IndustryInsights

By Ian Campbell and Dan Hilley
Managing Director West and Senior Vice President
The Abernathy MacGregor Group, Inc.

Reuters called it “revolutionary.” Sell side analysts offered plaudits. No, this was not a new product rollout from high technology giant Intel. What startled the Street, instead, was as simple as this: a decision not to deliver scripted comments on this October’s quarterly earnings call. Intel instead, pre-published the content that on most earnings calls consumes a half hour or more.

The result: a call that reduced management’s introductory comments to a few key highlights, leaving more time for questions. This is something that all investors claim they want—and that more than a few companies dread.

Whether or not Intel’s new format is right for every company (we suspect it’s not), it does challenge CEOs, CFOs, legal counsel, and corporate and investor communications officers to take a fresh look at how they communicate earnings. Intel deserves credit for tackling the elephant in the room of earnings communications: they are often utterly boring.

Symptom of a Larger Communication Issue?

Intel’s move directly responds to complaints from investors that scripted conference call remarks are too long, simply rehash the earnings release, or could be read, along with the tables, faster than listened to. The criticism is well taken; in fact, it’s an issue we’ve raised for many years. Even the most dynamic speakers are dull when they recite a series of financials. Accompany a canned script with PowerPoint slides so dense the investor’s mind (not just the eyes) glaze over. Combine that with the fact that everyone on the call has email, blackberry, Instant Messenger, and perhaps even Twitter to distract them from the call. The odds are small indeed that management is getting a lot of undivided attention.

On the other hand, throwing in the towel on wellthought- through management commentary and leaving the conference call to pure Q&A isn’t the right solution for most. Prepared and presented correctly, management’s discussion can be invaluable. Just because investors are unhappy with the form of most earnings calls today, it is not management comments themselves that are the problem. It’s the way most are crafted and delivered. Cutting commentary out is less important than making it more compelling. A small, but meaningful minority of companies already address these communications issues, either by distributing commentary in advance of the call or by limiting the introductory remarks to a few brief highlights— or both.

Ensuring Effective Earnings Communications

In the early 1990s, with the advent of quarterly earnings conference calls, one of our clients had a clear, simple approach. The CEO and CFO would work with the IRO and the Chief Communications Officer to outline on a couple of pages of legal yellow pad the key developments of the quarter and what they meant for the overall strategy. The CFO outlined how these developments were reflected in the financial statements. They’d review their notes with the General Counsel. The result: no more than ten minutes of topline comments from notes, followed by Q&A.

These presentations seem light-years distant from today’s highly scripted calls—but they had what great communications require. They were focused, brief, simple, and genuine because each executive spoke in his own “voice.” The investors took from each call what they most wanted: a sense that they’d heard directly what was on management’s mind. And they were “safe” because they followed Mark Twain’s dictum: “It takes about three weeks to prepare a good extemporaneous speech.”

We understand of course that speaking from notes, not script, is rarely done; that’s why we suggest companies that want to improve their earnings call begin by thinking of their approach to quarterly financial communication as defined by two axes. The vertical axis is how compelling you are prepared to make your communication. The horizontal axis is how risk-free you feel you must make your communication. Somewhere, there should be a reasonable sweet spot (depending on the skill of your speakers, the unpredictability of your business, and your willingness to work hard to perform well) within which you deliver the best possible communication with the level of flub-risk you can tolerate.

Here are some additional thoughts to guide whatever rethinking you decide your earnings call needs:

1. Start by distilling your quarterly story into three sentences. Too often form dominates substance because it is easy to plug new content into last quarter’s templates. The problem is, companies tend to add to templates without taking much out. Documents grow, themes get lost, Wall Street complains. It’s not practical to entirely re-invent the wheel each quarter, but it’s worth asking a few key questions: What’s most relevant this quarter? What’s extraneous and no longer relevant?
2. Put each communications form to its best & highest use. When you decide which earnings information should go where (not everything needs to be in every communication), think about which form does the job best. Your conference call consists of the following elements: a) the press release and its attachments; b) the conference call slide deck, if you use one; c) the conference call prepared remarks; d) prepared answers to anticipated questions on the call. So: a) put all the necessary disclosures in the press release, but make sure your key themes are right up at the top; b) put the trend-and-analysis data you most want people to focus on into the slide deck – and consider distributing the slides at the same time as the press release; c) use prepared remarks to restate and emphasize your key themes and the important trends and analyses; and d) make sure you save some interesting-but-not-material talking points for the Q&A.
3. Be consistent, but inject the new & fresh to keep investors listening, and learning. Changing the routine in your communications too frequently signals inconsistency or anxiety. But creating the expectation that management will provide from time to time something of substance outside the routine can be effective, and keep audiences paying close attention. Introduce a “visiting” operational manager on the call; devote a portion to extra discussion of a new timely topic. The message to investors from management is that: a) we’ll give you the essentials every quarter in a format that’s consistent and easy for you to use – but, b) occasionally we’ll add something extra when we think it will help your understanding of our business and where it’s going.
4. Make your own best practices. Entire industries fall into bad earnings communications habits simply because each company follows what its peers are doing. The best companies make their own best practices. It is useful to know what your peers are doing, but don’t assume they have all the answers. For instance, if there’s a non-GAAP metric that crystallizes the condition of your business, and that you’re comfortable sharing, go ahead and share it—even if no one else does.
5. Listen to your audience. You don’t have to be a Seinfeld to do what the best stand up comics do: discard the material that doesn’t work, and polish the gems that do. The comic listens for laughs. Management, obviously, should be listening for what the company’s owners tell them they need to hear, and how they like to hear it. Sometimes a third party firm can take those soundings most objectively for you.

Whether or not Intel has started a new trend, they’ve done a tremendous service to everyone who cares about investor communications. Intel’s experiment should encourage companies everywhere to test tried, but not always true, earnings communications practices.

If you would like to discuss this article, please contact Ian Campbell or Dan Hilley in the West Coast office at 213-630-6550 or via email at idc@abmac.com or dch@abmac.com. In our New York office, please contact Jim MacGregor at 212-371-5999 or jtm@abmac.com.