Every three months, publicly held companies are required to publish their financial results and file them with the Securities and Exchange Commission (SEC) using forms 10-Q for the first three quarters of the fiscal year and 10-K for annual reports. Since many companies have a fiscal year that follows the calendar year, January to December, a lot of them report their earnings around the same time, known as earnings season. The SEC has deadlines for when companies can file their financial results, and typically, firms report these numbers a few weeks after the end of the reporting quarter. During earnings season, many companies will simultaneously announce their earnings in press releases and file form 8-K with the SEC. Form 8-K is used to disclose to the public material events like earnings announcements. The earnings call generally takes place shortly afterward. Earnings calls are usually attended by different groups of people.
Investors and the General Public
Earnings calls are open to the public but may be of particular interest to individual and institutional investors that hold that company’s stock, or those looking to purchase those shares. These calls are also often attended by members of the press who then may report on the proceedings.
Sell Side Analysts
Sell side analysts research companies and make recommendations to buy or sell their securities. Sell side analysts work for banks and broker dealers. Their recommendations are made available to clients of the firm, or by subscription. These analysts participate in earnings calls to ask questions and often factor management answers in their research reports.
Buy Side Analysts
Buy side analysts research companies and make recommendations to purchase or sell their stocks or bonds. They work for financial institutions that buy and sell large volumes of securities. Buy side analysts work for mutual fund companies, investment advisors, hedge funds, trust companies, pension funds, and other money managers. Buy side analyst recommendations are not published, and are not available to the general public.
How Do Earnings Calls Work?
Earnings calls often follow a three-part structure. The call begins with a disclaimer from the Investor Relations Officer (IRO), called a “safe harbor statement.” The safe harbor statement warns participants that the call is being recorded, and forward-looking statements made on the call may not match actual future results. Next, the IRO will hand off the meeting to the Chief Executive Officer (CEO). The CEO presents a summary of the results and will discuss the trends, company initiatives, current news, and other topics that have impact on the positive or negative results. Calls often include projections for the following quarter or the annual earnings. The Chief Financial Officer (CFO) also often discusses and clarifies some of the nuances of the financials during this section of the call. Finally, the IRO will generally open up the call to questions that usually come from equity analysts. The CEO may call on other executives to cover questions related to their responsibilities.
What It Means for Individual Investors
What happens during an earnings call may also have an impact on the company’s stock prices. Prior to a firm announcing its earnings, analysts compile their expectations from the earnings report. If the actual numbers are below those expectations, it’s considered a miss. Better-than-estimated financials are considered a beat. An earnings beat could, in some cases, cause stock prices to rise, and an earnings miss could lead to a decline in the company’s stock price. Similarly, management comments, clarifications, or disclosures that occur during an earnings call could impact stock prices of a company. That’s why the unscripted portion of the call—the question and answer session—can provide investors a window into top management’s real thinking. The tone of the question and answer can provide clues. Are questions being answered directly or skirted? Are managers confident or evasive? Though individual investors may not be able to ask their own questions, the questions asked on the call may still be insightful. For example, during Tesla’s first-quarter 2018 earnings call on May 2, 2018, CEO Elon Musk passed on an analyst question on the company’s capital raising plans, terming it “boring” and “not cool.” Musk’s dismissiveness caused Tesla’s stock price to drop, with shares opening about 7% lower on May 3. Earnings calls could also be a way for investors to get a better understanding of a company’s financial prospects and business operations, as well as get insights on the health of the economy, or how the company is responding to larger trends. The SEC, for example, recommended in April 2020 that during their earnings releases and calls, companies provide as much information as possible about their current and future operations under COVID-19 related measures. Additionally, environmental, social, and governance (ESG) criteria continues to take on more importance to investors, and some companies are using earnings calls to communicate material issues and strategies.
