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Money Talks: The Value of Earnings Calls

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November 08, 2018

Money Talks is our ongoing educational series to demystify the finance and investing industry for our community of translators, transcribers, and interpreters. If you are a practitioner in the finance and investing industry, you may even learn a thing or two as well!

Earnings calls give the management of publicly traded companies the opportunity to present their quarterly results to investors, analysts, and the media. In many cases, it can provide the listeners of the call a chance to learn new information about the company that is not always present or articulated in an earnings press release. They’re also an integral piece of any due diligence research process conducted by analysts.

An earnings call can give analysts and shareholders of the company an opportunity to ask senior and C-suite management questions about the state of the company.  It gives management a chance to provide forward-looking guidance or insight into the competitive landscape of the industry.

Why They Matter

Publicly traded equities in the US report earnings results on a quarterly basis. Analysts and investors spend a lot of time and money trying to forecast what those results may be to value the price of an equity. Due to the uncertainty around upcoming results, analysts or investors will perform rigorous channel checks or schedule meeting with industry experts to get a feel for how the company may be performing during the quarter.  As a result of the uncertainty, stocks can see a great deal of volatility in the days leading up to, or immediately following, those results.

Earnings calls can also provide the management an opportunity to present new information about a product in development or the company’s plans to move into a new market. More importantly, it gives analysts the chance to clear up any questions that they may have about the company’s results or assumptions the company is making for future guidance. It can help the analysts to better model future quarter revenue, cash flow, and earnings growth.

People even analyze the tone and inflection of speakers on these calls. One of my favorites comes from CB Insights, where they say “Elon Musk talks like a 7th grader.” This is actually a compliment, as relatively simpler language on a conference call is typically associated with a “no-BS” attitude whereas fancier language can get dismissed as buzzword-dense, substance-light commentary.

Micron

There have been many cases in the past when a company reports robust quarterly results, only for the conference call to reveal a new piece of information or guidance that may be viewed as negative. One recent example of this was Micron Technologies Inc. (MU),  which reported strong quarterly results on September 20 above analysts’ consensus estimates. The positive results sent the stock price surging in after-hours trading. However, when the conference call with management started an hour later, the management revealed the fiscal first quarter guidance would not be as strong analysts’ forecasts, which resulted in the stock ceding all its gains and falling below its closing price.

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Sector Impacts

In other cases, an earnings call can provide some essential information that may affect an entire industry. The Micron earnings call also revealed the company was seeing an impact from the recent tariffs the U.S. levied on China. As a result, the whole semiconductor industry has suffered, with many of their stocks falling as well even though many companies had not reported results. Investors used Micron’s call to inform their trading on similar companies, anticipating a similar outcome.

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Tesla

The electric automaker Tesla is a prime example of guidance and analyst models because analysts have always questioned Tesla guidance for their all-new four-door electric sedan Model 3’s margins. In the past, Tesla gave their assumptions and scenarios of how they might achieve profitably. In many cases, analysts questioned those assumptions, and because of those doubts, analyst forecasts for the company’s third-quarter results were way off. Tesla delivered a substantial profit during the quarter versus analysts’ estimates for a loss.

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Earnings calls play a critical role in the dissemination of a company’s quarterly results, and in some cases are even more important than an actual press release. They give investors and analysts not only a chance to interpret the data but also to listen to how a management team responds to questions and their tones of voice, playing an integral part in the analysis of stocks and valuations.

Companies also frequently provide transcripts and replays of these calls on their websites, which can also be useful reference guides for past events.

 Want to learn more about earnings calls? Check out our recent piece on some of the most impactful Q3 2018 earnings calls.

 

About the author

Matt Conger

CEO of Cadence Translate. Spent several years doing due diligence at Bain & Company and Hudson Capital Management. Lifelong learner currently focused on Salesforce, Python and Hearthstone. Lived/studied in Philadelphia, Palo Alto, New York and Beijing.

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