Like opening night in the theatre, the hours before the quarterly earnings results conference call for CFOs are fraught with jitters and last-minute adjustments — even when the financial results are positive. In the spotlight being judged by investors and analysts, no CFO wants to deliver a lacklustre performance.
Even seasoned CFOs who have been through dozens of earnings calls will attest that their heart still races just before showtime. But once the conference commences, their meticulous preparations steady them. In good quarters or bad ones, they're ready to relay the results and elucidate the reasons and ramifications.
New CFOs and other financial professionals charged with making high-stakes presentations can learn from the steps taken to prepare for an earnings call. FM interviewed five CFOs to determine their best practices. All follow a similar process — collecting information from across the enterprise to illuminate the factors behind the figures, writing the conference call script with the investor relations team, rehearsing the script, and participating in mock question-and-answer sessions to brace for forceful interrogation by investors and analysts in the real thing. While private company finance leaders do not typically have public earnings calls, many of these skills can also be valuable in meetings with their bankers, investors, or other critical stakeholders.
Our panel of finance leaders believe that quarterly results and their impact on long-term strategy should be absolutely transparent. "As the CFO, I take my fiduciary and legal responsibilities very seriously," said Mark Partin, who leads the finance organisation at Los Angeles-based BlackLine, a provider of finance and accounting automation software. "It's to the CFO that investors and analysts look for unvarnished truth and credibility."
Writing the script
In most companies, the preparations for the earnings conference call begin immediately after the previous earnings call. As the quarter progresses, early versions of the script are drafted based on the emerging financial picture. BlackLine sets aside a room with a whiteboard for this purpose. "We put up specific themes we feel are important to the quarter for our long-term [stock]holders," Partin said. "Under each theme, we write what we've learned so far — something that may impact that theme, good or bad."
These early drafts ultimately come together as scripted dialogue, with parts provided by the conference call facilitator (usually the head of investor relations), chairman, CEO, and CFO. Almost every script begins with, "Good day, ladies and gentlemen, and welcome to the [quarterly date and year] earnings conference call." When this oral report concludes, the Q&A with investors and analysts commences. These two halves of the call run for approximately 20 minutes each.
Typically, the head of investor relations or an outside IR firm is charged with writing the final script, which should not be a rehash of the earnings press release, since analysts and investors already have the release in hand. Instead, the script should elaborate on the quarter's key themes, aiming for simplicity, clarity, and briskness.
"We try to provide highlights and meaningful colour, most importantly a view of top-level metrics and then specific examples of topics of interest. For the stakeholders on the call, the health of certain geographies, strength of certain vertical markets, and a sense of the economic landscape are all helpful to understanding and context," said Ken Stillwell, CPA, the CFO of Pegasystems, a Cambridge, Massachusetts-based provider of customer engagement software. "I try to connect the dots instead of reading a laundry list."
Many companies use the earnings call as an opportunity to appraise the organisation's progress towards achieving long-term strategy. For instance, while Tom Liguori was CFO at Advanced Energy, based in Fort Collins, Colorado, the company issued an annual statement at the beginning of each year in which it established its aspirational revenue and cash flow goals for the next three years.
"We want investors and analysts to assess the current quarter against these goals," Liguori said. "If we just had a blowout quarter or a horrible quarter, I don't want the audience assuming this is our future." Liguori left the company, which develops power and control technologies for the semiconductor manufacturing industry, at the end of 2017 and is now CFO of global technology provider Avnet.
Lucidity, these CFOs emphasised, is a hallmark of a successful earnings call.
"It goes right to the heart of a CFO's credibility with the Street," said Mary A. Winston, former CFO of discount retailer Family Dollar Stores, and before that the CFO of Giant Eagle Inc. and Scholastic Corp.
"The CFO is all about the numbers and the facts," she said. "There can be no dodging or obfuscation. We direct good news or bad news or in-between news, but in all cases we must be clear why this is the case and what we're doing about it." Winston today is the CEO of financial and board advisory consultancy WinsCo Enterprises Inc.
Partin shares this view: "The earnings call is for the benefit of investors and analysts. This is their opportunity to learn all they can, and it's our responsibility to give it to them."
The play's the thing
Complete transparency does not mean the conference call is solely a "just the facts" exercise. Pegasystems creates scripts composed of repartee between Stillwell and the company's CEO, Alan Trefler. "The things the CEO says should tee up the things the CFO says," Stillwell said. "When Alan infers something in his remarks, it's my task to corroborate what he has said with factual information. If he says we're really excited about an opportunity in a new market segment, I then point out the financial reasons why this is the case."
