Thursday, June 28, 2007

Fear And Loathing On The Conference Call (Part 1)

Perhaps those of you in the analyst community have wondered what really goes on leading up to and during quarterly conference calls. Well, I am here to fill you in.

Let’s start with a basic premise – nobody at the company likes doing the calls. It’s perhaps not as bad as having a root canal, but it’s close. Remember explaining your report card to your parents? Well, conference calls are much the same feeling, except there are over 100 parents on the telephone line. And they vote with their money. Further, everyone in the conference call room has a large financial interest, in the form of company stock, vested in the outcome of the call. Meanwhile, the upside is limited – you’ve already released the numbers and because of Reg FD, without a press release you can’t say anything material. On the other hand, the downside, caused by a misstep: a wrong answer, a hesitation before answering or just the wrong tone, can be quite damaging. Oh, and one more thing – I know this will come as a shock to many analysts, but management really doesn’t like dealing with Wall Street and all their pesky questions in the first place. So usually there is a fair amount of tension in the room.

So how do companies deal with this? Mostly by staying “on message” as much as possible. The prepared remarks section of any conference call has usually been edited by at least four areas of the company – the I R/ communications area, the CFO/Accounting area, the General Counsel/legal area and the CEO. By the time this camel is designed, any new News has been removed.

So the fun part is the Q and A, where potentially interesting tidbits can be garnered from the answers to unscripted questions. Senior managements don’t like unscripted situations, so they try to stack the deck in their favor. They start with a built in advantage because they have way more facts than the analysts do. It’s not unusual for management teams to have a three-inch binder full of information going into the conference call. Meanwhile the analysts just saw the numbers that morning. And you can be assured that whatever information comes out of the binder will be displayed in the light most favorable to the company. Next, they manage the question queue. Virtually all conference call providers today offer a service that allows management to see who has called in for a question and to re-order the list of questioners. This means that analysts who have a favorable view of the company (usually because they have a buy rating on the stock) will get to ask their questions first. You can bet that those will not be the tough questions. (Note to sell side analysts: Don’t make your junior associates wait on the question queue from the very start of the call – it’s a waste of time.)

So what can analysts hope to get out of conference calls? I think that it boils down to two things: the occasional interesting fact that slips out in response to a question, and the tenor and tone of management. Everything else is too “on message” to be meaningful.


Gary Vineberg said...

Now I know why my questions rarely got taken on quarterly conference calls, no matter how quickly I queued up!

By the way, does it bother management that sell-side analysts ask endless trivial questions, ultimately making no use of the information, simply to sound smart to clients who may be listening?

IRO-22 said...

Great blog! I almost feel like you must be sitting in the room with us as we prepare for these calls!