An earnings call is a quarterly touch-base for publicly-owned companies to provide an inside look at their performance and expectations for the future.
Earning calls are not legally mandated, so a company doesn’t have to have one. However, almost all publicly traded companies host quarterly earnings calls, because they provide an opportunity for the company’s management team to explain and contextualize their most recent financial results, and to offer a small glimpse into the future. It also often provides the opportunity for investment analysts to engage directly with the company’s executives.
These quarterly calls align with a company’s fiscal year, which may be different from the calendar year. For instance, our favorite exemplar company, Bio-Techne, closed its third quarter in the spring, for instance.
You can either listen to these calls live via webcast. Or you can listen to the recording on the company’s website a short while after the call occurs. Or you can read the transcript of the call, which is what I most often do.
Let’s walk through Bio-Techne’s third quarter earnings call to better understand the structure and content of a typical earnings call. A transcript of this call can be found here: https://seekingalpha.com/article/4599539-bio-techne-corporation-tech-q3-2023-earnings-call-transcript
Safe harbor statement
A call usually begins with a safe harbor statement, which lets everyone know that financial results may include predictions about the future that may not necessarily come true. This disclaimer limits the company’s liability if the predictions about the future differ wildly from what the future actually brings.
In this part of the BioTechne earnings call, they also state, “During the call, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance.” Recall from our early posts (Part 2), that GAAP stands for Generally Accepted Accounting Practices and are standardized accounting practices utilized in ensuring that financials are accurately recorded and managed. The justification for reporting non-GAAP earnings is that large one-off costs, such as asset write-downs or organizational restructuring, should not be considered normal operational costs because they distort the true financial performance of a company. In other words, context.
Presentation and discussion of the financial results
Once the Safe Harbor statement is out of the way, the CEO (in this case Chuck Kummeth) kicks off with some opening messages that essentially boil down to a sales pitch for the company. Typically the CEO will present a narrative designed to coach listeners about the company’s position in the market and how they should think about the subsequent information. As a result, this section gives listeners a deeper understanding of how the company is positioning themselves in the market, and how optimistic they are about competitors and external market forces.
In the case of the Bio-Techne call, Chuck opens with all the things investors should be happy about (milestones, strong growth, etc), and then talks about “continued challenges of COVID in China, lower biotech funding and OEM destocking from supply chain disruption concerns last year,” but ends with an optimistic statement about these headwinds decreasing in the coming year. He also welcomes a new senior leader to the company, and then dives into performance by geography and end market, essentially fleshing out the themes he opened the call with.
Following the pattern of a typical earnings call, they then move into the detailed financial section, where the CFO takes the baton and dive into numbers that will give investors a sense of the relative health of the business and how that compares to past periods. In the Bio-Techne earnings call, the CFO (Jim Hippel) starts with the EPS (earnings per share). We’ll cover EPS in the next post on the investor Big Five financial ratios, but here’s a sneak preview:
EPS measures the profitability of a company by dividing its net income by the number of outstanding shares. EPS reflects the earnings potential of a company and its ability to generate returns for shareholders. All other things being equal, a growing EPS portends an increase in stock price. In an economic slowdown, companies will work hard to keep EPS up by reducing costs (not always great for the humans working at these companies). Shareholders can accept revenue decline, but are unhappy to see a decrease in EPS.
Similar to the opening business statements, Jim starts with an overall perspective, and then goes through the financials from various geographies and business lines. At several points, he refers to ‘unfavorable foreign exchange’ as a headwind (to refresh your memory on how exchange rates can impact a life sciences company, see Part 12).
Q&A
The final, and probably most interesting, section on an earnings call is the Q&A, and it is usually the longest part of the call. The host company can call upon analysts in their preferred order, prioritizing the most relevant individuals and deprioritizing the rest. Some investors will consider the tenor of how an earnings call unfolds, paying close attention to how leadership explains key pieces of information and how they navigate analyst questions at the backend of the call.
One interesting exchange in this section was from Dan Leonard from Credit Suisse who asked, “I want to make sure I understood your summary comments appropriately. Did you say that Bio-Techne would return to double-digit growth in fiscal 2024?”
For context, the summary comments from the CEO included: “Through it all, and as Q3 demonstrated, our growth platforms are still winning with double-digit growth. As we enter Q4, some of the headwinds should diminish, especially in China, but some are likely to remain, namely the OEM destocking and smaller biotech rationalize spending.
Looking further ahead into fiscal year 2024, these remaining headwinds should further diminish a double-digit revenue increases we see in our strategic growth platforms to once again be reflected in our headline numbers. In the meantime, we expect Q4 overall momentum to continue to improve from Q2 and Q3 with an overall growth rate likely similar to how we started the fiscal year in Q1.”
The issue around OEM destocking comes up several times in the Q&A and warrants some additional context. OEM will be a term for those more connected with the manufacturing world- it stands for original equipment manufacturer, or an organization that makes devices from component parts bought from other organizations. Destocking is just what it sounds like- to reduce the amount of stock/inventory held. So OEM destocking here means that BioTechne’s OEM customers are cutting back on the inventory they are buying, which is obviously not great for BioTechne.
