As every earnings season comes to an end, it is striking how often executives and investors alike complain that earnings calls are a colossal waste of time. It’s no wonder. Even a determined listener would be tested by an executive reading highly scripted texts of revenue, margin, and earnings data that would be better presented in tables. And few analysts or investors work up much enthusiasm for earnings-per-share (EPS) data that heed the generally accepted accounting principles (GAAP)—data that say little about value creation. Clearly, the quarterly earnings call needs an overhaul.
Short of eliminating them entirely—a step many managers are unwilling to contemplate—what’s a CFO to do? There’s plenty of room for experimentation with more insightful formats. Beyond the formal and legally required 10-K forms, managers are free to innovate their quarterly (or semiannual) interactions—around both the format and the content of their calls. Most stakeholders would likely be delighted. Three ideas could greatly improve the dialogue.
1.Ditch the prepared text—and allow more time for thinking. Today, very little time passes between a written announcement of earnings and the earnings call. Most companies send around a press release minutes before the call or, at best, the evening before, after the markets close. The call itself often starts with a prerecorded and legalistic review, most often a senior executive reading data from a script, followed by a mundane question-and-answer session in which the company usually selects who asks the questions.
The value of this setup is questionable. Nobody has time to analyze the data before the Q&A session, and the remarks are often a more convoluted way to convey data than simple tables. To improve the dialogue, companies should eliminate the prepared remarks and give investors more time to digest and analyze the data. For example, they could release—a few days in advance of the call—detailed tables and exhibits, as well as a targeted overview in text and perhaps even full quarterly filings.
If investors and analysts have enough time to review the pre-released data prior to the call, companies could likely eliminate the usual prepared remarks and go right to a Q&A session. The advantage of such an approach is obvious—questions are better when the data are clear and understood by the participants. And while executives might worry about volatility in stock price between the release of the data and the earnings call, they should not be. What matters is the longer-term value appreciation, not the day-to-day volatility—and in any case, volatility can be avoided if data are presented clearly in the release and the state of the company is described in a consistent and meaningful way.
2. Be creative in the way the Q&A is structured. Most Q&A discussions are broken. Sell-side analysts often ask questions—“even bad ones,” as one analyst told us—just so clients can hear their voice on the call or see their name in the transcript. Managers using sophisticated call-management software often invite questions only from the sell-side analysts they know and like. And buy-side analysts, arguably the most important participants on the call, are reluctant to reveal their thinking, and so are primarily just listening. The result is mediocre at best, routinely requiring numerous follow-up calls, and many questions remain unasked.