Definition and Examples of Earnings Calls
How do earnings calls work?
What does this mean for individual investors?
Definition and Examples of Earnings Calls
Earnings calls are held by the management team of a public company to discuss financial results and answer questions.
Public companies host earnings calls to discuss financial results and answer questions. Earnings calls are simply conference calls that bring together investors, analysts, and even the general public.
Every three months, publicly traded companies are required to release their financial results and file them with the Securities and Exchange Commission (SEC) using Form 10-Q for the first three quarters of the fiscal year and Form 10-K for annual reports.
Since many companies follow a fiscal year that aligns with the calendar year, from January to December, many announce their earnings around the same time, known as earnings season. The SEC sets deadlines for companies to present their financial results, and companies typically announce these figures a few weeks after the end of the fiscal quarter.
During earnings season, many companies announce their earnings simultaneously through press releases and file Form 8-K with the SEC. Form 8-K is used to disclose material events to the public, such as earnings announcements. The earnings call is usually held shortly thereafter.
Earnings calls are typically attended by various groups of people.
How do earnings calls work?
Earnings calls often follow a three-part structure. The call begins with a statement from the Investor Relations Officer (IRO), known as a “safe harbor statement.” The safe harbor statement warns participants that the call is being recorded, and that forward-looking statements made during the call may not align with actual future results.
Next, the Investor Relations Officer hands the call over to the Chief Executive Officer (CEO). The CEO provides a summary of the results and discusses trends, company initiatives, current news, and other topics that impact the positive or negative results. Calls often include guidance for the next quarter or annual earnings. The Chief Financial Officer (CFO) also discusses and explains some of the nuances of the financial information during this part of the call.
Finally, the Investor Relations Officer usually opens the call for questions, which typically come from stock analysts. The CEO may ask other officials to respond to questions related to their responsibilities.
Note: Earnings calls are always open to the public. Information about the call is typically available on the company’s website in the investor relations section. Dates, times, and phone numbers are published in advance, and some companies also provide rebroadcasts and written transcripts of these calls on their investor relations pages.
What does this mean for individual investors?
What happens during the earnings call can influence the company’s stock prices.
Before a company announces its earnings, analysts compile their expectations from the earnings report. If the actual numbers fall short of those expectations, it is deemed a miss. Financial figures that exceed expectations are considered better than anticipated.
Better-than-expected earnings can, in some cases, lead to rises in stock prices, while worse-than-expected earnings can lead to declines in the company’s stock price. Similarly, comments, clarifications, or disclosures made during the earnings call can affect the company’s stock prices.
For this reason, the Q&A session of the call can provide investors a window into the true thinking of upper management. The manner of answering questions can offer clues. Are the questions answered directly or skirted? Do the executives seem confident or evasive? Although individual investors may not be able to ask their own questions, the questions posed during the call can still be insightful.
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For example, during Tesla’s first quarter earnings meeting on May 2, 2018, CEO Elon Musk dismissed a question from an analyst about the company’s plans to raise capital, describing it as “boring” and “not great.” This dismissal from Musk led to a drop in Tesla’s stock price, with shares falling approximately 7% on May 3.
Note: You can get an idea of what to listen for in earnings calls by reading transcripts of previous calls. Is management making progress on issues discussed previously? Do the results align with prior expectations?
Earnings calls can also be a way for investors to gain a better understanding of the company’s financial outlook and business operations, as well as to gain insights into the health of the economy or how the company is responding to larger trends.
For example, in April 2020, the Securities and Exchange Commission recommended that companies provide detailed information in their announcements and earnings calls regarding their current and future operations amid coronavirus-related measures.
Additionally, environmental, social, and governance (ESG) criteria continue to gain importance for investors, and some companies use earnings calls to communicate about significant issues and strategies.
Takeaway
– Earnings calls are held approximately every three months and are open to the public to listen.
– The management team’s goal in an earnings call is to present the results in the best possible way.
– The Q&A session can provide investors with valuable insights into the company’s financial condition and future prospects.
Source: https://www.thebalancemoney.com/what-is-an-earnings-call-5113006
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