Let’s dig a bit deeper into the macro environment underlying this destocking trend. Pre-pandemic many companies tilted towards ‘JIT’ (just in time) inventory management practices- there are many reasons this practice is attractive for a company’s financial position (in the extreme: imagine how your cash flow statement looks like if you can sell and receive payment on inventory before you have to pay the vendors from which you bought the parts, because you’ve negotiated amazing terms- Net 90, for instance). But there is no free lunch, and JIT comes with risks to a company’s resilience, and during the pandemic massive supply chain disruptions made that risk very apparent. The upshot is that many distributors moved away from JIT and stocked up on inventory. In addition, many businesses diversified, strengthening their supplier base and giving them increased optionality with qualified sources for materials. So now with the pandemic now officially over, distributors are feeling more confident in ‘destocking’ a bit, or drawing down on that inventory. But it’s not only that, there are market pressures driving this destocking behavior as well. As we all know from the last 14 parts of this series, destocking will lead to an increase in operating cash flow. With debt markets enduring higher interest rates for at least the foreseeable future, CFOs are turning to alternative sources of capital, i.e., no one wants to borrow money at high interest rates if they don’t have to, so turning existing stock into products without replenishing it as quickly provides a convenient route to generate cash. This strategy may be great for the companies doing the destocking, but it’s not so great for the company’s selling the inventory that is now being destocked. Thus the BioTechne situation.
Okay, so with that context, what was the BioTechne’s response?
First the CFO chimes in, “Well, we’re in the process of building our plan right now for next year, right? What I was trying to indicate in my closing remarks was that if you take out the very isolated events OEM destocking. China, as an example, the ExoTRU deal and the rest of our business collectively is at double digits already. And our key growth programs, which are going to carry us to $2 billion and beyond are also all growing well in the double digits. And so it suggests that we get past these headwinds in fiscal year 2023, during fiscal year 2024, this underlying double-digit growth was seen not only in our core but definitely in our growth programs, growth platforms we’ll start to once again resonate and you’ll see it in the overall company results. And that’s our goal.”
And then the CEO pipes up: “Let me put a little ribbon on that. So, I mentioned our run rate – we watch our run rate and how we’re doing digitally with our catalogs. We are funded first and foremost, the catalog business for life sciences across the board, biopharma down through academia. And that’s remaining in teens tells us that things are okay. Then you look for other holes and we bridge it for you. This OEM thing is going to come and go, you pull that back, we’re back to normality. And on top of that, you have these growth programs. Our three top growth areas all hedged spectacular quarters. Spatial had double-digit, 45% GMP protein, 20%-plus in cell and gene therapy overall and Exosome at 87%. They’re not material enough right now to carry the average. But by next year, there are going to be a lot more material and they’re going to carry the average. So all the stuff fundamental coming back on top of these growth programs, we don’t give guidance, but we won’t be very happy here if we’re not a double-digit growth and so.”
This exchange highlights some of the richness of an earnings call. First, on this question both the CEO and CFO jump in to answer, one of the few times this happens in the Q&A, which may tell us something about the importance of the topic. Second, you can see the ‘hedging’ in language like, ‘we don’t give guidance, but we won’t be very happy here if we’re not a double-digit growth.’ And finally, you can see the narrative that BioTechne is advancing very clearly in this exchange: we have very strong growth areas and are optimistic that the headwinds bringing us down now are temporary and likely to improve in future quarters. Basically, they are trying to reassure investors about some less than spectacular numbers.
A few more notes on how to listen to an earnings call
If you are following a company for multiple quarters, you can gain insight from listening closely for what the company disclosed relative to what prior research or earnings calls suggested they would disclose. Which topics did they emphasize, and which did they de-emphasize?
You might hear the word “guidance” on an earnings call, which is a term used to describe how the company orients analysts and investors around their projected future performance. Guidances are often given in ranges and with the caveat that they are directional only, so take them with a grain of salt. In the case of BioTechne, the CEO explicitly states ‘we don’t give guidance, but…’ When guidance is given, it’s generally a good idea to give it a close listen because sometimes the changes made to the guidance do provide important insight into the company’s future.
As stated above, some investors pay close attention to the tone used when delivering information. Is the information being delivered with energy and optimism? Or do the presenters seem sheepish and concerned? Of course, these assessments are highly subjective and can lead to false signal (and are much harder to get at from reading a transcript), but some investors will factor them into their overall read of an earnings call.
I strongly urge you to dig through past transcripts to get a sense of how both management and investors are thinking about the performance of the business.
Just for fun, here’s an article on GenAI prompts for analyzing earnings calls: https://www.mlq.ai/prompts/earnings-calls/
Next time we’ll talk about the ‘Big Five’ numbers that investors care about, including revisiting EPS. In the meantime, you can join the mailing list to be notified of when that comes out!