There are many decisions that must be made before every company’s earning call. Every company will have its own correct answer based on the past working experience and comfort level of the management team presenting. A few of themost commonly asked questions are:
- Do we prepare slides for our quarterly call?
- Do we really need to follow the script?
- Should we prerecord our call this quarter?
The thought and strategy that you put behind these decisions will ultimately impact the company’s shareholder confidence and overall analyst reception. At Gilmartin, we walk with our clients every step of the way during this crucial time. But first, we must understand a few basic principals around what goes into each quarter.
Quarterly Reporting
All public companies must provide a quarterly update on their financials through a formal 10-Q SEC filing, although almost all of these companies will also distribute a press release and a webcast of an earnings conference call. The 10-Q is available and archived for years on the Investor Relations section of the company’s website, but it is still worth having a thoughtful discussion on why earnings calls and earnings releases are valuable additions to the quarterly reporting cycle. Institutional and individual investors, buy-side and sell-side analysts, and all other interested parties have the option to tune in or later reference the earnings release and call to provide additional color on the quarter apart from what is published in the 10-Q. A more detailed account of each type of disclosure can be found below.
10-Q SEC Filing
The 10-Q is a comprehensive report that includes all the necessary objective disclosures of the company’s performance since the prior quarter filing, including unaudited financial statements and relevant information about the company’s financial position. 10-Qs can be hundreds of pages long and full of redundant information, making it difficult for readers to quickly extract information and get a sense of the quarter’s overall results. Although earnings releases and calls are not required on a quarterly basis, it is extremely uncommon for a company to file a 10-Q without the additional documents.
Earnings Release
Earnings releases summarize the financial results of the quarter and provide a consistent update on company-specific metrics. Earnings releases begin with a few highlights or interesting updates over the quarter and include pages of financial tables. Earnings releases allow easy access to other metrics such as guidance, which management includes for intended benefits such as improved communications with the financial markets, higher valuations, and lower share price volatility. Apart from guidance, earnings releases mostly reference the prior quarter and don’t mention expectations for the following periods.
Many companies include a quote from the CEO or other notable company representative to add some subjective remarks to the flow of the release. However, it is becoming increasingly common to exclude the quote and stick to the essentials. Bringing key messages such as updated guidance and revenue growth percentage up to the heading and subheading of the earnings release takes advantage of the real estate and focuses the reader’s attention on the overarching message. Earnings releases are also one of the main sources for FactSet’s StreetAccounts and other data aggregators that pull this information as soon as it is live for broader distribution and awareness.
Earnings Call
Earnings calls provide more color on the quarter and expected future results than the other two disclosure types listed above. This is where you will find more information on product development, roadmap, and overall strategy. Earnings calls include at least the CEO and CFO, and oftentimes other senior management members will to either deliver a section of the script or field questions from analysts. However, this is more common in larger companies or when there is a notable company update, such as new data or a big commercial launch.
As the analysts’ questions are not known in advance, management’s answers can be very indicative of the company’s confidence and performance beyond just numbers on a page. Prepared remarks usually follow a similar format to the prior quarter, but there can be new and relevant information that is necessary to share. As an alternative to incorporating this information (i.e. unwanted precedent of anecdotes, case studies, products sold, etc.) into the prepared remarks, management can prepare with focused talking points that can be weaved into the Q&A portion of the call.
It is necessary to focus on tone and delivery of the call as this can send a powerful message about the future of the company beyond just the financial results. Earnings calls can be a great way for a company to explain why it fell short on internal or external expectations, defend the fundamentals of the business, or prevent a bad stock reaction from the news. On the other hand, if a company has significantly beat its guidance, the earnings call is an opportunity to show the performance was truly better than expectations rather than an intentional beat on an overly conservative guidance range.
It is important to understand how all of these pieces fit together to create a clear and concise message for the quarter. For additional information on the purposes of the earnings script, earnings release, and 10-K filing for your quarterly earnings communications, please contact our team.
Kelly Gura, Analyst
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