Every quarter, thousands of CEOs improve their company’s reputation in their earnings conference call.
The earnings call is a keystone reputation building event, listened to by investors, analysts, employees, journalists, key customers and competitors.
Some unfortunate conference calls take the CEO and the company down a notch.
- Green — enhanced reputation
- Yellow — neutral
- Red — diminished reputation
1. Corporate Strategy in the Earnings Call
Clear statement of vision
Apple’s corporate strategy was clearly focused on products. CEO Tim Cook said, “the seamless integration of hardware, software and services that provides unparalleled user experiences for our customers. These are the things that only apple can do.”
IBM’s strategy was presented in self-referrential McKinsey jargon — “strategic imperatives.” This was repeated several times, and revealed to mean “data, cloud and engagement.” Engagement itself was later defined to mean “analytics, security, social and mobile,” a potpourri of initiatives. Much of the strategy discussion was circular, i.e. “We are executing on a clear stategy that is moving IBM to higher value,” and “exit nonstrategic elements of the business.” (If you have any doubt that McKinsey is advising IBM, google this: “IBM McKinsey Strategic Imperative.” Consultanties give the most ink to their clients.)
IBM’s financial results were well-organized by product line, but balance sheet changes will make year-to-year comparisons of financial results difficult to reconcile.
Recommendation: Public companies can never assume 100% investors of investors crisply understand corporate strategy. Managers communicating with investors should assume that half are not clear, and they don’t know which half. Most investor perception studies clearly show this to be the case.
Apple focused on products and pipeline: “the biggest iPhone launch ever,” and new iPads, Macs, iOS 8, OS X Yosemite” and iWatch. The “strongest product pipeline ever.”
IBM’s operating plan is to pursue revenue growth in the “strategic imperatives,” albeit from a small base. The question for investors is, “Can IBM be a powerhouse in cloud, data, social and security, and can they do it quickly?”
Apple, under pressure from Carl Icahn to increase share buybacks, clearly stated how it is returning wealth to shareholders — by paying dividends and repurchasing $17 billion of its own stock in the open market during the recent quarter. This puts hard cash in shareholders’ pockets and, by being a large buyer of its own stock, keeping upward pressure on the price of the stock. (We’ll put aside the effect on financial calculations, but suffice to say, every quarter the company repurchases its own stock, each quarter’s earnings is spread among fewer shares).
Whether or not one supports their capital allocation decisions, Apple is clear about their intent, and there were no follow up questions on the subject.
In conjunction with their earnings call, IBM announced the sale of their semiconductor division. This was a large-revenue, money-losing enterprise, yet they still had to pay (!) $1.5 billion to get rid of the thing. Here, CEO Gini Rometty was very clear: that by selling this division, and the sale of other non-strategic businesses earlier in 2014, IBM is shedding “empty calories” that produced $7 billion in revenue and losses of $500 million.
Like Apple, IBM is buying back its own shares, which increases shareholder wealth.
There are huge opportunities for companies to state an investment rationale on their earnings call. Traditionally, companies present an abundance of information to investors and analysts, hoping they will pick and choose the appealing bits, based on their investment style. From this, everyone should theoretically construct their own best investment rationale. Relying on the recipient of these communications to properly interpret the messages is not as effective as taking ownership of the message. There is much work to be done here, and since most public companies already have strong understandings of their shareholder base, they should devise and communicate investment ratioanles that strategically further their goals.
Apple’s investment rationale is not clearly stated. Listeners must mentally combine Apple’s operating and capital allocation plans. IBM’s investment rationale is also not clearly stated, but the implicit message was clearly “we are trying to move as fast as we can, it’s just not fast enough yet.”
2. Credibility in the Earnings Call
Apple exceeded its previously-disclosed financial expectations. IBM did not.
IBM attributed its shortfalls to problems in sales and efficiency.
Typically, missing earnings is caused by a wide range of factors; here are a few:
- Lack of internal alignment
- Previous over-optimism
- Pricing pressures or higher COGS
- Culture does not encourage budgetary honesty
- Poor forecasting ability
- Big moves into new lines of business
- Personnel losses
- Shifting market headwinds
- Management Engagement
Apple CEO Tim Cook took control of the call by leading with prepared, easy-to-understand discussion. Mr. Cook also participated in Q+A. Mr. Cook took control of the call from its first moment, gave a top line review, then dove into a product-by-product and market-by-market review of Apple’s results. Later, financial officers gave more in-depth information.
Surprisingly, IBM’s bad numbers were emphasized by management’s lack of engagement on the earnings call. CEO Ginni Rometty was “available” for Q+A during the call, but had no role during the prepared remarks. In fact, it was implied that the IBM CEO’s presence during Q+A was a special treat, to “demonstrate” her “disappointment” with the quarter’s results. In other words, you have our attention, we take this seriously.
