When many management teams contemplate the quarterly earnings cycle, they think primarily about compliance – dotting the “i”s and crossing the “t”s. But while compliance is a major driver of financial disclosure, it should not be the only one – if it were, companies would file the 10-Q or 10-K and leave it at that. Take a more strategic approach to your next earnings cycle with these five tips.
1) Edit the earnings call transcript.
I know what you’re thinking. I just said you should be more strategic with your earnings process, and the first thing I mention is completely tactical. Or is it? Many companies are now posting the transcripts of their quarterly conference calls, or at least management’s prepared remarks, to their websites. Other services make the full transcript available whether you ask them to or not. Some of these services will allow companies to edit their transcripts for accuracy, so take advantage of the opportunity. Transcript services can do a good job, but they still make mistakes – some can be significant. We recently saw a company’s revenue transcribed with an extra zero, which would have been quite a shock – and very misleading – to investors had it not been corrected.
2) Correct the estimates.
Believe it or not, FactSet and First Call can be wrong. Either one of your covering sell-side analysts submitted an incorrect estimate, or the service made a mistake. Either way, you are entitled to correct factual errors so that the estimates displayed online match the corresponding analyst’s most recent research report. Of course, you aren’t allowed to tell analysts what their estimates should be. That would be a clear violation of Regulation Fair Disclosure. Correcting analysts’ estimates at FactSet or First Call provides investors with an accurate consensus, which in turn can influence trading.
3) Have something to say.
Have you ever finished reading an earnings release and still wondered how the company performed? Or how the results related to its business strategy? Too often, management quotes in an earnings release read as evergreen pablum. Or as one of my colleagues likes to say, they contain too much “bow-wow.” Quotations are management’s best forum to convey succinctly its vision and the performance drivers for the quarter. The earnings conference call allows for more explanation, but that assumes investors will take the time to listen to the call or read the transcript. The press release is the first opportunity. Instead of letting it slip away with meaningless filler, develop the two or three most germane points you want to communicate, and then integrate those messages within the release.
4) Aim for clarity and transparency.
Companies aren’t perfect, and neither are their results. Sales may sputter. A large customer could cancel that order you were counting on. And a large medical claim you didn’t foresee could appear just as you thought your results would turn a corner. Investors know this; in fact, they expect it. They aren’t looking for perfection, but they do expect transparency. Whether the quarterly performance is good or bad, they want to know why. Don’t go into elaborate detail, but pull back the curtain enough for the investment community to understand the puts and takes. As you provide more insight, you will build credibility with your shareholders. This will provide investors comfort that they understand the business and its drivers, which should lead them to be more supportive of the stock.
5) Use slides to shape your story.
While many companies use PowerPoint slides to accompany the earnings call, few use them well. Typically, the slides will be filled with bullet points that read verbatim from management’s prepared remarks. On the other end of the spectrum are the companies that simply post their financial tables without any context or commentary. If you are in either category, you have missed an opportunity to emphasize your key messages. Instead, aim for effective simplicity in your slide content. Use slides that provide context for the results and enhance the messages you selected in point #3. Don’tobfuscate by cluttering the slides. Do use them thoughtfully and judiciously, in order to solidify your key points in investors’ minds. If you’re looking for ideas, take a look at Chevron, Coca-Cola or PayPal.
By choosing to think strategically about the quarterly earnings cycle, management teams can help investors better understand their companies’ business performance and strategy. In so doing, press release and slide content will begin to connect with investors, elevating earnings to a process both CFOs and investors can support. And that is a far cry from dotting the “i”s and crossing the “t”s.