DEFINITION of Quarter - Q1, Q2, Q3, Q4
A quarter is a three-month period on a company's financial calendar that acts as a basis for periodic financial reports and the paying of dividends. A quarter refers to one-fourth of a year and is typically expressed as "Q1” for the first quarter, “Q2” for the second quarter and so forth.
The standard calendar quarters that make up the year are: January, February, and March (Q1); April, May, and June (Q2); July, August, and September (Q3); and October, November, and December (Q4). A quarter is often shown with its relevant year, as in Q1 2018 or Q1/18 which represents the first quarter of the year 2018.
What's a Quarter?
BREAKING DOWN Quarter - Q1, Q2, Q3, Q4
All public companies in the United States must file quarterly reports, known as 10-Qs, with the U.S. Securities and Exchange Commission (SEC) at the end of their first three fiscal quarters. Each 10-Q includes unaudited financial statements and operations information for the previous three months (quarter). A publicly traded company must also file an annual report, known as a 10-K, which summarizes the first three quarters and reports on the fourth quarter. The annual report will often include more detailed information than the quarterly reports including an audit statement, presentations, and additional disclosures.
Companies, investors, and analysts use data from different quarters to make comparisons and evaluate trends. For example, it is common for a company’s quarterly report to be compared to the same quarter the previous year. Many companies are seasonal which would make a comparison over sequential quarters misleading. A retail company could earn half their annual profits in the fourth quarter while a construction company does most of its business in the first three quarters. In this situation, comparing the first quarter results for a department store to their performance during the fourth quarter would indicate an alarming drop in sales.
Evaluating a seasonal company during their slow quarters can be enlightening. It is reasonable to assume that if sales and profits are growing in the off-quarters, when compared to the same quarters in prior years, the intrinsic strength of the company is also improving. For example, auto dealers typically have a slow first quarter and rarely conduct incentive sales programs in February and March. Therefore, if an auto dealer were seeing a significant improvement in sales in the first quarter, this year compared to last, it may indicate the potential for surprisingly strong sales in the second and third quarter as well.
Quarterly reports are important for publicly traded companies and their investors. Each release has the potential to significantly affect the value of a company’s stock. If a company has a good quarter, its stock value may increase. If the company has a poor quarter the value of its stock could drop dramatically.
The quarterly earnings report often includes forward-looking “guidance” for what management expects from the next few quarters or through the end of the year. These estimates are used by analysts and investors to develop their expectations for performance over the next few quarters. Those estimates and guidances, provided by analysts and management, can have a big impact on a stock every three months. If management issues guidance for the next quarter that is worse than expected, the stock’s price will drop. Similarly, if management issues guidance—or an analyst upgrades their independent estimates—the stock can rise significantly.
Some executives of public companies have questioned the importance of the quarterly-reporting system. Warren Buffett, the CEO of Berkshire Hathaway (BRK), and Jamie Dimon, the CEO of JP Morgan Chase (JPM) are both critics, saying that it puts too much pressure on companies and executives to deliver short-term results to please analysts and investors as opposed to focusing on the long-term interests of the business.
Following a discussion with PepsiCo’s CEO, Indra Nooyi, on August 17, 2018, President Trump joined the opposition saying he had spoken to business leaders who believe they would create more jobs and improve their businesses if they moved from a quarterly reporting system to a semi-annual one. The President asked the SEC to study the problem.
In the U.S., most companies that pay a dividend will distribute it more or less evenly over four quarters. For example, Microsoft (MSFT) paid an annual dividend of $1.47 per share in 2016 but split it up as $.36 in the first, second, and third quarter and $.39 in the fourth quarter.
In many economies outside the U.S., it is common to split the annual dividend into quarterly payments with one of the payments to be much larger than the others. It is also not unusual to find companies outside the U.S. that only pay one dividend per year. For example, SAP SE (SAP) paid a $1.188 dividend in May 2018 and $.98 in May of 2017.
The payment of quarterly dividends can create some volatility in a stock when the ex-date arrives. Some analysts have noticed that investors may rebalance or sell their stock on the ex-date or soon after when the dividend growth rate appears to be slowing or there are other changes in the market that make the dividend less attractive.
Only 65% of public companies in the U.S. use the calendar year as their fiscal year. For a variety of reasons, some public companies will use a non-standard or non-calendar quarterly reporting system. For example, Wal-Mart Stores' first quarter is February, March, and April; Apple Inc's Q1 is October, November, and December; Microsoft Corporation's Q1 is July, August, and September. In addition, certain governments use different quarter systems. The first quarter of the United States federal government’s fiscal year is October, November, and December, Q2 is January, February, and March, Q3 is April, May, and June, and Q4 is July, August, and September. State governments may also have their own fiscal calendars.
Sometimes a company may have a non-standard fiscal year help with business or tax planning. The Internal Revenue Service (IRS) allows companies to choose a “tax year” that is still 52-53 weeks long but does not end in December. H&R Block (HRB) ends its fiscal year on April 30th, which makes sense because that is the end of the busiest part of the company’s year. Releasing your annual report, which may be accompanied by shareholder meetings and additional disclosures after the busiest part of your year will help managers and shareholders make better decisions about the year ahead.
Companies that rely on U.S. government contracts may use September as the end of their fiscal year, and the fourth quarter because that is when they expect new projects to be closed and budget planning from the government to be available. Historically, large technology firms had stronger quarters early in the year, which is why many of them (including Microsoft (MSFT)) have a fiscal year that closes at the end of June.
Some companies have very unusual quarterly systems. Adobe Systems (ADBE) closes their fiscal year on the Friday closest to November 30th. In 2018, November 30th was a Friday, as well as the last day of the month but in 2017, ADBE closed their fourth quarter and the fiscal year on Friday, December 1st, because it was the Friday closest to November 30th.
Trailing 4 Quarters
Companies report their summary annual statements once per year, so the information can become stale and out of date in between the annual reporting cycle. One approach to solve this problem is to use a trailing 4 quarters or trailing twelve months (TTM) analysis.
Imagine a company that reported their annual data for 2017, including the fourth quarter, in January 2018. By the middle of the fourth quarter of 2018, the annual data for 2018 can be estimated by summarizing the last four quarters. In this case, assume that the company’s third quarter 2018 results are available. An analyst would manually combine the quarterly data from the first three quarters of 2018 with the last quarter of 2017 to make an estimate of the company’s earnings, and revenue trends.
This analysis will overlap some of the data used in the last annual report, but it will still give some insight into how 2018 is likely to look by the end of the year. If the first three quarters of 2018 had been poor compared to the first three quarters of 2017, the trailing four-quarter analysis will show that as lower expected performance in 2018.
Summary of Quarter - Q1, Q2, Q3, Q4
A quarter refers to a three-month period that usually coincides with a calendar quarter. Most financial reporting and dividend payments are done on a quarterly basis. Not all companies will have fiscal quarters that correspond to calendar quarters and it is common for a company to close their fourth quarter after their busiest time of year. Dividends are also often paid on a quarterly basis although companies outside the U.S. may do so very unevenly.