Earnings Calls Decoded: Earnings Whispers, Revenue Trends, Cash Flow and Guidance

Mary MacNamara  

Hello everybody and welcome to the Cents of Security Podcast. Today we are going to talk about earnings calls with economist James Yendrey of InvestMentor. Hi James. How are you?

James Yendrey  

I am doing well, Mary, how are you?

Mary MacNamara  

Good. So, in a nutshell, what is an earnings report?

James Yendrey  

I like to think of an earnings report as their financial report card. Every three months public companies disclose revenue, profits, earnings per share. Key business metrics tend to include things like the financial statements the management commentary, explaining their performance and where they want to go.

And after releasing the report, they end up having an earnings call where executives walk through the results and open questions to some analysts.

Mary MacNamara  

So that brings up a good question. So how often do companies report earnings?

James Yendrey  

Companies report every three months, us publicly public companies. Every quarter you have your 10 Q quarterly reports, which are unaudited. Then you have your K 10 audited reports, which are basically for the full fiscal year. But earning season happens four to six weeks after each quarter ends.

So, think January, April, July and October. European companies will often have semi-annually semi-annual reporting through the larger institutions. They typically, everybody reports quarterly.

Mary MacNamara  

So my experience is when you know you go on an earnings call, there’s some opening remarks and so what should like a beginner investor listen for in those opening remarks?

James Yendrey  

You can go on Nasdaq and figure out and see the reporting or the earnings that are going to be happening for that day or that week. And they have a little sun or a little moon, and that’s before hours or after hours that you can take a look at for diving into it.

But some of the opening remarks. I would say overall performance narrative. Did they meet or beat expectations? And what drove results? Other key metric drivers like revenue growth sources, new customers price increases, market share, what really changed from the previous quarter.

And then tone and confidence. Does management sound confident or are they slightly vague and defensive on kind of what it is that they’re trying to, to convey on this report it, it’s usually good to focus on the clarity aspect of it.

Mary MacNamara  

So you may have already answered this, but when the CFO goes through the results, what are the two or three things to focus on?

James Yendrey  

Things that I would focus on in this particular question would be revenue growth trends. Are they growing? Is it flat? Are they declining? Compared to the previous quarter, year over year. And what, at what clip? Is it accelerated growth or is it still growing, but just at a slower pace?

Then I would look into margins, gross margins, operating margins. Are they expanding? Price, power, efficiency or compressing, which usually hint to cost pressures or competition. So eroding market share. And then the third thing would be cash flow and guidance. Did they generate cash or consume it? And what’s free cash flow and what’s the outlook for the next quarter?

Mary MacNamara  

And it all depends on the type of company that you’re listening to, right? Is it like a brick and mortar? Is it an industrial, is it a growth company? More value oriented, right?

James Yendrey  

Yeah. Yeah, because even small beats or misses is move stock markets. And any sort of shock to the system will impact their share prices.

Mary MacNamara  

So often towards the end of the call, they have a q and a session. Why is this really important?

James Yendrey  

That’s a really good question, Q&A. I like to think of it like the unscripted truth, like what’s happening behind the scenes. The prepared remarks are, they’re polished, right? If you’re going through an earnings call, they’ve gone through everybody. But the q and a really shows how management is going to be thinking under pressure.

And this really matters for a few reasons. The analysts will, what they’ll tend to do is the release happens about an hour or so before the earnings call. So, they’ll probe for any weak spots that that they find out, and if they haven’t been recorded on in the call. They’ll bring the, they’ll take the time to bring them up within these calls, you can tend to see how executives handle these types of tough questions. Forward looking commentary that often usually emerges in the Q&A section. They tend to give like vague guidance, but analysts encourage them to dive a little bit deeper into it. What does this mean?

You said this, could you explain further? And these add a little bit more clarity to, to the markets and ultimately you can. The thing that I found the most interesting is tone shift between Q&A and then their prepared remarks. Are they still as confident in the Q&A section, or do they become a little bit more defensive?

Red flags that come to mind are like vague answers. Are they refusing to quantify some of the things that are disclosed some of the excess? Did they excessively blame some things on external factors? Did they pivot from a confident to a more defensive approach and is it more contradicting to the, their prepared remarks? So, this Q&A section is really the best part in my opinion, of the whole thing. because you get you, you get into the weeds a little bit.

Mary MacNamara  

Yeah, we like that so can any investment analyst ask questions or just the ones publicly covering the company? Can the general public also just chime in and ask questions too?

James Yendrey  

The public can’t just chime in and ask questions. I know it’s quite unfortunate because there have been sometimes, I was like, I’d really like to know the answer to this question and you just really hope that an analyst asks it or a question adjacent to it, but anyone can listen. But participation is.

It tends to be a bit restrictive to credential the analysts primarily because you have a time constraint of one hour and then they have a quality control factor that really sets the structure within the call itself. Usually, they’ll prioritize it in some sort of pecking order. So, some analysts from top firms tend to get priority.

Mary MacNamara  

And so, we haven’t heard this term earning whispers. What is that all about?

James Yendrey  

Okay. So, it’s the crowdsource estimate. So, it is think of it like the grapevine. Okay. It’s an unofficial estimate that kind of differs from the original analyst consensus. They represent what? What the market actually expects the company to be versus what the published estimates are like.

