Defining earnings calls
A conference call known as an earnings call is a discussion of the financial performance of a publicly traded company during a specific reporting period, such as a quarter or a fiscal year, between management, analysts, investors, and the media. An earnings report, which provides a summary of the company's financial performance for the time, typically comes before an earnings call.
Defining earnings release
The real financial information that will be revealed on the call is included in the earnings release. It is often delivered at least an hour before the actual call. There are occasions when the call script is delivered alongside slides that go along with the earnings release. This is particularly helpful for businesses that have a variety of indicators that can be challenging to visualize as voiceovers.
Earnings calls – are they required?
A business is not technically required to hold an earning call because it is not required by law. Public firms must disclose information about their financial performance, although this does not necessarily include information about their earnings. Some companies that are publicly listed don't even hold earnings calls. An earnings call being postponed due to an upcoming announcement, maybe involving an acquisition or merger, is also not unheard of.
Earnings call help investors decide how they feel about the company and what to do with their current and future investments. Earning calls may be so crucial that their effects on stock prices may be felt right away.
Structure in earnings calls
Earning calls are available to everyone. You can easily listen in over the phone by dialing a number that is provided in the earnings release or on the corporate website, or you can use a web-based dial-in. The call typically consists of four sections: an introduction, a welcome and overview, a thorough overview, and a Q&A period, the duration of which is determined by the host organization.
Statement of safety
A safe harbor statement, which simply informs everyone that financial results may include future predictions that may or may not come true, frequently comes at the start of a call. This disclaimer limits the company's liability in the event that future predictions significantly diverge from what actually transpires.
Presentation and discussion of the financial results
Because it serves as a functional sales pitch for the company, the first segment of the earnings call is occasionally referred to as a "commercial." Usually delivered by the CEO or President, this section presents a narrative intended to instruct listeners about the company's position in the market and how they should interpret the material that will follow during the call in light of that narrative. Listeners can learn more about the company's positioning in the market and their level of optimism regarding competitors and outside market forces in this part.
The CFO will likely take the lead and delve into the data in the comprehensive financial part to give investors a feel of the business's overall health and how it stacks up against prior periods. The financial terms that will be covered in this part may be unfamiliar to novice investors.
Q&A
Because analysts and occasionally even investors get the chance to delve into the financial specifics during the Q&A, it is typically the longest part of the call. Some listeners will look up the analysts posing the queries because their prior reporting on the firm and others in its industry will give a new level of context to the discussion. The host company can call on analysts in the chosen order, giving priority to the most pertinent ones and deprioritizing the rest, and is not compelled to respond to every query.
Analyzing earnings calls
Investors use a few strategies to get the most information out of an earnings call and release.
Study up on the history
We examine the past in order to comprehend the present. Therefore, for background information, read or listen to the transcript of the earnings call from the previous quarter. To discover how the firm has recently been covered and to see how analysts are advising investors, check through pertinent analyst reports next.
Track the experts
Look for articles and opinions from reliable experts in the relevant field. This could include analysts, writers, and other thought leaders renowned for their expertise in a certain sector or organization. Some investors might find it useful to look back over articles to see how, if at all, sentiment or coverage has changed.
Prior to the call, investors may search through these open sources to acquire a more complete picture of the company's state of affairs. Regulatory investigations, significant announcements, company updates, and previously made public business indicators are a few examples of data points that might be analyzed before an earnings call.
Read the earnings release
Usually, the earnings release is made accessible at least one hour before the actual earnings call. The call may be held the next morning if the earnings are disclosed after the market has closed. The company's website should provide a press announcement detailing the earnings, frequently along with other materials. The announcement will probably be syndicated on financial news websites, and some will occasionally post call transcripts after the call has concluded.
An earnings release may contain a wealth of data. Financial benchmarks and recommendations are frequently closely scrutinized by investors. They will also keep an eye out for any significant announcements, such as changes in the company's leadership, new products, and joint ventures, as these could have an impact on how the company develops in the future.
Last but not least, it's critical to pay attention to modifications in the balance sheet's depicted financial condition. Changes in cash, short-term investments, inventories, debt, sales, and share count may be included in this.
Post-call
Investors can research the call's effects on the market after it has been made. What conclusions have analysts and professional writers drawn from their research? You may also compare the company's disclosures to what earlier studies had predicted they would divulge. Which subjects did they prioritize more, and which did they downplay? Following an earnings call, investors might use the following questions to form their opinions about the company's future.
SEC Forms (10Q & 10K) and earnings calls
Management of the company discusses the specifics of its SEC Form 10-Q (quarterly report) or 10-K during an earnings call (annual report). Publicly traded corporations are required by federal securities rules to present specific information in these forms, including comprehensive financial results and more in-depth analysis.
The most in-depth examination of financial outcomes and other performance metrics is typically found in the MD&A section (management discussion and analysis). It will typically go into the causes of specific growth or fall on the income statement, balance sheet, and statement of cash flows of the organization.
The MD&A will go through specific development factors, dangers investors run when buying shares or making loans, and even open legal cases. The MD&A portion is frequently used by management to introduce the upcoming year by discussing future objectives and strategies for brand-new projects and initiatives, as well as any changes to the executive team and/or major recruits.
