot potential risks: Earnings calls often highlight possible challenges, such as supply chain disruptions, regulatory issues, or increased competition. Understanding these risks may guide your decision on whether to buy, hold, or sell a stock.
Observe long-term trends: Monitor how management’s guidance and company performance evolve over time. Consistent growth may signal a strong investment while declining results could be a sign to reassess your position.
Watch market reactions: Note how the stock price moves after the call. Even with solid earnings results, a stock may decline if the forward outlook fails to meet investor expectations.
Pros and cons of earnings calls
Earnings calls are a valuable tool for investors looking to assess a companys financial health, but they come with both advantages and limitations.
Pros:
Real-time insights: Hear directly from management about the companys performance, strategy, and future outlook.
Forward guidance: Companies provide projections for future quarters, helping investors gauge potential growth.
Q&A session: Analysts ask questions that can reveal deeper insights into the company’s operations or risks.
Context to financial data: Executives explain financial results, offering clarity beyond raw numbers.
Competitive insights: They may provide a view of industry trends and competitors performance, helping investors understand broader market conditions.
Market reaction: Information shared during earnings calls can significantly influence stock prices, as positive or negative news may lead to immediate market responses.
Cons:
Potential bias: Management may spin results to appear more favorable, downplaying risks.
Short-term focus: Calls often emphasize recent performance, leading to short-term market reactions rather than long-term analysis.
Market volatility: Stock prices can swing based on the call, sometimes in response to just one comment or forecast.
Complexity: Earnings calls can be filled with jargon, making it difficult for retail investors to grasp the details fully.
By understanding both the benefits and limitations, you can make more informed decisions during earnings season.
Enhance your investment strategy with earnings calls
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 companys 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.
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.
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.
How often do earnings calls take place?
Public companies have an earnings call each quarter. These quarterly calls are where companies share financial information like revenue, profit, losses, and earnings per share (EPS). Quarterly calls align with a companys fiscal year, which may be different from the calendar year.
Where can you find and listen to earnings calls?
Many companies host live earnings calls on their investor relations webpages, providing webcasts and recordings for a limited time. The official earnings call in audio format along with the presentation deck are also available on Public.com on the respective stock pages.
Are earnings calls required?
Earnings 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 among 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.