Steven Horowitz, CPA, CGMA, the CFO of Hartford, Connecticut-based health care services provider CareCentrix, likewise said that the CEO and CFO should convey a contrast in approach. "Analysts don't want the CFO to be a 'Type A' cheerleader personality talking about the long-term vision; that's the CEO's job," Horowitz said. "CEOs have more flexibility to freewheel it a bit, putting their personality fingerprint on the company. But investors need to trust the numbers are right and there won't be a restatement. They depend on the CFO for this assurance. Our role is to be that rock."
While the CEO and CFO have to be "connected and consistent" in their remarks to the audience, each has a slightly different purpose, as well as tone, in their scripted comments, Winston said.
"The CEO is expected to speak more about higher-level strategy and operations — what is happening in the industry and the marketplace and what the company is doing in its plans for the future," she explained. "The CFO follows up with a deeper layer of details based on the CEO's forward-looking statements — the numerical outcome of these strategic directions. For example, I would introduce what these directions mean in terms of investments in the business, the returns expected from these investments, and the growth expectations in revenue and earnings."
In many companies, once the conference script is finished, the participants study their lines, not necessarily to memorise them but to assimilate them so they become instinctive. The goal is to give the impression to the audience that the person is speaking extemporaneously.
Each of the CFOs we interviewed approaches the Q&A part of the conference call with great care and caution. Like politicians readying for a major debate, the speakers participate in several mock Q&A sessions before the actual event, grilled by their head of investor relations to be as prepared as possible to field any question likely to be asked by the audience and provide knowledgeable, clear, and succinct responses.
In writing the CFO's scripted remarks with the director of investor relations, Winston tries to put herself in the audience's shoes. "If I were an analyst, what would I want to know about the company?" she explained. "This also helps me prepare for the Q&A session with analysts afterwards, as there are obvious questions and follow-on questions. I try to anticipate what these questions might be."
Does she ever go off-script to make her remarks more relaxed and informal? "It's too risky," she said. "Instead I go over the script so many times in my head and verbally that it eventually sounds natural and conversational."
In preparing the script for its earnings calls, Partin from BlackLine schedules a "key themes" meeting with the company's leaders in operations, sales, and marketing. "We discuss what worked well during the quarter or didn't," he said. "We then practise in a room with our investor relations people, legal counsel, and a few business leaders and managers, going through each of the questions on the list. We're as prepared as can be, but on occasion there's that one question that gives pause."
Horowitz can relate to this. "Ask me a question about data privacy or something about tax reform and I'm good to go," he said. "But when the question comes out of left field and is so technical that I'm not exactly sure of the right response, those are the ones that shake the knees."
On such occasions, Horowitz defers his response. "I tell the person that I'm not exactly sure at the moment, but we can discuss the subject after the call has concluded," he explained. "All CFOs want to please, so if there's a question, we do our best to answer it. The risk is [when] you don't really have the answer but wing it anyway. Those things can come back and bite you."
To continuously improve their presentations, the CFOs occasionally reach out to investors and analysts for their feedback. "I've also found it to be a great help to review the transcripts of previous earnings calls I was involved in," said Horowitz. "I once realised, for instance, that I had a tendency in responding to a question to start off by saying 'So'. Lately, I've learned that I tend to say 'like' a lot. I also have provided long-winded answers that could have been less than half as long. They stuck out in the transcripts."
The day of the earnings call abounds with tension. Even though substantial time and effort have gone into writing the script and rehearsing the event, the participants' nerves are on edge as the clock ticks towards showtime.
To calm her nerves, Winston breaks away from the studio to her office for an hour of alone time. "There's all this commotion going on, and I don't want other people's voices in my head," she said. "I close the door and have some hot water and lemon so my voice is clear and resonates well. Then I go over the salient points I want to make in the call, to be sure they're top of mind."
At the appointed hour, scripts in hand, the CFOs step into the spotlight. "There is a mental transition that occurs before you go into the call," Partin said. "We spend our business lives in meetings or at our desks solving day-to-day problems. Now is the time to separate from these tasks and commemorate all the hard work."
Horowitz shares this perspective. "I've always felt light on my feet after the earnings call is over," he said. "I've done my best to be credible and sense the investors and analysts are pleased. It feels good and then, about an hour later, it wears off. After all, I think, who remembers Warren Buffett's CFO?"
Russ Banham is a freelance writer based in the US. To comment on this article or to suggest an idea for another article, contact Chris Baysden, an FM magazine associate director, at Chris.Baysden@aicpa-cima.com.