In today’s rapidly evolving business landscape, investors and analysts require timely and precise information to make intelligent investment decisions. Earnings calls, an indispensable component of investor relations, provide a platform for company executives to share financial results and strategic insights with the market.
These calls — essentially consisting of an earnings presentation and a Q&A session — offer an opportunity for senior management to demonstrate transparency, accountability, and leadership, which enhances their reputation and builds investor confidence.
However, a common refrain is that earnings calls are a waste of time and can backfire if they are not managed professionally. The reasons for this are:
Earnings calls require a significant amount of time from senior executives and IR teams mainly because they are not planned and executed efficiently.
They can be overly focused on financial metrics, which may not provide a complete picture of a company’s overall performance and prospects, leading to a narrow and myopic view of the company’s strategy and outlook.
Earnings calls can cause stress for executives, who may feel pressure to meet expectations and portray the company’s performance in a positive light, leading to a culture of “spin” that ultimately damages the company’s reputation and management’s credibility.
Leading organisations however recognise quarterly earnings calls are not merely an investor relations requirement but a highly efficient tool to build and maintain trusted relationships with capital market participants.
These calls offer an opportunity to communicate the company’s progress on corporate strategy, financial performance, and guidance on future expectations. Based on our experience working with some of the largest listed companies in the GCC region, we provide some guidelines to maximise the value of earnings calls for all parties involved.
Planning, preparation, and process are paramount
In developed markets, companies typically publish their earnings calendar a year in advance, including the dates of their quarterly earnings calls. This gives executives, analysts, and investors sufficient time to plan their schedules and ensures that the date for the earnings call can be blocked off in advance. By doing so, companies can help to ensure maximum participation and engagement from analysts and investors.
Unfortunately, most companies start their quarterly earnings call preparation process too late, waiting for internal approval of financial results before preparing their earnings cycle materials. However, weeks before the call, it is essential to have a thorough understanding of the financial results, strategic plans, and any other relevant information.
Companies should already have a clear message that they want to convey to investors and prepare responses to potential questions that may arise during the call, beginning even before the company finalises its financial results.
The process for a successful earnings call starts with building a strong and cohesive narrative that aligns with the expectations of the audience. This requires a deep understanding of what investors and analysts want to know, as well as a thorough review of relevant financial, strategic, and operational data and trends.
During the call, senior management should be able to provide clear interpretations of this information in the context of both the current market dynamics and the competitive landscape. It is also necessary to prepare responses to the most likely questions that may arise during the call, and to anticipate and prepare for unexpected queries because answering questions with ‘no comment’ can shatter trust.
Being underprepared at an inherently judgmental forum is a recipe for disaster. Failing to demonstrate command of facts and figures will lead to questioning the competence of the entire management team.
Facts alone are useless
A key objective of a successful earnings call is to inspire others to believe, as you do, in the company’s future potential. This cannot be achieved by facts and figures alone; telling the company’s story in an informative and engaging way can capture the attention of analysts and investors.
This is where the most respected executives distinguish themselves from their counterparts by departing from the outdated practice of using the earnings call to merely repeat what has already been provided in financial statements and press releases. Instead, they augment the value of this information by speaking candidly about underlying drivers and outlining how these facts and figures are shaping future strategy.
Management should consider how their strategic responses to short-term challenges will relate to their long-term vision for the company. They should also preempt concerns and address them during the management presentation, rather than waiting for analysts to pose a difficult question during the Q&A session.
Pragmatism trumps optimism
In their efforts to impress investors, many organisations make the mistake of using their management presentation to highlight past accomplishments and downplay risks. While their intention of sweeping aside details about potential threats is to convey healthy optimism and dispel doubt, they only postpone the inevitable, leading to highly charged and confrontational Q&A sessions.
To successfully engage with investors is to draw a distinction between public relations (PR) and investor relations (IR) and recognise that a smoke and mirrors approach and appearing ‘over-bullish’ erodes trust when it contrasts with market expectations. This danger becomes outsized in challenging market conditions.
Investors know that even the most prudent businesses are not immune to the impact of externalities like wars, pandemics, and macroeconomic challenges. So, pretending that everything is hunky-dory is simply not credible. In fact, analysts and investors will respond positively to leaders who have a firm grasp of the challenges they face and can present realistic ways in which their organisation will navigate these challenges.
Investors will warm to a can-do attitude that exhibits realism and pragmatism. The earnings call is the venue to demonstrate all of this and more — it is a forum where knowledge is exchanged in a way that maintains confidence that invested funds are in the right hands.
Words inspire action
The language used in an earnings call can greatly impact its success, often equally as important as performance data and market conditions. To effectively engage with investors, senior management should prioritise linguistic precision over flowery language and vague descriptors. This distinction between IR and PR is crucial, as overly optimistic, or contrived language can erode trust with the investment community.
Instead, personal anecdotes and metaphors can be used to bring topics to life and help investors better understand the company’s message. Recent advancements in natural language processing algorithms have made the choice of words and manner of speech even more decisive.
These AI tools are capable of cross-correlating language with data points to determine if the management’s confidence and sentiment aligns with the narrative and financial results presented. Companies that recognise the opportunity presented by earnings calls can utilise these tools, such as Iridium’s Quant-Lens NLP platform for Earnings Calls, during rehearsals and post-event, to fine-tune their narrative and delivery, optimising the call’s potential impact.
Earning success
Ultimately, a successful earnings call involves hosting an insightful call that engages analysts and investors on an emotional level. Leaders must exhibit both pragmatism and candor, making the earnings call a primary vehicle for building trust with the investment community. To earn the confidence of investors, companies must be transparent and forthcoming in their communications, as well as understand what investors want to know and how they want to hear it.
By following these guidelines, companies can transform their earnings calls into a valuable experience for both analysts and investors. This can help build trust, convey a compelling narrative, and inspire confidence in the future of the company, ultimately providing a strategic advantage in a competitive marketplace.