There were 2 very odd moments on the IBM earnings call:
(1) To an analyst who asked, “Is this a crisis?”, Ms. Rometty responded, “Look, let’s just back up…”.
Listen to the exchange here (Flash required)
Tone and word choice reveal a lot. This is not just subjective — some hedge funds use voice-stress and word-choice data analysis on earnings conference calls to detect less-than-forthcoming comments. By responding defensively, Ms. Rometty gave the impression that she was above being asked the direct question. Was she unwilling to prepare for such a question?
(2) Ms. Rometty refered to having a dinner with 30 large customers in Europe, as if this is a way of hearing from customers, at an exclusive dinner. She was not visiting their offices and talking to employees; she came off as very removed.
3. Culture in the Earnings Call
Mr. Cook said Apple employees had “done an extraordinary job executing the manufacturing ramp trhoughout the entire supply chain,” and credited “years of innovation and hard work by teams all across Apple,” and these are “things that only Apple can do.”
Pity the poor IBM employee. After all the layoffs earlier this year, they are still held to blame for the company’s shortcomings. On the earnings call, management said, “We had some sales execution issues” and “we didn’t get the productivity required in our services business.” In other words, it happened to us (the management team). Management didn’t own the problem, they “otherized” it.
Apple is a pressure cooker but when your leader gets out in front of the world and says you do “extraordinary” work, that’s a huge positive.
The earnings call’s did not give much insight into Apple’s culture per se. However, Tim Cook’s remarks about employee “innovation” and “hard” “extraordinary” work shows an enthusiastic appreciation for employees.
An analyst’s question about “headcount and culture” prompted the IBM CFO discussed headcount at some length, with no mention to culture, reinforcing bad cliches about CFOs). Finally, Ms. Rometty chimed in that their culture was “Speed, the word engagement, and simplification by removing layers.” (Not something to really rally the troops behind.).
Speed was said to mean” agile dev ops” (which means, an agile process approach to developing software). Agile isn’t a culture, it’s a work method. Engagement is another word for interaction, and removing layers carries its own challenges. This all seemed very “made up on the spot,” so IBM/McKinsey has a bit more work to do in repairing IBM’s culture ane employee morale.
Recommendation: Human capital, culture, employee motivation and retention are important. We’d like to see companies include brief discussions to indicate that they are thinking about these questions, and have a thoughtful approach and target metrics.
4. Disclosure of Earnings
Timing of Earnings
Apple’s disclosure was on time, with no surprises. This is what everyone wants.
IBM did not pre-announce the earnings shortfall, instead IBM waited until they could also announce the divestiture. There is plenty of disagreement in IR circles about the upside/downside of preannouncing earnings. Some stocks take a double hit, and it is very likely that IBM would have taken a double-hit too. Management may not have had enough visibility into 2015 guidance adjustments for a preannouncement.
IBM also announced their earnings before the market closed, which is odd. Usually, that would signal good news. Instead, if was a red herring. Of course, the stock price dropped significantly once the earning shortfall was disclosed. One advantage is that the “hit” is taken in one day, instead of brewing overnight in international markets and opening down significantly the following day. This is getting into the realm of reading tea-leaves, so let’s move on.
Both companies provide sufficient information for analysts and investors to do their work. Yes, the companies might disclosure more information, but we don’t have enough information to judge where the line falls between useful and competitively-harmful information disclosures.
IBM’s information presentation was is complicated by the divestitures, by the reporting of “constant currency” measures which remove the effects of currency fluctations, and by the heavy use of acronyms and jargon for describing lines of business. Notable was that currency fluctations cost both companies money this quarter. However, this specific factor was mentioned frequently as a contributor to IBM’s poor showing, but merely called “a fact of life” by Apple.
Apple’s CEO speaks in plain English, and its CFO and SVP of finance also speak “close to plain-English,” which should be the standard in all earnings calls. Information was presented in organized tables and scripted remarks.
Companies can incorporate more — and better — visual elements into their presentation of financial information. Charts, graphs and video all help to bring the numbers to life. Video, in particular, brings the management team to life. Every company does not need to have a Yahoo or Netflix style video earning call, but for companies where shareholders are concerned about bench strength, video forms a connection that voice-only calls can not.
On the IBM call, in prepared remarks and answers to questions, few things are clear. There are no declarative sentences. Everything must be interpreted through a IBM-demystifying-translator. Perhaps an enterprising analyst could start a paid English translation service for IBM earnings calls.
That’s a strategic imperative we would support.