A thin line divides what we do based on well-established practices and the knowledge we’ve gained over time, and what we do as a force of habit; often without our taking the time to truly understand the motivations and meaning behind our actions. If this sentence sounds too highbrow for an investor relations piece, please bear with me and take a moment to reflect: How did you conduct your latest earnings conference call?
If you followed the traditional model, your conference call began with a presentation discussing your quarterly results, featuring very similar (or identical) content to that within your earnings press release, potentially published a few hours prior to the call, with one or more members of your senior management team reading a script verbatim. Depending on the size and complexity of your company, your presentation probably ran between 15 to 40 minutes, followed by a Q&A session.
We know what you’re thinking. “What’s the problem? This is exactly how everyone does it. Is there even another way?”
Based on feedback from members of the financial community who participate in quarterly earnings calls, most of the preamble to Q&A is neither wanted nor needed. Investment analysts and managers pay little or no attention to these canned remarks, focusing on other things or even doing other work altogether, while they wait for Q&A to begin.
We’re therefore wasting valuable senior management time on an activity with little or no practical relevance; painstakingly crafting the precise wording of a script to which most will not listen. We’re wasting our scarce resources and burning through the very finite attention spans of call attendees for no discernable reason.
So what is the ideal call format? It’s a format that respects the audience’s limited time, availability and attention. A format that minimizes repetition of the information already conveyed in the press release, to instead maximize what’s important: the financial community’s opportunity to discuss your company’s quarterly and full year highlights with management. In practical terms, the ideal results conference call would include:
- The operator must read the boilerplate text. We cannot avoid this part, and we do not want to create hostility with attorneys;
- Management’s brief prepared remarks of, at most, five minutes (or it should feel like five minutes.) Show three main quarterly highlights, including revenue growth, operating margins, acquisitions, investments, etc. No more than three genuinely relevant items. If there have been more over the course of the preceding quarter, a separate conference call should have already been held to address them. Talk about these highlights clearly and directly. State why they are important but resist the urge to drill down into the fine points of each item. For the details, we have the earnings release and the footnotes;
- The question and answer section with, fundamentally, an equivalent structure to what we have today. Ideally, answer with short and straightforward answers, at all costs avoiding an attitude like that of Elon Musk, who in Tesla’s 1Q18 earnings conference call shut down an analyst who asked a difficult question with: «I’m sorry. Next question; boring and stupid questions are not interesting.» Then, after ignoring the following question, he abandoned analyst Q&A altogether, fleeing to YouTube to answer individual investors’ questions. Tesla’s shares fell almost 6% immediately thereafter.
The current format of earnings conference calls does not meet the needs of analysts nor investors, and this is nothing new. Even so, every time we propose these changes to our clients, they resist. These are the main arguments we hear:
- A boilerplate text read by the operator. This part can’t be avoided, nor do we want to create problems with our attorneys;
- Management’s brief prepared remarks of, at most, five minutes. Include three focused quarterly highlights, including revenue growth, operating margins, potential acquisitions, investments, etc. No more than three truly relevant items. If there have been more over the course of the reported quarter, a separate conference call should have already taken place for these to have been addressed. Discuss said highlights clearly and directly. State why they’re important but resist the urge to drill down into each item’s fine points. For these details we have the earnings release and the footnotes;
- The question and answer section that’s essentially similar to our current call’s format. Ideally, answers should be succinct and straightforward, at all costs avoiding Elon Musk’s brusque attitude when, on Tesla’s 1Q18 earnings conference call, he shut down an analyst who asked a challenging question with: «I’m sorry. Next question; boring and stupid questions are not interesting.» Then, after ignoring the subsequent question, abandoning the results call Q&A entirely, fleeing to YouTube to answer investors’ questions individually. Tesla’s shares promptly fell almost 6%.
The current format of earnings conference calls isn’t meeting the financial community’s needs, and this is nothing new. Nevertheless, every time we propose these changes, our clients resist. We tend to hear the following arguments:
- “Everyone does it like this.” This is undoubtedly the strongest argument; we all find safety in numbers. However, not embracing simple, productive, bold changes means staying in your comfort zone, shrinking from high risk/reward opportunities and caving to an aversion to risk which then paralyzes you into inaction. Instituting a new but much more productive call format designed to best respect your analyst and investors’ time and needs would likely draw favorable attention to your company. And if you, like most Latin American companies, have a difficult time drawing attention to your earnings call to begin with, repeating the same process will only ensure the same continued results: low visibility, limited coverage and a perpetually depressed valuation.
- “But I don’t have questions to answer.” This also a widespread argument: “I usually have just a few or no questions to answer, so if my prepared remarks aren’t relatively long, the call will only last 5 or 10 minutes.” The simple fact is that if no one is asking questions, it’s probably because there aren’t many people listening to the call to begin with, and prolonging the call without a valid reason, at best, annoys the few participants you have. The problem here isn’t the call format but perhaps the fact that the investment thesis isn’t particularly attractive, which speaks to communications challenges far more profound than conference call dynamics. The U.S.-based Zillow (NASDAQ: ZG), an online real estate database company, began the innovative concept of using the Slido App to manage the Q&A component of its earnings call. This interactive App allows participants to anonymously ask detailed and complex questions, and to then vote on those questions they’d most like to see answered by management.
- «The analysts don’t read the financial statements/earnings release anyway, and without a presentation, they’re not aware of the granularity behind our results.» The weakest argument, as it underestimates the financial community’s work and intelligence. Treating your client like this (and it’s important to note that analysts are IROs’ clients) is not a recipe for success in any field. Also, should this be the case, IROs need to ask themselves who’s responsible for the fact that long, repetitive, un-focused press releases aren’t being read. We should use this as a mea culpa opportunity, and to draft brief and succinct materials that are more in line with global best practices (a topic for another article.)
To sum up, there are many reasons to try something new and potentially better. At the very least, said initiative will result in a better use of time, attention, and resources. What’s more, this could drive favorable attention to your company’s investment thesis in a way that’s both exciting and transparent while also being recognized for your thought leadership and innovation.
Fabiane Goldstein is Founder and Partner and Luis Fernando Oliveira is Executive Officer at InspIR Group Brasil, the successor of MBS Value Partners.