October 5, 1998

FOOL ON THE HILL
An Investment Opinion
by Dale Wettlaufer

Conference Calls

[Ed. Note: With the quarterly earnings reporting season just getting underway, today we reprint a Fool on the Hill column on company conference calls that originally appeared Mar. 3, 1998.]

Formerly the exclusive domain of institutional investors, access to company conference calls is slowly becoming available to individual investors. This is not only good for investors, but it is also good for any publicly traded firm -- if that firm can accept the idea that it is beneficial for the company to keep its share price in line with intrinsic value. Rather than disserting on why a company should not lock investors out of its conference calls (or conference call replays, which are more efficient and convenient for everyone concerned), a more beneficial use of this space for new Fools is to explain what a conference call is and how Fools can profit from listening to them.

What Is a Conference Call?

A conference call is a quarterly teleconference in which the management of a company updates its owners and the analysts that follow the company and industry. In the conference call, the company's chairman, CEO, or president usually starts things off with a general overview of what happened during the quarter. Then the chief financial officer (CFO) comes on and details financial performance for the quarter. This can sometimes be a boring recital of what is contained in the press release, with the CFO moving on to detail later in the call, but sometimes the CFO will give exacting color to the numbers.

What's in the Numbers

Whether they packed into the start of the conference call or given in response to questions asked during the call, the numbers presented by a company's CFO are usually more helpful than what is contained in the press release. For example, very few companies publish a statement of cash flows when they report earnings, leaving that until the necessary filing of a 10-Q up to 45 days later. Cash flow statements can help investors bridge the gaps between the income statement and the balance sheet.

Some companies don't even publish a balance sheet for the quarter, which leaves out even more detail for investors. The CFO will usually go over some of the key balance sheet items needed to assess capital efficiency. In the absence of a cash flow statement, the balance sheet can give vital details on changes in cash, inventories, payables and receivables, changes in fixed assets, and changes in the way a company has been financed. Depending on the type of company in question, the inventory breakdown between raw materials, work in process (WIP), and finished goods can tell an investor how things went during the quarter and what might be coming up for in next quarter.

After a Fool has become comfortable working with these data, he or she will miss them when a company doesn't publish the information in the press release. It's not uncommon to hear the data detailed on the conference call even when it's not included in the press release. Companies hope the information will filter back to investors through analysts or reporters, but analysts have no incentive to tell non-clients about the information and reporters frequently miss reporting on important balance sheet information. Getting comfortable with the data is the first step -- getting on the conference call to be able to assess the data firsthand is the second important step.

Strategy


One thing that is missed in federal filings like the 10-Ks and 10-Qs are discussions of strategy and tactics. While discussions of strategy appear in securities registration statements or in boilerplate form each year in the annual report, hearing tactical updates on how strategies are being carried out gives an investor a better idea of what is happening at the company. The business world is highly dynamic -- things change every day, week, month, quarter, and year. How the company adapts to changes, which is the tactical side of business, tells an investor as much (or more) about the quality of the company as a highly detailed statement of mission and strategy.

Being able to listen to a conference call helps an investor know what the company is planning. If a company's management tells investors and analysts during the conference call that their plans are A, B, and C for the coming period, it's much easier to assess the progress of the business over time. Without an informed idea of the yardsticks by which a company's management measures its own success, it's harder for an investor to know what he should be looking for.

This has morphed itself into the whole game of meeting or beating estimates, but making its projected EPS number isn't the only way to tell how a company did during the quarter and the year. On the conference call, the company can talk about margins, what sort of unit growth and pricing it is looking for, what sort of production challenges its is facing, the competitive environment, what customers are thinking, what challenges vendors are facing, and how various units have performed. Though some companies will say everything an investor needs to know in the press release, it's rare to never that you'll see the above issues in a quarterly earnings press release.

In the end, conference calls are what an investor makes of them. There may be only one piece of information that rounds out an investor's knowledge so that the investor will buy more stock. There may be a particularly illuminating interchange between an executive and a questioner on the call. The management's discussion of a particular set of issues may lead an investor to correct his approach to looking at the company or to gauging the company's success.

Whatever it is that each particular investor gets out of the call, it's highly important to listen to them at least once in a while to stay in touch with what's happening at the company. No other medium besides the conference call can provide the level of detail or the dynamics of real-time interchanges between informed followers of the company and its owners. That includes the annual meeting or the annual report. If you owned a private business, you would want to be able to hear a couple times a year how things are going, and not just on a superficial level. It's no different with a public company, especially when secondhand information can get garbled, misunderstood, and miscommunicated by the time it gets to the poor investor that didn't get to listen to the call.

Should you own a company that gives investors access to the conference call or conference call replay, that's great. If the company is reluctant to open it up to you, explain that you are an owner and that you are genuinely interested in what's happening with the business. The more that people ask about it, the more companies will understand that it's an important issue to their investors. At some point, access will be a standard feature of being an owner of publicly traded companies -- and there will be a lot informed and rational shareholders of publicly traded companies when that comes to pass.

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