Today's Earnings Conference Calls

A conference call is an event that allows companies to provide information to interested parties. This includes institutional investors (such as the large investment banks and stock analysts) but conference calls are also available to individual investors. Conference calls are usually scheduled every quarter and usually coincide with the release of a company's earnings report. While most companies take advantage of the opportunity to have a conference call with analysts, there is no legal obligation for them to do so.

A conference call is a form of marketing and public relations for a company. It is an opportunity for them to control or, in some cases, change the narrative of the company. For example, if the company had a solid quarter marked by exceptional growth, the conference call is a way for them to highlight their accomplishments.

On the other hand, if the company had a poor quarter, the conference call gives them the opportunity to calm investors looking to jump ship. Because a conference call typically takes place after the earnings report has been released, executives are not going to lie about their results, but they have a fiduciary obligation to present their company in the best light possible.

Most successful companies know that it's good public relations to be forthcoming with information. It doesn't mean that companies won't put a spin on their conference call but, in general, there is more harm to a company if they avoid analysts than to speak with them.

Most conference calls follow the same basic format. For participants who are listening to the call on the phone, there will be a dial-in number and passcode. For those who are listening to the call over the Internet, they will be provided with a link to stream the call. At the beginning of the call, the host of the call (someone from the company) will introduce the members of the management team who will be making statements on the call. After this, someone from investor relations or from the company's legal department will go over what can be called the "fine print" of the call. Basically, it's a reminder that past performance doesn't indicate future results, and that while much of what is going to be talked about will be in future terms, there is no guarantee that any events discussed will happen with certainty.

The next section of the call is perhaps the most tedious, but depending on how much research you’ve done can be valuable. This is when the earnings report is reviewed in detail. All of the raw financial data is explained and reviewed. The officers of the company will typically provide some commentary that may go “off script”. For the most part, however, any information in this section of the call is readily available through press releases that have already been posted on the company’s site.

So is there any value to this part of the call? Yes, if you know what to listen for. In many cases, this part of the presentation will be divided among several executives including the Chief Executive Officer (CEO), Chief Financial Officer (CFO), and other executives. Does what they say track with any research you’ve done or read? If there were major issues that affected their performance negatively, have those issues been resolved, or will they be resolved soon? Any color on performance could be a clue to future stock performance.

The last part of the call is a question-and-answer period for analysts and investors. This is perhaps the most useful part of the call for investors because analysts will quickly cut through the official language and push for clarity on areas that warrant a deeper explanation. Think of this as the manager, or coach, of a college or professional sports team addressing the media. The reporters will generally ask the coach questions that they don’t necessarily want to answer. The answer they give can give you a clue about how confident they are about a particular outcome.

The conference call is important because it occurs after a company has released its earnings reports. After the call, analysts and investment banks will make their “buy”, “sell”, or “hold” recommendations which is what moves the stock price. So for a company that reported good earnings, the conference call is a way to inspire confidence that they will continue to provide a good return on investment (ROI) for their shareholders. On the other hand, if their report disappointed or “missed” in terms of revenue, earnings per share (EPS), or both, the conference call gives companies the opportunity to mitigate the damage done to their share price.

The basic steps you take to prepare for a conference call are really no different than the steps you’d take for making any major purchase. You have to do some prep work in advance of the call, you listen to the call, and then you form your analysis.

• Preparing for the call – the two basic steps to take when preparing for a conference call are to review the company’s earnings statement from the previous quarter and compare it to recent company news and their current earnings report. What were analysts concerned about after the last earnings report? Were those issues resolved or in the process of being resolved? How do their results track with other companies in their sector, and if relevant to the broader economy? For example, you might expect that an oil company's stock might be going up as crude oil prices rise. But if the company you are investing in has a share price that is declining, this should be a caution flag, if not a red flag. You should also then compare their past quarter's earnings statement with their most recent statement. Obviously, you're looking for consistency if the last quarter was good, and improvement if the report was not good. Much of this information is available either on the company's website and on other financial sites like Marketbeat.com. It may take a few hours to digest all the information, but it will be time well spent.
• Listening to the call – this means actively listening, particularly to the question-and-answer period at the end. Remember, there is a natural tension between analysts and the company. The company is trying to present itself in the best possible light and the analysts' job is to paint as realistic a picture as possible. Although individual investors very rarely get to ask questions (in some cases, there are thousands of listeners on a call), the analysts will probably ask the questions that you were thinking of. And, let’s face it; they’ll probably come up with a few that you never even considered.
• Analyze the call - By doing your research beforehand, you are in a better position to form opinions. Are there any questions in your mind that were left unanswered? Can you make any educated guesses about that answer based on the information you have? Did any of the financial information provided by the company seem irrelevant or self-serving? It's okay to answer yes to this question. The thing about statistics is they can be twisted to make any conclusion you want to make. So if some metric seemed odd to you, chances are the analysts saw it the same way. In the end, trust your gut. In many cases, a conference call will simply confirm what you may have already felt, but in some cases, you may get some surprises. And finally, pay attention to the stock price in the days immediately following the call. That is usually the best indicator of how institutional investors felt about the company's performance on the call.

Obviously many individual investors may not have the time to stream an hour-long conference call while they’re e at work. The good news is that in most cases, the conference call will be recorded. Usually, the recording can be found on a company's website in the investor relations section. In the event that the company does not choose to make the recording accessible, it can generally be found on other financial websites. Even if you can only find a written transcript, it can still be valuable.