Fundamental analysis in earnings calls
Analysts do a fundamental study of the company using the information they gather from the earnings call. Financial statements for the company are where fundamental analysis starts. In addition to listening for verbal clues from corporate management during the earnings call, analysts will scrutinize these assertions. During an earnings call, analysts may have questions about key ideas or even specifics in the footnotes that center on inventory and "reduced accumulated depreciation" lines.
Earnings calls – the pros & cons
Investors, analysts, and members of the financial community can learn a lot from earnings calls. When conducting a fundamental examination of the company, analysts might benefit from the information presented during the earnings call.
If permitted, some participants may ask questions that will be addressed by an executive or representative of the company during the call. The questions might provide insightful data that would improve the company's reputation, but some of them might also raise issues that management would prefer to remain obscure, which would be detrimental to the business.
Investors may immediately get the information they need during earnings calls rather than having to sift through dozens of report pages. Additionally, they frequently plan trades for right before the earnings call, and the trades they make depend on the information disclosed.
The earnings call preparation process can be time-consuming and expensive. This commitment might interfere with regular corporate activities. A corporation must also keep the investment community interested after holding an earnings call. This means that it must keep making these calls to keep investors from suspecting a problem.
Pros
- Helps with fundamental analysis
- Guides investors' decisions on trading
- Allows participants to ask questions
Cons
- Strains normal business operations
- Q&A could produce unfavorable results
- Must establish a regular cadence to prevent negative speculation
Earnings calls examples
In addition to CEO Tim Cook, CFO Luca Maestri, other corporate executives, and analysts from other big corporations like Morgan Stanley, Evercore, UBS, and Bank of America, Apple (AAPL) hosted its second quarter (2021) earnings call on April 28, 2021.
Tim Cook and Luca Maestri talked about the company's projections for future earnings, costs, and capital plans. Tim Cook emphasized the performance of the previous quarter, pointing to a notable increase in revenues. He also praised the performance of the iPhone, Mac, wearables like the Apple Watch, and services like Apple TV+.
Instead of concentrating on the company's products, Tim Cook talked about the company's dedication to the environment and its emphasis on the American economy. Apple intends to introduce roughly eight gigawatts of clean energy and keep funding global environmental projects in its pursuit of a net-zero carbon impact by 2030. It has plans to invest more than $430 billion in the economy of the country, which will lead to the creation of almost 20,000 new employees.
Cook's statement was expanded upon by Luca Maestri by giving specific numbers. He praised their exceptional second quarter performance, which saw revenues of $89.6 billion, a 54% rise over the same period the previous year. He broke down revenues by category in further detail, attributing $16.9 billion of the quarter's revenue to services including App Store purchases, cloud services, Apple Music, and more, and $47.9 billion of the total to iPhone sales.
Maestri highlighted Apple's outstanding performance, noting that the company returned more than $23 billion to shareholders during the March quarter, including $3.4 billion in dividends and $19 billion in open market stock repurchases.
Due to delayed releases and supply issues, the company anticipates that the June quarter won't match the outstanding results of the March quarter. Operating costs are projected to total around $11 billion, and gross margins are predicted to be a little under 50%.
Analysts questioned the company about pricing, proactive activities, the factors that contributed to its high gross margin (42%), and the unexpectedly strong performance in its Services business. Maestri discussed the company's commitment to the goal, how much more revenues increased over its operations expenses in the prior quarter, and its plans to keep investing in the business. They were also asked about the company's performance and outlook on revenues and expenses, as well as how their plans for the American economy would affect the company's expenses.
Earnings calls – what to do next
Earnings calls offer a unique chance to learn a lot about a publicly traded firm in a short amount of time. This information varies from plain-text financials that hint at the current state of the company's finances and its future growth possibilities to more sophisticated data that helps the listener understand how the leadership is presenting the company's narrative and positioning in the market. The quarterly earnings call may be a helpful resource for individual investors to re-educate themselves on the firms they invest in and possibly base their investment decisions on new insights acquired when combined with publicly available content supplied by dependable journalists and analysts.
FAQ
Why are earnings calls important?
A public firm can share its previous results and future plans on an earnings call, as well as respond to queries from analysts, investors, and the media.
How long are earnings calls?
The duration of earnings calls is not set in stone. Most, though, are shorter than an hour.
Where can you find earnings calls?
The company's website normally posts the earnings call recordings for a set period of time, like two weeks. Often, the transcripts are accessible for a longer time. On investment websites, nevertheless, you can also access recordings and transcripts. Reviewing the company's results report on its website or the Securities and Exchange Commission's (SEC) website is the next best option in the absence of an earnings call.
Why do investors follow earnings calls?
The earnings call is one of the first places an investor looks for pertinent information when deciding whether or not to invest in or keep investing in a company. Earnings calls frequently contain substantial financial information and other insights that could influence an investor's choice. Some investors will even take into account the tone of an earnings call, focusing on how the leadership clarifies important information and handles analyst queries at the end of the conference.
How often do earnings calls take place?
Each quarter, public firms hold earnings calls. Companies exchange financial data such as revenue, profit, losses, and earnings per share on these quarterly calls (EPS). The fiscal year of a corporation, which may not coincide with the calendar year, is what it follows for quarterly calls.