Tuesday, July 23, 2013

Lights! Camera! Earnings Call!!

Lets face it – earnings calls are boring. Lawyers will tell you that this is a good thing because you are far less likely to get sued or have regulators come down on you if you don’t do anything splashy. So for most companies the earnings conference call has evolved into an elaborate kabuki theater consisting of 20 – 25 minutes of prepared remarks followed by 25 – 30 minutes of questions from analysts.
The prepared remarks are the worst – many times all you get is a regurgitation of the earnings press release, proving only that the CEO and CFO can read. This is because lawyers, ever fearful of Reg. FD, are reluctant to allow even the smallest snippets of information to vary from what has been “broadly disseminated” in a press release format. So you wind up with a highly paid executive reading dishwater dull financial information to analysts and investors who have already read the press release and put the numbers in their models. My guess is that with earnings season being notoriously busy, most analysts are only listening with half an ear to the prepared remarks while they multi-task on other things.
The question and answer sessions are a bit more interesting, if only because there is some uncertainty at work, both in the questions that are asked and the answers given by executives. Keep in mind however, that companies have a system for controlling who gets to ask questions, and when on the call the questioner will appear. Thus invariably, the company’s favorite analyst (read “biggest booster”) will get the cherished first question position, and the question is likely to be one that management has no difficulty answering. Thus analysts are often reduced to the role of the old Kremlin watchers, where  more information is to be gleaned from nuance, voice tone and innuendo than in the party line answers executives spout.
Now, however, the earnings call may be starting to evolve. Last week Yahoo’s CEO and CFO presented a live webcast of its second quarter earnings call. In most respects, their webcast was just like an earnings call, except you could see the executives. Thus, in addition to voice tone and inflection, analysts and investors could also judge body language. This also means that, unless it was done off camera, no one could surreptitiously slip answers to the executives. This is perhaps a small step, but it does add a few more points that investors can use in judging management.
A few days later, Netflix also broke with the typical earnings call with a slightly different format. In their presentation, which was conducted on Google Hangout via webcam and posted to YouTube, Netflix dispensed with the prepared remarks entirely and went directly to questions and answers. This is probably a good development, as it avoids needless repetition of financial information. The questions were compiled beforehand and posed to management by a reporter and an analyst. This may be a less salutary development, as it favors a single analyst and reporter, and while the company says that it did not see the questions beforehand, this process may be open to manipulation. In addition, because many of the questions were composites, there was no attribution of questions to any particular analyst, which I’m sure did not please the sell side community.
In general, both presentations were well received as bringing something new to the staid conference call format. I can only hope that more companies start to push the envelope in order to make things more interesting and to stand out from the crowd. Because, with disclosure to investors, as with classical economics, more is better - at least until you get to the point of disutility…

Thursday, July 11, 2013

The Application of Greek Mythology to Investor Relations

Having received a degree in history from a small liberal arts college, I periodically feel the need to justify all the obscure, unrelated and mostly useless knowledge I picked up in the course of my education. This actually comes in handy from time to time if you are in the business of communicating, which, of course, we all are in investor relations. 
When I teach or give a public talk, I like to bring in a variety of arcane sources in order to keep the audience engaged. I find that introducing something interesting, which, at first blush has no connection to the topic, helps to get people thinking about what you’re saying. Of course, sometimes it’s the only thing they remember from your talk, but I’m happy if they remember anything at all from my talks.
For example, a number of years ago I was given the task of explaining executive benefits at a 7:00 AM meeting. This is about as bad as it gets – a dull topic at a miserable time of day.  The strategy I hit upon to liven things up enough to keep people awake was to use song lyrics to illustrate my points. (I freely admit that I stole this idea from a Bar exam prep teacher I had many years ago, but the best ideas are often stolen.) I had to work at it – not many songs mention stock options or long term disability insurance – and eventually references ranged from Gershwin to 1960s Motown to Pink Floyd, but I kept the audience interested in what I was saying. 
I bring this up because one of the obscure references I like to mention when I discuss the role of communications in investor relations is Sisyphus. Those of you that were blessed with a proper grounding in Greek mythology will recall that Sisyphus was the Greek King who incurred the displeasure of Zeus and was sentenced to roll a huge bolder up a steep hill, only to have the bolder roll back down to the bottom of the hill before he arrived at the summit, forcing Sisyphus to begin all over again. This ceaseless effort very concisely describes the process of communications in investor relations.
When you are communicating with investors, as they used to say in an old Nike ad, “There is no finish line”. The company is constantly moving towards its next reporting date. You are either just reporting results or getting ready to report results. The company and its strategy are continually evolving, requiring you to refresh your message. The composition of your investor base is also routinely changing as the stock is bought and sold, causing you to have to regularly educate an entirely new set of investors. In short, it never stops.
Nor should it. Good investor relations requires continual communication with investors and potential investors. The more you communicate in a transparent manner, the fewer surprises will confront investors and the less volatile your stock will be. When more information that is routinely transmitted to the Street it also means that there is less opportunity for insider trading. In short, as in economics, more is generally better until you arrive at the point of disutility. What constitutes disutility of information is a discussion for another day. For now, I will leave you to roll the rock up the hill.

(For those of you who are interested in classical Greek analogies, you may also be interested to read my post from October, 2008 “Greek Classics Revisited” comparing the financial crisis to the Iliad.)