Attendees of the The National Investor Relations Institute 2015 (NIRI) Annual Conference (June 14 – 17, Chicago) had the opportunity to attended a small-cap IR session taught by subject matter expert Bernie Kilkelly. Fortunately for us, we have Bernie as our expert in our ongoing six-part webinar / podcast series. Please CLICK HERE to listen. Below is insight from our session on earnings releases.
Q: What is the role of the IRO or the IR consultant in preparing for the company’s first earnings release?
The IR professional manages the release process to ensure the smooth release of earnings information. This process requires significant preparation not just for drafting the release itself but also for the logistics of disseminating the release. If your company is doing a conference call and webcast following the release, the IR professional also manages that process. This involves handling the logistics of the call, preparing the script and Q&A document for the call and most importantly working with management in rehearsing and prepping for the call.
Q: When should the company start preparing for the earnings release?
Preparation should not wait until the quarterly results are available. Instead, doing the work early on related to logistics, planning, and identification of potential issues will allow more time for message development and rehearsals. It is very important to incorporate earnings releases into the annual IR planning calendar. This is so time can be reserved on senior executives’ calendars, not just for the conference call itself but to block out prep time.
You should do this a year in advance – a good practice is to schedule all the quarterly calls for the fiscal year either at one time or on a rolling 12-month basis. When scheduling quarterly calls, it is also very important to consult with the company’s financial reporting team to understand the timeline for filing the company’s Form 10-Q or Form 10-K with the SEC. Many companies try to have the dates for the filing and the earnings release as close together as possible, if not on the same day.
Q: Is it necessary for a newly public small cap or micro-cap company to hold a conference call the first time it reports quarterly earnings? How do you know when the company is ready?
It is important to remember that neither the earnings release nor a conference call is a requirement for a public company. The mandated release of quarterly earnings can be satisfied solely through the filing of the 10-Q or 10-K with the SEC. But in reality, it is a best practice for public companies to issue an earnings release and hold a quarterly conference call with analysts and investors. According to NIRI’s July 2014 Earnings Call Practices Survey, 97 percent of respondents hold a quarterly earnings call. Almost all of the calls are webcast live, and 73% of companies said they provide an archived audio file of the webcast on their IR website.
One of the main reasons that companies hold quarterly calls is for efficiency, especially when you’re talking about a large cap company that has many sell-side analysts following the company and a large number of institutional investors. A conference call and webcast gives the company the opportunity to explain its results to the broadest possible audience while also communicating and reinforcing the company’s strategic messaging. The call also gives management the chance to answer questions in a public forum, although questions typically are asked just by sell-side analysts.
For a small cap company and especially for a micro-cap company, the efficiency reason is not as pertinent. The time and effort to prepare for a conference call is enormous, so every newly-public company should consider whether the return on investment is worth it. If the company only has one or two sell-side analysts and a small institutional investor following, it may make sense to wait a few quarters. Because once you start having quarterly conference calls, you shouldn’t stop having them — that would send a very bad signal to investors. It is also important to remember that conference calls have a long shelf life, being accessible through archives and transcripts, so you must make sure you are ready to put your best foot forward before committing to quarterly calls.
Q: Who should be part of the team in preparing the earnings release?
It is common practice to convene a multi-disciplinary group to discuss the high-level messages for the quarterly earnings release. Participants often include the CEO and CFO, legal, financial reporting, corporate planning and budgeting, treasury, and media relations/corporate communications. The discussion in this meeting should provide the content for the initial draft of the earnings release.
While the release needs to be reviewed by a number of internal stakeholders, everyone involved in the reviewing process must fully understand the highly sensitive nature of the information. The IRO or IR consultant is responsible, along with legal counsel, for making sure that the review group treats the earnings release process as confidential prior to its release to the public.
Once the internal review group has provided feedback, the audit committee of the board of directors and the external auditors should review and comment on the draft earnings release.
Bernie Kilkelly is a senior investor relations practitioner with over 25 years of experience in designing and running successful IR programs to help companies build shareholder value. His background includes serving as head of investor relations for three public companies in the financial services sector, including Delphi Financial Group, Inc. from 2001 until its acquisition in 2012 by Tokio Marine Group at a 76% premium to its stock price. In addition to serving as a corporate investor relations officer, Mr. Kilkelly has worked at leading investor relations and financial/public relations agencies in New York, including Morgen-Walke Associates, Makovsky & Co. and Robinson Lerer & Montgomery. Mr. Kilkelly is a recognized leader in the investor relations community and has served as a director of the New York Chapter of the National Investor Relations Institute (NIRI) since 2007. He was NIRI-NY Chapter President in 2012 and is currently serving as Vice President-Communications, responsible for the chapter’s website, newsletter and social media.
Q: What information does the earnings release need to include? How detailed does the release need to be?
