Earnings Call

An earnings call is a conference call or webcast in which a company's management discusses financial results it has just reported, usually followed by questions from research analysts. The SEC has no definition of the term and describes the thing in ordinary words, referring in one release to "a scheduled conference call to discuss the announced results" and in another to "a conference call in connection with their earnings releases." Two rule sets give the practice its shape. Form 8-K Item 2.02 governs the announcement of results and, in its second paragraph, sets the conditions under which the call itself need not be furnished as a separate filing. Regulation FD governs what may be said selectively to particular listeners. Neither requires the call to happen. The filing calendar the call sits inside, and the reason the figures discussed carry less assurance than the ones in the filed report, belong to earnings season; the forward-looking projection management usually gives on the call is earnings guidance.

What triggers the paperwork is the announcement, not the call. Item 2.02(a) of Form 8-K provides that where a company or a person acting on its behalf "makes any public announcement or release (including any update of an earlier announcement or release) disclosing material nonpublic information regarding the registrant's results of operations or financial condition for a completed quarterly or annual fiscal period," it must disclose the date of the announcement, briefly identify it, and include its text as an exhibit. The Form's General Instruction B.1 gives four business days for a report on the form unless otherwise specified. Instruction 4 to the item excludes a disclosure made in a Form 10-Q or Form 10-K, so the periodic report is not itself an Item 2.02 event.

The four conditions, which are why every earnings call looks the same. Item 2.02(b) provides that a Form 8-K is not required for material non-public information "that is disclosed orally, telephonically, by webcast, by broadcast, or by similar means if: (1) the information is provided as part of a presentation that is complementary to, and initially occurs within 48 hours after, a related, written announcement or release that has been furnished on Form 8-K pursuant to this Item 2.02 prior to the presentation; (2) the presentation is broadly accessible to the public by dial-in conference call, by webcast, by broadcast or by similar means; (3) the financial and other statistical information contained in the presentation is provided on the registrant's website, together with any information that would be required under 17 CFR 244.100; and (4) the presentation was announced by a widely disseminated press release, that included instructions as to when and how to access the presentation and the location on the registrant's website where the information would be available." That is the structure of the familiar routine: a release first, a call within two days, a public dial-in and webcast, supporting numbers posted on the site, and an advance announcement telling everyone how to join. It is worth being precise about the legal character of that list. It is not a set of duties. It is the price of an exemption a company may choose to take, and a company that does not want the exemption is free to furnish the presentation instead.

The single most useful fact for a retail listener, and it is the SEC's own words. In adopting Regulation FD the agency set out a model for making a planned disclosure such as a scheduled earnings release, using a combination of methods: "First, issue a press release, distributed through regular channels, containing the information; ... Second, provide adequate notice, by a press release and/or website posting, of a scheduled conference call to discuss the announced results, giving investors both the time and date of the conference call, and instructions on how to access the call; and Third, hold the conference call in an open manner, permitting investors to listen in either by telephonic means or through Internet webcasting." A footnote to that third step is the part nobody quotes: "Giving the public the opportunity to listen to the call does not also require that the issuer give all members of the public the opportunity to ask questions." So an individual holder has, in substance, a seat at the back and no microphone. That is not a loophole anyone slipped through; it is the design. A separate footnote in the same release adds that an issuer using a webcast or call as part of its public-distribution method "should consider providing a means of making the webcast or call available for some reasonable period of time," which is where the replay recording comes from.

What governs the substance of what is said. Regulation FD, 17 CFR 243.100(a), provides that whenever an issuer or a person acting on its behalf "discloses any material nonpublic information regarding that issuer or its securities" to a person described in the rule, the issuer must make public disclosure of that information "[s]imultaneously, in the case of an intentional disclosure" and "[p]romptly, in the case of a non-intentional disclosure." The covered recipients, listed in 243.100(b)(1), are brokers and dealers and their associated persons; investment advisers, Form 13F-filing institutional investment managers and their associated persons; investment companies and certain affiliated persons; and any holder of the issuer's securities "under circumstances in which it is reasonably foreseeable that the person will purchase or sell the issuer's securities on the basis of the information." Analysts and institutional investors on an earnings call are squarely inside that list, which is exactly why the call is public. Rule 243.101(d) defines promptly as "as soon as reasonably practicable (but in no event after the later of 24 hours or the commencement of the next day's trading on the New York Stock Exchange)" after a senior official learns of the non-intentional disclosure. Public disclosure means a Form 8-K or, alternatively, "another method (or combination of methods) of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public."

One limit on Regulation FD worth knowing. Rule 243.102 states that "[n]o failure to make a public disclosure required solely by 243.100 shall be deemed to be a violation of Rule 10b-5" under the Exchange Act. Failing the selective-disclosure rule is a Regulation FD problem on its own terms. Whether the same facts also amount to insider trading is a separate question with separate elements.

A company furnishes its written earnings release on Form 8-K. It announces the call by press release, giving the time, the date and the access instructions. The call is held with a public dial-in or webcast, opening with prepared remarks and moving to questions from analysts. The supporting financial and statistical information sits on the company's website. A replay or transcript is usually posted afterward. If a condition of the Item 2.02(b) exemption is not met, the presentation itself is furnished on Form 8-K.

A hypothetical, on the 48-hour condition. A company furnishes its earnings release on Form 8-K at 4:05 p.m. on a Monday. Forty-eight hours later is 4:05 p.m. on the Wednesday. A call that begins at 8:00 a.m. on the Tuesday starts 15 hours and 55 minutes after the release, comfortably inside the window. A call that begins at 5:00 p.m. on the Wednesday starts 48 hours and 55 minutes after it, which is outside, so that presentation would not satisfy the first condition and the company could not rely on the exemption for it. This is why the call is almost always the same day as the release or the next morning.

A second hypothetical, on Regulation FD's clock. Suppose an executive says something material and non-public to an analyst by accident, and a senior official learns of it at 3:00 p.m. on a Thursday. Public disclosure is due as soon as reasonably practicable and in no event after the later of two moments: 24 hours later, which is 3:00 p.m. Friday, or the commencement of the next day's trading on the New York Stock Exchange, which is 9:30 a.m. Friday. The later of those is 3:00 p.m. Friday, so that is the outer limit. Had the official learned of it at 8:00 p.m. on the Thursday, 24 hours later would be 8:00 p.m. Friday, and that would be the later moment instead.

Pros

• Any member of the public can generally listen, because broad accessibility is a condition of the exemption most companies use.
• The supporting financial and statistical information has to be on the company's website, so the numbers referred to on the call are checkable.
• The call has to be announced in advance with access instructions, so it can be diarized rather than discovered afterward.
• Regulation FD pushes material information into public disclosure rather than into private conversations, which is why the call exists in public at all.

Cons

• Listening is not participating. The SEC has said that opening the call to the public does not require letting all members of the public ask questions.
• Nothing requires a company to hold a call, so the practice can be discontinued without notice or explanation.
• The figures discussed are usually those in the earnings release, which is not required to be reviewed by an accountant or prepared under GAAP.
• Management chooses the framing and the running order, and the analysts asking questions are not the company's shareholders.