Earnings Calls: The Soap Operas of Business
Getting the Tea with Business Acumen
Earnings calls are the soap operas of business. If you think they're boring, you may not be understanding them. If you speak the language of finance and know some basic vocabulary, you can listen to those earnings calls, and all of a sudden it's like watching the Bachelor. It's human intrigue! It's the excitement of business watching those earnings calls.
Part 1: Prepared Remarks
This is how they work. Every quarter (obviously, because they're quarterly earnings calls), publicly traded companies report their financial results and answer questions from analysts. The first portion of an earnings call is usually the prepared remarks. This is when an executive — usually the CEO — gives a visionary explanation of where the company is headed. And afterward, the CFO wraps things up with a more number-heavy explanation which if you don't speak finance can be boring. That's totally fine. You may just want to listen to the CEO's section anyways.
During the prepared remarks, you can tell how a company is doing by what type of metrics they report on. If they are reporting on obvious metrics like top line, revenue, bottom line, profit, gross margins, operating profits, or operating margins — basically all of the terms you're probably familiar with — they're more likely doing well. In that case, they may say, "we have increased here, we're hitting guidance here, we're doing well here."
However, if everything sounds rosy but they're reporting on obscure key performance indicators like, "we were three points higher than expected in our Asian market corporate division," you know what they're doing is trying to find any good news. Anything metric that went, they want to report on. That's how you can use prepared remarks to tell how a company is doing just by listening to what type of metrics they're reporting.
Part 2: Question & Answer
The next section of the earnings call is the analyst Q&A. These financial analysts are familiar with this company's past earnings and will get the company's quarterly results a little bit before the call. They get the chance to quickly read their financial results, interpret them, and jump onto the call to ask their questions. What you don't know is that behind the scenes the CEO and CFO had the opportunity to move those questions around. They see them coming in and can change the order. The order is really important. Generally, they'll take the easy, lowball questions first. You know, start out with good news. Then they put the hard questions in the middle. If you start paying attention, you can almost skip to the middle of the transcript or middle of the analyst Q&A and those are the hardball questions. Then they usually try to end on a lighter note again so that it won't impact the stock market price too negatively. That's what they're hoping for anyway. What's so interesting though is it doesn't always follow that format.
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Tesla is an interesting company to follow. During one recent earnings call, Elon Musk took the hardball question right up front and used it to his advantage to hilarious effect. This is what happened. An analyst asked, "Mr. Musk, you aren't very accurate in your predictions. In the past, you've told us that [self-driving cars] would be launched a long time ago... you've been wrong a lot. Tell us why we can trust you now." Pretty hardball question! He took that as the first question. Brave! This is why people follow Elon, right? Musk replied, "I'm so glad you asked me that question. I want you to experience it for yourself. I want you actually to go to this website and try the self-driver." He totally turned it into a marketing opportunity. Seriously! He took the hardball question, answered it first, and turned it into a marketing opportunity.
If these insights into the inner workings and strategies of companies aren't like watching the Bachelor, we don't know what is. If you want to be entertained, first you do need to learn a little bit of the finance vocabulary and then start jumping on those quarterly earnings calls of the companies that you work for, follow, sell into, partner with, or invest in, and be entertained!
Continue your education at our next earnings call lab where we'll break down another amazing company:
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