The earnings conference call is a way for companies to relay information to all interested parties, including institutional and individual investors, as well as buy- and sell-side analysts. Conference calls allow companies to highlight successes during prosperous times and calm fears during adverse ones. The most popular time for companies to conduct these calls is immediately following the release of financial results, typically at the end of each quarter. These are known as quarterly earnings results conference calls.

While news releases, research reports and the latest earnings are all good sources of information, one often overlooked source worth following is the company conference call. In this article, we'll discuss what a conference call is, what information it contains, what the critical components are and where you can find conference calls for listening in.

The Basics of an Earnings Conference Call

During a conference call, investors and analysts can call in over the phone or listen online to hear a company's management comment on the financial results of a recently completed quarter. Most public companies hold four calls per year, usually within a month after the completion of a quarter. Conference calls are also known as analyst calls, earnings conference calls and earnings calls.

Traditionally, calls were only made available to Wall Street analysts and institutional investors. However, thanks to the accessibility of the Internet, almost all public companies allow individual investors to listen in on the call.

How an Earnings Conference Call Works

Conference calls generally follow the same structure. The call begins with the conference's operator, or host, who introduces the management team. It usually continues with the vice-president of investor relations or a member of the company's legal team outlining the conduct of the call and acknowledging that the call will probably contain plenty of "future-looking statements", or predictions about the future of the business (which is always uncertain). By acknowledging future-looking statements, the company reminds investors not to assume that everything discussed in the call will happen for certain.

The next item of importance is the raw financial data, such as reported and/or projected earnings and revenues. Management typically reports the key financial information, summarizing the company's bottom-line performance and augmenting it with commentary. Much of the information presented in this portion of the call is readily available in press releases.

Conference call participants usually include the chairman, CEO, CFO and, depending on the company and the events under discussion, various other executives. These individuals provide an overview of all the major issues that affected the company's performance during the last quarter. Discussions often also cover what can be expected from the company in upcoming quarters.

A conference call generally ends with a question and answer period, when analysts and investors can ask informed questions regarding the company. Most analysts and investors agree this is probably the most important part of the entire conference call, as analysts are able to pose questions to management about any area of the company's performance that wasn't clear or that requires elaboration. This is the analysts' chance to put the management team in the hot seat!

As an individual investor, you probably won't get to ask your own personal questions. Keep in mind that there are often thousands of people on a conference call and it would be impossible for the management to answer everybody. However, if you listen to all of the analysts' questions, your question will most likely be answered and, more than likely, analysts will ask questions you never considered.

What to Listen for on the Call

Even though conference calls are live events, the discussion from the CEO and CFO at the beginning of the call is mostly a recap of company press releases. Remember that financial statements give a snapshot only of how the company did in the past. The analysis and projections in a conference call tell you how the company is doing currently and how the management expects performance to be in the future. Significant deviations in performance from previous estimates or material revisions of future estimates are key details to be concerned with, and it's a good idea to listen to management's commentary regarding them. Some analysts and investors believe that by focusing on the tone and the manner in which the message is delivered, further information can be gained about the company and its future.

Listening to all the analysts' questions can provide you with great insight into any major concerns professional money managers have about the company. Pay close attention to how the company's management responds. The analysts' questions are neither rehearsed, nor submitted before the conference call, so this is your chance to see how candidly and confidently the CEO and company management can back up the company's performance under pressure.

There have been countless cases of a company's management fumbling a question during a conference call, thus causing the stock to be punished in the following days. In one particular memorable conference call, the CEO of a large chip company blamed his company's poor performance on traders who, he claimed, weren't holding on to the stock for long periods of time. According to this CEO, it wasn't poor execution by management, bad inventory control or plunging semiconductor prices — traders were the ones to blame! As you might imagine, the market saw right through this CEO's poor excuse. As a result, the stock dropped 25 percent the next day, even though the company's earnings met expectations.

More than anything, conference calls can be used to get a gut feel for the company's management. You can read about projected earnings in various financial publications, but numbers on paper can never convey the tone of a CEO's voice. Listen to the mood of management as well as that of the analysts asking questions. Notice if this mood has changed from past quarters and think about what might have caused a change. The more conference calls you hear, the more you'll develop a good sense of how to distinguish between strong management and weak management.

(For more, read Earnings Guidance: The Good, the Bad and Good Riddance?)

How to Listen to the Calls

Real-time internet streaming has opened up the broadcasting of conference calls to the average investor, allowing individuals to participate in or simply listen to the calls. You can usually find them in the investor relations section of companies' websites, among other places. Conference calls are a great way for investors to stay in touch with their current or prospective companies; a lot of valuable information is often divulged during these calls.

They are also usually available online as audio that can be listened to on-demand after the completion of the call. Some companies also have publicly-accessible archives dating back a number of years. You can easily find out when companies are holding their calls by visiting the various online stock research sites.

The Bottom Line

Next time you listen to a conference call, the key is to distinguish between what is strictly boilerplate conference call speak and what is useful information. The more calls you listen to, the better you will get at deciphering them. Although there is a lot of information in the conference call that can be easily accessed elsewhere, the call can also yield important tidbits of information — especially in the question and answer period — that can help you learn more about a potential investment.

(To learn more, check out Putting Management Under the Microscope.)

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