As we think about best practices for earnings and quarterly reporting, we focus on the message in its totality and how to best prepare. This means the press release, scripted remarks, Q&A preparation, analyst after-call preparation, and slides (if relevant). We spend time reviewing perception, consensus expectations, specific analyst areas of focus, and competitive commentary as well as sector sentiment – all in relation to current and expected future performance.
That said, we have been recently asked about the necessity of actually reading a script of prepared remarks to analysts and investors. In an increasingly digital world, it seems a bit inefficient to force the Street to furiously take notes and quickly draw conclusions on relevant information and metrics…then form their questions so they can ask provocative questions in the Q&A session. We decided to explore this further and here is what we learned.
Here is the question we posed: Would it be better to post management commentary in the form of a shareholder letter, give the analysts 30-60 minutes to read it, then host only a Q&A session which is shorter and to the point? The answer is not necessarily – at least not in the healthcare sector. But, we do see value in making prepared remarks available to your analysts and the Street by disseminating them after the webcast and/or posting them on your IR website. We also think supplemental materials can be valuable, especially for companies with multiple business segments and/or clinical data sets.
1 | The data – a recent NIRI thread. NIRI recently published results of a survey1 on best practices for earnings, and a related question was posed – specifically, “Which companies with a $1 billion market cap or greater issue prepared remarks in written format and host a call for Q&A only?” Below was the answer:
- Ciena Corp (CIEN; $6B Mkt Cap) – Beginning Dec. 2017 Ciena Corp posted their prepared remarks 90 minutes before their conference call, then hosted a very brief segment of CEO and CFO comments with a longer Q&A session. We would characterize this as a “light version” of the Q&A only approach
- Five Below, Inc. (FIVE; $7B Mkt Cap) – Five Below is interesting in that Q2 2018 was a traditional call; in Q3 2018, the company posted their prepared remarks and only hosted Q&A, but in Q4 2018 reverted back to the traditional format. We aren’t sure what to make of this.
- Greif, Inc. (GEF; $2B Mkt Cap) – From 2015 to 2017 Greif posted prepared remarks and hosted a call with Q&A only. As of 2H 2017 through the present, the company is following the traditional format of reading prepared remarks and hosting a Q&A session
- Netflix, Inc. (NFLX; $160B Mkt Cap) – Netflix is interesting because they host Q&A only with a twist – they have sell-side analysts ask questions sent in by investors
- Tesla, Inc. (TSLA; $46B Mkt Cap) – Beginning in 2011, shortly after its 2010 IPO, Tesla has posted prepared comments and hosted Q&A only. Now, however, Elon Musk is taking a few minutes to emphasize key highlights at the start of the call, before Q&A
- Ubiquiti Networks, Inc. (UBNT $11B Mkt Cap) – Ubiquiti posts prepared remarks then hosts a call for Q&A only
So, while a small number of companies, mostly in the tech sector, have migrated away from the traditional earnings call format, there aren’t many. And in certain situations, whether it be to address a complicated message or for other reasons, a few of these have migrated back to providing prepared remarks in addition to the Q&A session. As we consider precedent setting – we would caution that if a company decides to evolve in this direction, they are confident they won’t want to revert back to the more traditional format in subsequent quarters to address potential confusion.
2 | Disseminating prepared remarks – regardless of call format. As analyst time is becoming increasingly stretched, we are competing for mindshare. With that in mind, we believe that if we can make it easier for the analysts to understand quarterly results, messaging and guidance, then companies will get a better result. On busy days, analysts will have as many as six companies reporting earnings at the same time and will be juggling calls. And we know that if forced to choose, they will migrate to the most controversial situation as opposed to a conference call with straightforward looking results and guidance. With that in mind, we view it as best practice to disseminate the prepared remarks to covering analysts as soon as the call ends. This gives them a chance to read the commentary and come to the after-call with more informed questions. It also means that they are hopefully less apt to misinterpret something and print a mistake or have line items in their models that are inconsistent with management commentary. We also suggest posting the prepared remarks on the IR website. In fact – in a recently published NIRI survey, of the companies that post their scripts online, roughly 80% keep them archived for at least a year.
3 | Materials – what supplemental materials are helpful? For SMID-caps, we generally believe that the press release (including financial tables) and prepared remarks will suffice – with the 10Q and 10K documents on file with the SEC shortly after or simultaneous with the call. That said, for large diversified businesses and/or those with multiple clinical data sets, it can be beneficial to include a slide deck with the earnings report. In the recently published NIRI survey on Earnings Best Practices, roughly 40% of mid ($2-10bn) and large ($10-25bn) cap companies – across all sectors – included slides in their quarterly earnings presentations.
4 | Healthcare analysts – their feedback. We queried several healthcare analysts at bulge bracket, emerging growth and boutique banks on this topic. A couple of them were receptive to the idea of companies posting their prepared remarks online, with the caveat that the call should necessarily be shorter (i.e. limited to 30 minutes). More, however, felt that they are inundated with written and digital material to read. The process of being required to dial into a conference call, while seemingly “old fashioned,” forces them to prioritize time and pay attention (rather than skimming). They also commented that posting prepared remarks might seem impersonal and could detract from the analyst-management partnership and relationship that they work to develop. All in, we found that meaningfully more analysts would rather stick with the status quo than switch to a model where companies post their comments online and only entertain questions (despite their acknowledgment that this could be more efficient). Across the board, they voiced positive receptivity to receiving the scripted comments at the conclusion of the call.
5 | How important is tone? This is one of the more frustrating (and seemingly inane) topics for many of our management teams – the fact that they are being judged on how energetic or dour they sound on a call. What if the CEO was up all night with a sick child, received bad (or good) personal news moments before the call or is sick herself!? That said, as we talk to investors and analysts – they routinely comment on management’s tone: how they sounded during prepared remarks, Q&A and in the after-calls. They also talk to each other about tone, “…the CEO sounded generally more upbeat about the market than he did last quarter…” Really? We are pretty sure most management teams have a long-term view on their market opportunities, but OK. We have a lot of opinions on this topic, but one thing is certain – analysts will comment on tone. So, is it important? Yes. Practice the prepared remarks and Q&A – especially the thorny questions – with your IR team so you can get feedback on how you sound.
In conclusion, there are interesting trends shaping up in how management teams communicate with shareholders and analysts. We try hard not to default to the most comfortable approach, or the “it’s always been done that way” plan, rather to be innovative and forward thinking – often drawing from the tech sector for our healthcare companies. We think for some companies, posting prepared remarks online (and disseminating them) then hosting a thorough Q&A session may be a good, efficient approach to reporting earnings. But, it’s not yet mainstream and this approach does have some drawbacks, so tread carefully!
We have worked with hundreds of healthcare companies as they handle quarterly earnings and what will be most effective and impactful. With our Street backgrounds, coupled with our immersion in the sector, we are uniquely positioned to share our experiences with similar situations as well as to look ahead to be more forward thinking. We roll up our sleeves to help both strategically and logistically to ensure the message is clean and delivered in the best way possible with the ultimate goal of maintaining and building credibility to create shareholder value. Give us a call or check out our website at www.gilmartinIR.com for more information on how we partner with our clients.
Lynn Lewis
Founder & CEO
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