Wednesday, May 30, 2012

Good News Earnings Call v. Bad News Earnings Call

Earnings call archetypes:

First, the Good News Call. All is right with the world. Management is proud to report they have exceeded consensus expectations by two pennies. The CFO reads from a prepared statement, but his voice has a little life to it for a change. He strays a bit from the script. But just a bit. 

And hey, guess what, somehow the CEO found his way to the call. That almost never happens! The man is just so busy. He's eager to share his insights into why business is so good. Luck has very little to do with it. It's culture...skill...management technique.

Question and answer time. The queue fills up quickly. Each analyst prefaces his question with a hardy congratulations. The tone of his voice betrays a belief that he somehow contributed to the outcome; that he's a part of this winning team. Because he predicted this winner! Formality is tossed, as everyone addresses everyone else by christian name. 

"Hi Bob. It's Darryl from Highfalutin Capital Management. First, let me say terrific job! We all knew you had this kind of quarter in you."   

"Thanks Darryl. We really appreciate hearing that. Especially from you. Your support means a lot to those of us here in the executive suite."

If they were in a locker room, towels would be swirled into tight spirals and popped playfully onto one another's backsides. 

CEO and CFO are downright loquacious, glad to answer all questions. Noting at times that they ordinarily don't provide THAT sort of guidance; THAT level of detail, but what the hell...just this once.

The call ends, and everyone breathes a deep, cheerful sigh. Management takes off early for the day and heads for the links. The analysts churn out bullish reports about the wonderful prospects for this business, accept congratulatory calls from their firms' salesmen while instructing them to get clients buying more and more, and then dutifully watch the ticker blink green.

***

Second, we have the Bad News Call. Management released the press statement as late as possible last night. Despite all attempts to reclassify expenses and revenue in the past few days, the earnings are two pennies below Wall Street consensus estimates. Down slightly from the same quarter last year. 

The CFO reads from his prepared remarks. His voice is gravely. He just sounds worn down. He keeps tightly to his script. I'm sorry, he says at the end, but Bob, our CEO, wasn't able to make it to provide his management outlook. He's with a very important client today. But the CFO is happy to take questions.

The queue fills up quickly. "I'm not sure how you could have let this happen," says the first analyst. "This result puts you in the lower half of your guidance estimate. And I thought you UNDERSTOOD that we UNDERSTAND that if you provide a range for your estimate, we assume that means you'll be on the high side. Please explain to me, Mr. Senior-Vice-President, how I should explain to my clients that your stock won't fall in half in the next quarter?"

The CFO explains dutifully that - while we would never lay blame on the economy, we're a company that takes full responsibility for its results - the economy does sort of stink right now. 

And so the questioning continues until the CFO is mercifully saved by the operator chiming in, "That's all the time we have for questions this morning."

The call over, the CFO hangs up his phone. He looks over to the CEO Bob sitting across the table, a sheepish look on his face after begging his colleague to excuse his absence. "That was the best we could do. Circumstances were just out of our control this time."

Meanwhile, the analysts crank through their timid predictions for the company's future. True, they were bullish just two quarters ago. But that was before management demonstrated it was inept. Now, they tell their salespeople, we should instruct our clients to sell, sell, sell. It will be months before this business gets back on track.

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