Earnings Calls: Behind the Scenes

Last weekend I wrote about the Applied Materials earnings call. And over the last couple of years I’ve written about lots of other earnings calls. Most people have never been on an earnings call, I mean in the conference room where the call is being conducted, not just listening. So I thought it might be interesting to describe how it actually goes down.

When I was at Cadence I was part of the investor relations team in that I was the technical person that they would arrange meetings with if an analyst came by and wanted to discuss technology. The main investor relations people could talk about the company finances but knew little about technology. I was the house-trained technologist who could be trusted not to pre-announce a product or say something that I wasn’t meant to. In fact the analysts actually knew very little about technology in most cases, and were out of their depth if I went too deep into anything. I think they just wanted to try and assess whether we were ahead of Synopsys by looking someone (me) in the eye, and also learn a few new buzzwords so they could sound smart when they asked questions on earnings calls.

You generally only hear 3 people talk on the earnings call. The head of investor relations who introduces the call and reads the safe-harbor statement. The CEO of the company who usually goes next and gives some color to the quarter with the headline financial results, which all the analysts already know since the press release went out 30 minutes prior to the call. Finally the CFO who will give more detail of the finances, cash-flow, capital investment, headcount and so on. Then the interesting part begins when the CEO and CFO have to answer questions.

So you might assume that there are just 3 people in the boardroom when the call takes place. Actually, at least when I was at Cadence, we would have another half-dozen or more people. Another investor relations person learning the ropes, maybe someone else from finance. Since the CEO Ray Bingham was from finance and not technology we would have several of us on hand to handle technical questions. We didn’t actually answer them, of course, we trained Ray so he could answer them. Our job was to make him look good. One challenge was that the boardroom had a top-of-the-line phone system with microphones hanging from the ceiling so on a call anyone in the room could speak and be picked up. On an earnings call this was a disadvantage since it means that nobody could speak, however quietly.

The CEO and CFO’s statements have been word-smithed to death over the preceding few days and so provide a very controlled perspective of the company’s business. The interesting stuff happens in the questions when there is no script. If it were a financial question Ray, or Bill Porter the CFO, would answer. If it was technical or product related then Ray would stall for time for a few seconds while we wrote talking points on a white-board and he would then take those bullet points and run with them. That way we made it look like he knew a lot more about the underlying technology than he really did.

With Regulation-FD (fair disclosure) anyone has the right to listen to an earnings call. This regulation was passed to stop the practice prior to 2000 of giving market-moving information to a select few (typically large institutional investors) before it became generally public. In those days, you wouldn’t be able to get on a conference call if you weren’t a professional investor or analyst.

So now even you can get on the call. But don’t expect to get called on to ask questions, that will be limited to analysts who already have a relationship with the company since their opinion has a broad reach (aka affects the stock-price). I prefer to read the transcripts than to listen. I usually skim the CEO and CFO’s statements since they are not going to contain any surprises. It is the question and answer session where interesting stuff gets conveyed and maybe something off-message gets said. I’m not interested in the financial stuff in general so I skip questions about next quarters cash-flow or tax-rate. The questions about product are always interesting. Fabless companies and manufacturing equipment companies often let out details of foundries that the foundries themselves do not. After all, if a volume manufacturing ramp pushes out, these are the first people to know and it is often material to their business so they cannot say nothing at all.

A good place for listening to recordings of calls are reading transcripts is SeekingAlpha here.