Investing 101: What Are Earnings Calls?

Person looking over data and numbers while on a laptop.

An earnings call is a conference call where a public company’s management team discusses their financial results. This call is typically done for each reporting period (e.g., every quarter, every year, etc.). 

What Is Discussed During an Earnings Call?

Earnings calls discuss results found on the company’s SEC Form 10-Q, a quarterly report, or SEC Form 10-K, an annual report. Companies that are publicly traded are legally required to share this information with investors. That includes not just facts and figures but also qualitative discussion on them.

On these forms, the management discussion and analysis section (MD&A section) is the breakdown of the financial results and any other performance metrics the company sees as valuable. It also breaks down those results, often discussing the decline in a company’s income or the growth it has seen. In addition, it typically includes discussion on the statement of cash flows, balance sheets, and income statements. 

The MD&A section also provides information about risks investors are taking, pending lawsuits for the company, and any other drivers of growth. Management teams sometimes use this as a chance to discuss upcoming changes, expectations, and future goals for the company. For example, they may talk about new projects or changes in the business’s management or ownership.

Why Are Earnings Calls Important?

Most earnings calls are designed to allow companies to discuss their financial results. This information is beneficial to investors who may make decisions about stocks or other investments in the company. Some smaller companies may provide a simple phone recording of the actual call at some time in the future for their limited investors. 

Some investors find an earnings call to be a very important part of stock ownership in a company. As a result of the information shared, investors may make decisions about their future investments. For many investors, the earnings call may be a signal to invest more, pull back, or make other decisions. These calls can be a form of risk management, providing insight into what is occurring and perhaps providing some idea of what the future holds. 

There are notable benefits to an earnings call. The main advantage of them is that they provide a significant amount of information to investors, financial analysts, and other people interested in the company’s success. This information helps analysts and investors better understand an organization’s health. 

It is also beneficial for investors and others to ask questions and get information that may not be otherwise understood or available. Earnings calls may provide an opportunity to have direct access to executives from the company that may not always be available. Investors receive information without gathering numerous reports, which can prove to be essential.

What Happens During an Earnings Call?

Before the Call

Most of the time, the company issues an earnings report leading up to the earnings call. It typically provides information about what’s occurred, including the company’s financial performance during the period. Before the earnings call, individuals should invest some time into reading through the earnings report or gathering additional information about the company.

It may also be helpful to listen to a company’s previous recordings of earnings calls to provide insight into the company’s performance. It is often possible to find earnings call recordings on a company’s website or through an investor’s portal the company offers.

During the Call

Typically, several broad steps happen in an earnings call, including:

  • Safe Harbor Statement: The safe harbor statement is often a warning to the call participants about the earnings presentation. It warns that the discussion about the financial results may include some forward-looking statements or statements about the company’s future, which may alter the perception of findings in the financial results. (In other words, when forward-looking statements are made, they may differ significantly from what actually happens.)
  • Presentation and Discussion of Earnings and Financial Results: Key executives, such as the chief executive officer and the chief financial officer, often discuss the information on the earnings report. The manager will also likely provide an overview of what’s next for the company outlining any specific plans, goals, or achievements for the organization. They may also provide information to address the changes likely due to the outcome of the organization’s financial health.
  • Question and Answer: This may allow investors and analysts to ask questions about the earnings report. It is not a requirement for those managers to actually answer those questions – they may elect not to do so. 

Fundamental Analysis and Earnings Calls

Analysts use earnings calls to complete a fundamental analysis or financial breakdown of the company. This analysis starts with the financial statements for the organization. These professionals look for any details about the company to better understand what is occurring. Sometimes management teams provide verbal clues in these documents that may be valuable to the investors. 

Also, analysts may ask questions during an earnings call. This may allow them to gain more insight or better explain the terms provided. For example, they may question concepts or details listed in the footnotes of the earnings report to get a good idea of the company’s financial health.

Example of an Earnings Call

A simple example of an earnings call occurred on April 28, 2021, when Apple CEO Tim Cook, CFO Luca Maestri, and other executives provided insight into the organization’s health. During the call, Cook discussed the company’s performance in the prior quarter and noted increases in the company’s revenue. They also talked about the sales of various Apple products. 

Cook also talked about the company’s focus, which (in this case) was about reducing the company’s carbon footprint. He then discussed how the company was performing in the current economy. Cook went on to talk about how the company would be investing in the coming months and years, with a specific focus on environmental changes it was implementing. 

Maestri offered insights into the company’s performance by breaking down the numbers from the earnings report — which included providing more information about what the figures represented to the company. The company also used this time to discuss how the earnings from the quarter were going towards shareholder payments, discussing how much was paid and how. They also offered insights into what was to come for Apple, outlining customer base changes, forward-looking initiatives, and expected performance. It provided insight into where it thought profits would be in the next quarter and the subsequent year as well. 

Finally, the earnings call included questions that analysts asked, prompting Apple to share insights about the company’s goals and expectations. Analysts asked questions about how Apple would revive its customer base and build its profits heading into the next months and years.

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