How Good Are Earnings Calls?

That individual investors can -- via the Internet or by dialing a toll-free number -- listen to company conference calls is undoubtedly a great thing. If upper corporate management is the royalty of today's world, these calls are a way for the investing hoi polloi, the rabble, Shakespeare's groundlings -- you and me -- to attend and draw near.

It can be exciting, too. It was on a pre-blow-up 2001 call that former Enron exec Jeffrey Skilling called an analyst an [expletive deleted] merely for asking why the company didn't release a balance sheet at call time. That was one honking warning for what followed. 

To find the calls in the first place, almost every company sends out a press release each quarter announcing the time of its earnings release and quarterly call. On Fool.com, you can check for it on our Quotes & Data page by entering the stock ticker and clicking "News." If you maintain your portfolio on our site, news for your holdings appears under your stock list. You can also check the company website if you don't see anything after the end of a quarter. Those who actually work at their jobs and must listen during off-hours will find that companies archive the calls for a limited period.

Typical call agenda
Not all calls show Enron's disdain for investors, but they do vary widely in quality -- from detailed, insightful, unscripted, and fascinating to a scripted and hurried formality. Smaller companies usually do better, and larger ones less so, but not always.

The process is almost always the same: Senior management reads the press release almost verbatim for as long as it takes, and then answers questions for the remainder. Officially or not, companies seem to want to limit the whole business to an hour. When some analysts ask too many questions, I'm glad that execs cut them off or nudge things along, but it often appears to be an effort to shut down information flow.

Matt Richey (TMF Matt) and I have written about and both own small online advertising services firm ValueClick (Nasdaq: VCLK) (check out Matt's Dollar Bills for 83 Cents). A recent announcement encouraged webcast participants "to submit questions on financial results and business operations to management prior to the call." I called spokesperson Elizabeth M. Lloyd to find out why.

She told me no one is required to submit questions, but I imagine some notice allows execs to give better answers. We've all listened to calls on which management says they'll get back to so-and-so about such-and-such. But, according to Lloyd, there's no time pressure on the call.

ValueClick is one of many that contract with CCBN to maintain the investor relations portion of their website, and the package includes producing and archiving earnings calls. She says that cost is "pretty much a flat fee" and does not increase with the length of the call, but the company prefers to keep it to an hour as an "attention span issue."

ValueClick will continue the call as long as there are questions that don't go on and on. The company says it values shareholders and thinks the calls are a great way to disseminate information. I've been on a couple, and I have to agree.

The other side
However, Energy Conversion Devices' (Nasdaq: ENER) most recent call was disappointing. I own this highly speculative alternative energy company and have written about extensively online and in The Motley Fool Select.

On this particular call, management's tone conveyed it was performing a mere chore, and no more. It may be fair to limit people to one question, but Chairman Robert Stempel rolled over questioners, interrupting them mid-sentence, especially as management stonewalled or deflected a question. It seemed the company was doing everything in its power to limit access and information.

I've gotten the same feeling in my previous contacts with them. Last year, I tried to talk to a financial person about part of the company's 10-K -- to clarify one part of the document. Energy Conversion Devices is a kind of holding company for its many joint ventures, and the website was unclear about where to go to ask questions. I received suspicious, pat answers, and "you know, Reg FD." They wouldn't even give me a straight answer about why they started using an "ECD Ovonics" icon on their website. Was it a new name? "No." If they're emphasizing founder Stan Ovshinsky's science of "Ovonics," why don't they just say so?

When people act so suspiciously about something so mundane, it raises your antennae. I might say this company isn't all that interested in investors, but that's probably personalizing my experience too much. Still, if this keeps up, it may be a sell sign.

The eBay way
If you listen to eBay's (Nasdaq: EBAY) call last week, you'll find that management read from the script, more or less, for one-third of the hour and answered questions for two-thirds. They had a pleasant task; eBay is a huge success.

With 73% year-over-year growth in transaction revenue for the third quarter, 82% growth in operating cash flow, 60% growth in gross merchant sales, 46% increase in registered users -- blah blah blah -- life is sweet. And no debt. No wonder the stock is valued in the stratosphere -- 18 times trailing-12-months (TTM) sales, 91 times TTM earnings, and 80 times TTM free cash flow. Investors pay for hurricane growth.

The only tough question for eBay -- one we've asked in this space several times over the last two years -- is how long management intends to keep the annual options grant net of cancellations over 5% of outstanding shares. I suppose that when revenues and free cash flow keep growing at Brobdingnagian rates, no one cares. But when things pull back to normal rates -- and they will some day, be it several years from now or next week -- that greater than 5% net dilution annually will be more noticeable to shareholders.

What would be best
After listening to these and other calls for a couple of years now, I suggest this list of best practices:

1. Allow unlimited time for questions, unless they're really dumb or repetitive, or both.

2. Archive the calls indefinitely, or at least until the next one. Bytes are cheap.

3. Provide written transcripts on your website.

4. If you're going to have an analyst day that offers more detail, broadcast it on the Web, and then follow No. 2.

5. It's fine if you think analysts are lower than low, but please remember that individual investors are listening.

Why not ask your companies to do these?  

You probably won't find out everything you need to know about a company by listening to its calls, but you may learn more about management, and, once in a great while, perhaps even clue into an Enron. (One little thing I enjoy is hearing how many execs' accents suggest foreign birth. U.S.-based businesses really do attract worldwide talent.... I never tire of finding this out. Between that and shiny objects, I'm amused for days.)

Updated port returns below. Have a most Foolish week!

Tom Jacobs (TMFTom9) joins the team of Motley Fool analysts to bring you deeply researched, undiscovered stock ideas every month in The Motley Fool Select. Subscribe today! At press time, Tom owned shares of Energy Conversion Devices and ValueClick. To see his stock holdings, view his profile, and check out The Motley Fool's disclosure policy.

Rule Breaker Portfolio Returns as of 10/21/02 Market Close:

            RB        S&P     S&P 500
            Port      500      DA*    Nasdaq
Week       3.63%**    6.93%   --       7.30%
Month     11.42%**   10.36%   --      11.74%
Year     -23.48%**  -21.63%   --     -32.85%
CAGR 
 using IRR***
 since 
 8/4/94  +21.12%     +8.55%  +10.31%  +7.55%