What Is an Earnings Call?
Let me explain what an earnings call really is. It's a conference call where the management of a public company talks directly with analysts, investors, and the media about the company's financial results for a specific reporting period, like a quarter or a fiscal year. This call usually comes right after the earnings report, which gives a summary of the financial performance for that period.
Key Takeaways
You should know that an earnings call is essentially a conference call between a public company's management team and interested parties to go over earnings for a specific period. The company dives into important parts of its quarterly 10-Q report and annual 10-K report, especially the management discussion and analysis (MD&A) section. Analysts rely on this information for their fundamental analysis of the company. Companies often release an earnings report just before the call, and at the end, participants get to ask questions.
How an Earnings Call Works
The term 'earnings call' combines a company's report of 'earnings'—think net income or earnings per share—with a conference call to discuss those results. Most listed companies host these calls to review their financial results, though small companies with little investor interest might skip them. Many companies post a recording or presentation of the call on their websites for weeks afterward, so if you miss the live one, you can still access it. Earnings calls often start with the moderator giving a safe harbor statement, warning that the call might include forward-looking statements.
Earnings Call and SEC Forms 10-Q and 10-K
During the call, company management breaks down the details of its SEC Form 10-Q for quarterly reports or 10-K for annual reports. Federal securities laws require publicly traded companies to include detailed financial results and a more qualitative discussion in these forms. The MD&A section provides the most in-depth look at financial results and other performance metrics. It explains the reasons for growth or decline in the income statement, balance sheet, and statement of cash flows. You'll hear about drivers of growth, risks for investors, pending lawsuits, and even announcements for the upcoming year, like future goals, new projects, changes in executives, or key hires.
Earnings Call and Fundamental Analysis
Analysts incorporate what they learn from the earnings call into their fundamental analysis of the company. This analysis starts with the financial statements, and analysts will review them closely while listening for verbal cues from management during the call. They might ask questions about main concepts or even specifics in the footnotes, like inventory details or lines about less accumulated depreciation.
Advantages and Disadvantages of Earnings Calls
Earnings calls offer a lot of information for investors, analysts, and the financial community. What comes out during the call helps analysts with their fundamental analysis. If questions are allowed, participants can get answers from company executives, which might reveal valuable details that improve the company's image—but some questions could highlight issues management prefers to avoid, potentially harming the company. Investors get the information they need quickly without digging through pages of reports, and they often base their trades around the call's revelations. On the downside, preparing for these calls takes time and resources, which can pull away from regular business operations. Once a company starts hosting them, it has to keep it up to avoid investors suspecting problems.
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
Example of an Earnings Call
Take Apple's 2nd Quarter 2021 earnings call on April 28, 2021, as an example. It featured CEO Tim Cook, CFO Luca Maestri, other executives, and analysts from firms like Morgan Stanley, Evercore, UBS, and Bank of America. Cook and Maestri discussed future revenues, income, expenses, and capital plans. Cook highlighted the previous quarter's strong revenue growth, praising iPhone, Mac, wearables like Apple Watch, and services like Apple TV+. He also talked about Apple's environmental commitments, aiming for net-zero carbon by 2030 with plans for eight gigawatts of clean energy and global projects. On the economy, Apple planned to invest over $430 billion, creating about 20,000 jobs. Maestri provided specifics, noting record revenues of $89.6 billion, up 54% from the prior year, with $47.9 billion from iPhones and $16.9 billion from services. Apple returned over $23 billion to shareholders via dividends and stock repurchases. Looking ahead, they expected a dip in the next quarter due to delays and supply issues, with gross margins below 50% and operating expenses around $11 billion. Analysts asked about customer base growth, pricing, initiatives, gross margins, services performance, and how U.S. investments would impact expenses, with Maestri emphasizing continued business investments.
Earnings Call FAQs
You might ask, what is the purpose of an earnings call? It lets a public company discuss its past performance, future plans, and answer questions from analysts, investors, and media. What should you listen for? Prepare by reviewing the previous call and analysts' reports, then check the earnings press release for benchmarks and dividend plans. During the call, focus on results, benchmarks, plans, and risks. Afterward, analyze management's tone, results, and Q&A responses. How long is an earnings call? There's no set time, but most are under an hour. Where can you find them? Recordings are usually on the company's website for a couple of weeks, with transcripts available longer; you can also check investment sites or review the earnings report on the company's or SEC's website if needed.
The Bottom Line
In summary, an earnings call is a conference call where company executives review performance for a specific period with the financial community, covering potential risks and future plans. At the end, analysts and investors can ask questions, which aids in their fundamental analysis of the company.
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