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What Is an Earnings Call?
An earnings call is a conference between a public company’s management, analysts, investors, and the media to review financial results and discuss future prospects. Held after the release of an earnings report, these calls summarize key performance data and often include a Q&A session, allowing stakeholders to gain deeper insights into the company’s outlook.
Key Takeaways
- An earnings call is a conference call where a public company discusses financial results with analysts, investors, and media.
- The call typically follows an earnings report and provides a deeper analysis of the company’s performance.
- Earnings calls include a Q&A session where participants can ask questions, potentially revealing additional insights.
- Many companies publish earnings calls on their websites, allowing broader access to information.
- Analysts use information from earnings calls to perform a fundamental analysis of the company.
Understanding the Mechanics of an Earnings Call
The term “earnings call” is a combination of a company’s report of “earnings” (such as its net income or earnings per share) and the conference call to discuss results.
Fast Fact
Earnings calls often begin with the moderator issuing a safe harbor statement, which advises that the call may include forward-looking statements.
Most listed companies hold earnings calls for their financial results, but small ones with little investor interest might not. Many companies post recordings or presentations of the earnings call on their websites for several weeks, so investors who missed it can access the information.
How Earnings Calls Relate to SEC Filings
During an earnings call, company management discusses the details of its SEC Form 10-Q (quarterly report) or 10-K (annual report). Federal securities laws mandate that publicly traded companies provide certain information in these forms, including detailed financial results, along with a more qualitative discussion.
The MD&A section (management discussion and analysis) usually provides the most comprehensive discussion of financial results and other performance metrics. It will generally dig into the reasons behind certain aspects of growth or decline on the company’s income statement, balance sheet, and statement of cash flows.
The MD&A will discuss particular drivers of growth, risks that investors face when purchasing shares or extending loans, and even pending lawsuits. Management also often uses the MD&A section to announce the upcoming year by outlining future goals and approaches to new projects and initiatives, along with any changes in the executive suite and/or key hires.
How Earnings Calls Inform Investment Analysis
Analysts use the information they learn from the earnings call in fundamental analysis of the company. Fundamental analysis begins with the company’s financial statements. Analysts will comb through these statements in addition to listening in on verbal cues that company management gives during the earnings call. Analysts may ask questions during an earnings call related to main concepts or even details in the footnotes that focus on inventory and “less accumulated depreciation” lines.
Weighing the Pros and Cons of Earnings Calls
Earnings calls can provide a wealth of information for investors, analysts, and members of the financial community. What’s released during the earnings call can help analysts in their fundamental analysis of the company.
If allowed, some participants may present questions to be answered by the company’s representative or executives during the call. The questions may yield valuable information that can enhance the company’s image; however, some questions may be about topics management does not want in the forefront, thereby damaging the company.
Earnings calls provide investors with the information they need, without sifting through extensive reports. Also, they often schedule trades close to the earnings call, and how they trade is dependent on the information released.
Preparing for the earnings call can take time and command significant resources. This commitment may come at the expense of normal business operations. Also, once a company hosts an earnings call, it must continue to keep the investment community engaged. This means that it must continue these calls to prevent investors from thinking something is amiss.
Pros
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Helps with fundamental analysis
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Guides investors’ decisions on trading
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Allows participants to ask questions
Cons
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Strains normal business operations
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Q&A could produce unfavorable results
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Must establish a regular cadence to prevent negative speculation
Real-World Example: Apple’s Earnings Call
On April 28, 2021, Apple (AAPL) held its 2nd Quarter (2021) earnings call with CEO Tim Cook, CFO Luca Maestri, other company executives, and analysts from other large companies, such as Morgan Stanley, Evercore, UBS, and Bank of America.
Tim Cook and Luca Maestri discussed the company’s outlook on future revenues, income, expenses, and plans for its capital. Tim Cook highlighted the prior quarter’s performance, noting a significant increase in revenues. He also boasted about iPhone and Mac’s performance, as well as that of wearable products like the Apple Watch and services like Apple TV+.
Shifting the focus from its offerings, Tim Cook spoke about the company’s commitment to the environment and its focus on the U.S. economy. In a quest for a net-zero carbon footprint by 2030, Apple plans to introduce approximately eight gigawatts of clean energy and continue supporting environmental projects globally. Regarding the nation’s economy, it plans to invest more than $430 billion, which will result in approximately 20,000 new jobs.
Luca Maestri expanded on Cook’s message by providing concrete figures. He celebrated their record-breaking performance of $89.6 billion in revenues recorded for Q2, a 54% increase compared to the same quarter of the prior year. In greater detail, he dissected revenues by segment, attributing $47.9 billion of the quarter’s revenue to iPhone sales and $16.9 billion to services, such as App Store purchases, cloud services, Apple Music, and more.
Citing a remarkable performance, Maestri shared how Apple returned more than $23 billion—including $3.4 billion in dividends and $19 billion as open market repurchases of Apple stock—to shareholders during the March quarter.
Looking forward, the company expects the June quarter to not mirror the spectacular March quarter performance due to delayed launches and supply constraints. Gross margins are expected to be slightly below 50% and operating expenses are to be approximately $11 billion.
Analysts asked questions about reviving the existing customer base and attracting new customers, pricing, forward-looking initiatives, drivers for its high gross margin (42%), and the unexpectedly high performance in its Services division. In addition to the company’s performance and outlook on revenues and expenses, they were asked how their plans for the U.S. economy would affect the company’s expenses, to which Maestri reflected on the company’s dedication to the goal, how much more revenues increased over its operations expenses in the prior quarter, and its plans to continue investing into the business.
Earnings Call FAQs
What Is the Purpose of an Earnings Call?
An earnings call allows a public company to discuss its past performance and future plans, as well as answer questions from analysts, investors, and media personnel.
What Do You Listen to in an Earnings Call?
Before listening to an earnings call, it is helpful to prepare to get a better understanding of what to listen for and what’s particularly important to investors and analysts. Listen to the company’s previous earnings call and read subsequent analysts’ reports to gain insight into the company’s performance.
Then, review the earnings press release, which is usually published before the call. This can provide valuable information, such as benchmarks and plans for dividends. As you listen to the earnings call, pay attention to the results, benchmarks, plans, and risks.
Afterward, you can analyze the call—management’s tone, the results, and the answers to analysts’ questions.
How Long Is an Earnings Call?
There is no prescribed time length for earnings calls. However, most last less than an hour.
Where Can I Find Earnings Calls?
Earnings call recordings are typically published on the company’s website for a specific time, such as two weeks. The transcripts are often available for a longer period. However, you can also find recordings and transcripts on investment websites. If an earnings call is not available, the next best alternative is to review the company’s earnings report on its website or the Securities and Exchange Commissions’s (SEC) website.
The Bottom Line
Earnings calls are vital forums where company executives discuss financial performance, risks, and strategies beyond what’s found in reports like 10-Qs and 10-Ks.
They begin with a review of results and end with Q&A sessions, giving analysts and investors valuable context for fundamental analysis and trading decisions. While they enhance transparency, earnings calls also require careful handling as tough questions can reveal challenges, making them both informative and high-stakes.
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