You start seeing people purchasing more AI chips, you’re thinking, okay certain stocks are going to climb on the back of this. And so even though consensus is this, I think that they’re going to beat. And so, these whispers start to create and propagate through the grapevine and they’re actually, it’s interesting how they matter because official estimates. Could be quite stale. Whereas whispers could reflect more real time sentiment. It’s like a sentiment gauge for the for the individuals, a company can beat an official estimate, but the whisper if they don’t beat the whisper, it, the stock will tend to fall.

So, an example would be like an essential consensus. Say that you’re, you have the consensus is at a dollar, like they think you’re going to beat earnings by a dollar. EPS comes in at 105, but the whisper said 110. You start to see a decline in the stock because it though it beat consensus, it didn’t match the sentiment that was being propagated through this grapevine.

So, it’s an interesting thing to be aware of.

Mary MacNamara  

Can a company show profits but still have money problems?

James Yendrey  

Yeah, absolutely. Working capital is, completely different, right? So, you’re looking at like revenue booked versus not collected reports for profit from sales, but the customers haven’t necessarily paid anything. Think of like a net 90.

So, you know, you have your accounts receivable pile up with no cash then you have heavy capital spending profitable but burning cash on equipment or expansion.

Mary MacNamara  

What are some simple signs that profits may not be high quality?

James Yendrey  

Profits growing faster than revenue if net income surges, but revenue is flat, you. Gotta ask why, right? Could be cost cuts, you have short-term boosts, accounting adjustments, or some of these one-time gains. You have weak or negative cash flow, strong net income but weak operating cash tends to mean that profits aren’t necessarily converting to cash rising accounting receivables faster than revenue. So, think of like customers that aren’t paying revenue booked, isn’t cash collected again. Declining gross margins, lower pricing power and facing rising costs, and then you have some of these one-time items like asset sales or tax benefits or you got to strip these out to see more of the core profitability.

Mary MacNamara  

So, what does it mean when people say results were priced in?

James Yendrey  

I would say that the market is more or less anticipated exactly what was going to be materialized. So, the results and the adjusted stock price. Before the announcement, everybody knew it was going to be meet it, like if a, if consensus, the whisper and everything meets it. Previous example of every, if everything met a dollar, everything.

If everyone expects strong earnings and investors buy ahead, it pushes the stock up when results come out even if great and there’s no surprise, the stock doesn’t really move or fall. So, it’s more or less kind of trading in the consolidated window in which it was prior to the release.

Mary MacNamara  

So, what matters more the quarter that just happened, or what the company says about next quarter?

James Yendrey  

Guidance about next quarter, in my opinion, would matter most because markets are primarily forward looking. Past quarter is done. Investors want to know, okay, can you continue the growth? Or if you got yourself into a rut, are you able to get yourself out of the rut? The past is in the past.

How can we continue to grow in the future? Yeah, that that’s my take on it.

Mary MacNamara  

So how do you compare results to prior quarters and years and not just expectations?

James Yendrey  

Looking at trends over multiple periods year over year, quarter by quarter or multiple patterns, like you take a year over year comparison, Q1, 24 to 25 it eliminates a lot of the seasonal things that you’ll start to see. So, you, you have like strong retail signals that happen usually in the December quarter.

So, looking over the year over year will help smooth out what those metrics are, whether when you look sequentially, quarter over quarter compare from one to four shows immediate momentum but can be distorted by these seasonality trends. So, looking over quarter and year over year is going to be ideal taking both.

Mary MacNamara  

And last question, what are Non-GAAP or adjusted earnings and should I trust them?

James Yendrey  

That’s actually a good one. Should we trust, Non-GAAP.

Mary MacNamara  

What is Non-GAAP anyway?

James Yendrey  

So GAP stands for Generally Accepted Accounting Practices. Non-GAAP is non generally accepted accounting practices. The standard accounting practices more or less, these earnings include all expenses, one-time charges, stock compensation, restructuring, everything. Non-GAAP removes those certain one-time expenses to show the core. And you could think of it as ongoing profitability rather than a singular event that happens. Think of like acquisition costs for an M&A transaction, or one-time legal fees that were settlements. So, the non-GAAP pulls that out so you can see the core growth.

So, it is something that you should, you should weigh on both sides. But use co I would use caution with non-GAAP because it could be useful to understand more or less the core operations, but it can also be abused, right? Some companies exclude legitimate recurring costs to make some of the results look better.

So, knowing the difference and knowing what you’re looking at in that regard that, that’s going to be key in that aspect.

Mary MacNamara  

Good. So, I think we touched on a few things for this episode. There is so much more to talk about I’m sure, but this also ties back to our last podcast on financial statements. So, we’ll link this so people can see it. You should see it pop up if you’re watching us on YouTube. We’ll also include it in the show notes.

James Yendrey of InvestMentor, thank you for explaining all of this to us very clearly. We really appreciate it. Thank you.

James Yendrey  

Absolutely. And before I go, just wanted to say that the InvestMentor app actually just released their understanding earnings course as well. So, if you guys want to know a little bit more and dive into kind of the nuances of it, feel free to download the InvestMentor app.

And thank you Mary for having us.