A good template for the quarterly earnings release can be found in NIRI’s Standards of Practice for Investor Relations: Earnings Release Content (2013). According to the standards of practice, a quarterly earnings release should include:
- Discussion of the quarterly financials
- Discussion of year-to-date financials
- Discussion of charges/gains/losses
- Non-GAAP financial measures
- Senior management quotes
- Key events and changes
- Gross profit or margin, cash flow, and other measures
- Segment/line of business information
- “Safe harbor” language
- Financial statements – typically the balance sheet and income statement, plus any segment info or supplemental information
It is always important to show trends in the earnings release. This can be done in the text by discussing percentage increases, but a much better way is to use bullet points or a small table at the beginning of the release to highlight key numbers.
The earnings release should also include the phone and email of a contact person at the company, either the CFO or the IRO, and the phone and email of the outside IR consultant if there is one.
Q: What is the best way to disseminate the earnings release? Is it necessary to use a wire service?
The SEC does not mandate the use of a wire service but it is clearly a best practice to ensure that the earnings release is getting the broadest disclosure and reaching all the important financial outlets. In addition, a good wire service will provide an important editing function since they are used to handling earnings releases and will often spot errors in formatting or other typos.
Q: What documents need to be prepared for the conference call and who should be part of the team in preparing them?
The IR professional is typically responsible for drafting three main documents: 1) a slide deck, 2) prepared remarks that are referred to as the “script,” and 3) a Q&A document to help prepare for the Q&A period of the call. The slide deck is optional but can be helpful in providing a structure for the prepared remarks.
One of the biggest complaints from analysts and investors about conference calls is that the prepared remarks go on for too long, and often include a boring recitation of numbers that have already been included in the earnings release. By using a slide deck, companies can try to keep the numbers discussion shorter and leave more time for high level discussion of strategy and progress toward previously disclosed goals.
The prepared remarks are usually divided between the CEO and CFO, with the CEO providing overview comments and the CFO getting into more detailed discussion of the financial results. The IR professional should ensure that the company’s financial and legal team has time to review the prepared remarks and slide deck to ensure accuracy and compliance with regulatory requirements.
To prepare management for the Q&A portion of the call, many IR professionals research “hot” topics and develop a document that outlines answers to potential questions. This Q&A document often is maintained by the IR professional throughout the quarter. It is also helpful to review questions asked on peer company earnings calls, since many analysts or investors will ask the same question of each management team. The Q&A document should also be used to facilitate a practice session, to better prepare the CEO and CFO for that portion of the call. This practice session also encourages feedback from the senior leadership team, helping to refine responses and ensuring accuracy.
Q: What are the most important logistical steps in preparing for the earnings conference call?
Managing the logistics is equally important to the success of the earnings call. Nothing will derail a good earnings call faster than a phone line that goes dead in the middle of management remarks. Make sure you have a detailed checklist so that nothing is overlooked. The following is a sample list of logistical tasks that should be performed prior to each earnings call:
- Reserve internal meeting rooms for earnings calls and preparation meetings
- Reserve audio/visual equipment, as necessary (microphones, sound system, speaker phone, etc.)
- Arrange earnings conference call with applicable provider, obtain telephone numbers and access codes to provide to those who are authorized to ask questions and those who are not (typically the news media), ensure services include a full transcript and a digital recording of the call, and ensure that service providers do not disclose the date of the company’s call before it is publicly announced
- Announce the details of the call to investors well in advance, notifying them of the date and time, dial-in and webcast information, and other details for the call; this process includes coordination with third-party data providers, which publicize earnings dates
- Send the press release to the company’s wire service provider and review the proof:
- Ensure the Form 8-K and the press release are ready for SEC filing
- Work with the website team (could be internal or a third party) to:set up a webcast link
- Ensure posting of documents on website, including the press release, the earnings slides, and any other supplemental information typically posted
- Set up podcast or audio archive of conference call
- If applicable, touch base with the company’s social media team to determine appropriate content and timing for social media postings
Q: What is the best time to hold your earnings conference call? Is it best to hold the call a few hours after the release of earnings or is it okay to release after the market and have the call the next morning?
There are pros and cons to both approaches, and it can depend on the company’s geographic location and time zone, and also on whether other peer companies are having calls on the same day. The pros of releasing after the market and having the call the next morning is that it allows you to get some market reaction, especially from sell-side analysts, which will help management prepare for the call. For a small cap company which does not have a large sell-side following this can be a good way to go. For companies with a larger following it is usually preferred to have the call soon after the release of earnings.
Q: Should you screen the callers for the Q&A portion of the call and is it okay to not let certain analysts or investors ask questions?
Yes, I recommend that callers be screened because there have been numerous widely publicized incidents of people who have come on calls and asked inappropriate questions. I do not recommend blacklisting anyone from the call unless there is a history of them being abusive. It is also important to limit each questioner to two or at the most three questions each, and if they try to ask more then to ask them to let others have a chance and to get back in the queue.
Q: How long should the call go? Should it be limited to one hour or should you let it go over if people are asking a lot of questions?
The call should have a strict one hour time limit, regardless of how many questions are being asked.