Is there a format that best holds analyst and investor attention during your earnings conference call? The short answer is, “Yes.” But the key to executing it is for company management to put themselves in the audience’s perspective.
Research shows that the average sell-side analyst covers 10.8 companies. As Wall Street consolidates amid tighter regulations, including new rules for how the buy-side will “pay” for research, structural market changes, and lower commissions, analysts have been under pressure to expand coverage.
It’s not unusual for a senior analyst with one or two associates at a mid- to large-size firm to cover 15-20 companies. At smaller firms, the range is 12-15. And most of that coverage is gravitating toward mid- to large capitalization companies. So for small- and microcap companies being heard is all the more challenging.
Meanwhile, buy-side analysts and portfolio managers (PMs) will often cover an investment universe comprising hundreds of companies. These include “core holdings,” which do not turn over much. It then extends to a satellite of companies across all sectors that PMs will rotate into and out of depending on a variety of factors.
The Earnings Season Crunch
Given these dynamics, earnings season is crunch time in the investment community. Analysts jump from conference call to conference call in a whirlwind that typically lasts 3-4 weeks. Companies are prioritized by their importance to the analyst and their firm. Banking clients come first. Then “buy” – or rare “sell” rated stock – because those are where the analyst has the most risk exposure. “Hold” or “neutral” rated stocks are treated as well, neutral.
As a result, when overlaps occur – and they occur often – an associate is delegated to listen to a lower-priority call. If the analyst has no associate, the analyst with either listen to the replay of the call or read the transcript, whichever becomes available first.
Analysts or associates enter the actuals into their models – ideally between the time the press release comes out and the conference call begins. Then, based on the results and company guidance, they update their models and valuation. Finally, they write a note summarizing and interpreting the results, which also provides rationale for changes to their model or stock rating, if they believe one is warranted.
Beyond any guidance a company provides, these decisions are often made based on the tone of the call. This includes the question and answer (Q&A) session that follows management’s prepared remarks. With so many companies to keep track of, is it any wonder that share prices experience their greatest volatility during earnings season?
Keep Them Zoned in…not Out
The format of your call becomes vital to holding the audience’s attention. Analysts are stressed and short on patience and attention during earnings season. They want the most relevant information delivered in the most efficient way.
To keep them zoned in, be economical with your words. Announcers of ball games on TV are taught to “let the action on the screen speak for itself.” They don’t need to make detailed commentary on all things viewers can see. Instead, along with their color commentators, they interpret what the play means in the context of the game.
CEOs and CFOs should think the same way. Your press release is the “action” the audience can see. So use your prepared remarks as the interpretation.
The Efficient Formats
There are two formats that are equally efficient, with either the CEO or CFO leading off with their commentary. The CEO should start with a quick highlight of the results. Then s/he can provide color on the tone of business, including market conditions, customer and competitor activity. The CFO should focus on reviewing key metrics tied to the results. S/he should also give guidance if it’s company policy to do so. There’s no need for a line-by-line review of the actuals. It adds nothing beyond the press release and frankly wastes everyone’s valuable and limited time.
If the news is bad or there is a specific topic investors and analysts will likely want to discuss, don’t shy away from it. Get right to explaining why your results missed expectations or why you are issuing disappoint guidance. Nothing puts more downward pressure on your stock than irritable analysts and investors who perceive that you are tap dancing around the explanation.
If there is a sensitive topic you are hoping listeners don’t ask, you can bet they will inquire about it so you are much better served by addressing this in your prepared remarks as opposed to potentially being put on the defensive during the Q&A (see above re/tap dancing).
The CEO should conclude his/her remarks by reinforcing the strategic value message behind the story. In other words, even if the news is bad, why is your company’s stock still a solid long-term investment? Accept that your shares will take a beating if “the Street” is disappointed. But focus on your proposition for building value longer term.
Budget 10-12 minutes for the CEO’s section. That’s all you need to make your key points. Speaking from experience, when a CEO carries on for much longer, it starts to raise suspicions among analysts: either that there is bad news coming, or that the CEO simply talks too much. Neither of these is going to be viewed as a positive.
The CFO’s section should take 8-10 minutes. Since there’s no need for a line-item review, the CFO should concentrate on those metrics that s/he feels analysts should focus on most. This allows the CFO to help analysts best understand the results and any nuances in the business that may be one-time in nature.
With prepared remarks taking no more than 22 minutes, management has the leeway to leave more time for Q&A. When your results surprise – up or down – you may want to allow more time to provide additional color.
Nowhere is it written that an earnings call must last a full hour. Your audience will appreciate getting the information they need – good news or bad – efficiently. Rest assured that analysts and shareholders will contact you if they want to discuss something in more detail. Management may also consider proactively reaching out to analysts or investors subsequent to the call in case they feel a particular question was not fully addressed during the actual call or there is further clarification needed that would be helpful to address offline.
About TechTonics Advisors (www.techtonicsadvisors.com)
TechTonics Advisors was founded to help technology companies maximize value for all stakeholders by bridging vision, strategy, product portfolio and markets with analysts and investors. Our unique expertise is bringing award-winning analyst perspective and comparative analysis to the investor relations process. Building upon in-depth understanding of the technology sector, our experienced team works closely with clients to develop clear, concise, consistent and compelling messaging that is communicated across all relevant channels to the investment community.