Lesson 8 of 8
Reading an earnings call
An earnings release and call carry three things a thesis needs: what changed in the numbers, what management now expects, and what it declined to answer.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
Who writes thisEditorial processLinkedIn (opens in a new tab)X (opens in a new tab)
In one minute
- The 8-K results release states the numbers before the call begins; the call adds what management now expects and how it answers questions about it.
- Any adjusted figure must be reconciled back to GAAP, and the reconciliation lists exactly what was excluded.
- Which questions get a specific, checkable answer and which get a general one is as informative as the answers themselves.
An earnings release and the call that follows it carry three separate things: what changed in the quarter's numbers, what management now expects, and what it would not say plainly when asked.
How this quarter's adjusted EPS was built from GAAP
- GAAP earnings per share$1.10
- Restructuring charge added back+$0.15
- Litigation settlement added back+$0.05
- Adjusted earnings per share= $1.30
The release already contains the numbers
Item 2.02 of Form 8-K covers quarterly results. Most companies furnish the release as an exhibit on the day they announce, before the call; the rule itself allows four business days. If the company gives guidance, it is usually in the release too, in a document you can read before a single word is spoken. The call is a webcast on the company's investor-relations site, and the transcript usually follows there. The call adds tone, emphasis and the question-and-answer session; it rarely adds a number the release did not already state.
The reconciliation is the point, not the footnote
Regulation G, together with Item 10(e) of Regulation S-K, requires any non-GAAP measure a company presents to be reconciled to the nearest GAAP measure, in the same release. Item 10(e) also requires the GAAP figure to appear with equal or greater prominence than the adjusted one. That reconciliation is a list of everything management chose to exclude to arrive at the adjusted figure, and reading it line by line answers the only question an adjusted number raises: excluded because it will not recur, or excluded because it is inconvenient this quarter.
What management now expects
Guidance is the one part of a release that is not a report of the quarter just finished; it is a forecast of the ones ahead. Regulation FD requires that forecast, like every other piece of material information, to reach every investor at the same time rather than a favored few first. If a company gives guidance, it is disclosed on the call and in the release rather than selectively beforehand. Whether guidance was raised, held or lowered against the range set the previous quarter is the single fact in the whole release most directly about what management believes is coming.
What was declined
A question answered with a specific figure leaves something to check next quarter. A question answered with a general assurance leaves nothing. Which questions get the specific answer, and which get "we don't break that out" or a description of feeling good about a trend with no number attached, is itself a finding, repeated often enough across quarters to be worth a note.
A twenty-minute routine, release to call
- Read the 8-K's Item 2.02 release before the call, for what changed in revenue, margin and the balance sheet.
- Find the non-GAAP reconciliation and read what was added back or excluded to reach the adjusted figure.
- Note whether guidance was raised, held or lowered against the range set last quarter.
- Mark which questions in the transcript got a specific figure and which got a general answer with no number in it.
Check yourself
Which item of Form 8-K carries the quarterly results release?
- Item 2.02
- Item 1.01
- Item 5.02
Show the answer
Answer: A.
Item 2.02 covers results; the release is attached to it, usually on the day of the announcement.What does Regulation G require of a non-GAAP figure like adjusted earnings per share?
- That it be audited separately from the GAAP figures
- That it only be used in the annual report, not the quarterly release
- That it be reconciled to the nearest GAAP measure, in the same release
Show the answer
Answer: C.
Regulation G and Item 10(e) of Regulation S-K require a reconciliation to the nearest GAAP measure, which is where every exclusion is listed.An analyst asks about a specific segment's margin. One answer gives a percentage; another says only that the company feels good about costs. Which answer leaves more to check next quarter?
- The general answer, because it covers more ground
- The specific answer, because it names a figure that can be checked against next quarter's disclosure
- Neither; transcripts are not comparable across quarters
Show the answer
Answer: B.
A specific figure can be revisited and checked later. A general assurance with no number in it leaves nothing to hold the company to.Sources
- Form 8-K items, including 2.02, results of operations and financial condition.
- Regulation FD, 2000, on disclosing material information to all investors at the same time.
- Regulation G and Item 10(e) of Regulation S-K, on reconciling non-GAAP measures to GAAP.
What this leaves out
- The reconciliation figure and the two answers are round invented illustrations, not a transcript of any real call.
- A reconciled adjustment is disclosed, not automatically wrong; some add-backs describe a genuine one-off and some describe a recurring cost by another name, and only reading several years of the same reconciliation tells the two apart.
- Nothing here is advice about any security.