Well, since I’m apparently brain-dead from a content-writing perspective at the moment, how about a short story? 1/x
A little while back I talked about way a typical earnings night was like 2/x
My first go at earnings was more interesting 3/x
As I’ve mentioned before, I was as green as a bean when I started this job. No clue what was going on, and woefully underprepared when I actually launched coverage (I’ll tell that story at some point, it’s too long for today) 4/x
For any new sell-side analysts out there, I would recommend going into your first earnings prepped. Get your templates in order. Do a few dry runs. Practice. 5/x
I did none of that. 6/x
In fact I went into my first earnings (I think Q209) with a set of overly-complex models, a blank sheet of paper, and a smile. 7/x
Needless to say, they were some LONG evenings. 8/x
But one in particular stands out to me. 9/x
For those that don’t know, after an earnings call is finished, IR and management teams spend the rest of the evening doing “callbacks” with the sell side 10/x
The callback allows the analyst to probe more into things that don’t make sense to go into on the earnings call itself, for example routine (but important) modeling questions, as well as get clarification on stuff, as well as some relationship building. 11/x
The callback also allows the company themselves to stress points to the analyst, and make sure things are clear, as well as engage in damage control if, for example, they put their foot in their mouth on the call itself (it happens) 12/x
And sometimes companies also use the callback to subtly “steer” analysts in one direction or another in terms of where they want estimates to land, and to make sure people aren’t too far out of whack with where the company wants to set expectations. 13/x
Note that management teams also have callbacks with the buyside, but usually over several days following the report (they may need to speak with 30 sell-siders, but potentially hundreds of buy-siders). 14/x
Suffice it to say, on my very first earnings season I was unfamiliar with the concept of “the callback.” I knew I had some sort of phone call with IR scheduled afterwards, but didn’t really understand what it was for. 15/x
Anyway, the earnings call ends. It was a doozy, one w/ some reporting & other changes that required a rebuild of my (never-used) model on the fly, as well as being in the throes of the snapback following the Great Financial Crisis (which made things interesting as well). 16/x
Anyway, the team and I futzed around for a few hours (and God do I feel bad for them now, I was a mess of a manager back then...) And then I get the callback, the head of investor relations rings me. 17/x
We exchange a few pleasantries. I start asking what I think (at the time) are deep important questions. He humors me for a bit but for some reason he sounds like he's getting irritated. And then he says: 18/x
“Look, I have a lot of calls to make tonight, can we just get to the model?” 19/x
I say, “Uh, sure, OK I guess so” 20/x
And then he starts talking. Goes over a whole bunch of stuff. I had trouble following his thrust as I wasn’t too aware what were the important things to worry/think about at that point. 21/x
Anyway he talks for maybe 6-8 minutes straight, tossing tons of stuff at me. I couldn’t have gotten a word in edgewise if I had tried. 22/x
After he finishes, he takes a deep breath, and says “So, what’s your number?” 23/x
I say “Huh??” 24/x
He repeats, “So what’s your number?” 25/x
And I say (of course)
“What number?”
“What number?”
Dead silence... 27/x
He says, again, “Your…your number, what is it?” 28/x
I say “Well I don’t have any numbers yet, I haven’t even touched my model yet tonight..." 29/x
Dead silence... 30/x
He says “Oh, umm…well...OK, then.” Then he says goodbye and hangs up. 31/x
And I sat there. Thinking to myself, “Man, that was weird…”
And the team and I get back to work.
About 30 min later my phone rings. It was a client. 34/x
He says to me “Hey, did you hear from XXXX yet?” I say Yes. 35/x
He says “I’ve heard they’ve been trying to steer people to $Y.YY tonight, what did they say to you?”
And then it hit me what that whole thing was about. 37/x
He was trying to serve the “Number” up to me, on a silver platter. 38/x
And I was so naïve and dense that I didn’t understand what he was doing. 39/x
And I didn’t let him do it. 40/x
(I’m not sure what he thought...) 41/x
These days I know better what the “callback” is for. And while some companies might “help” you a little bit, most are not nearly as aggressive as this particular case was (at least in my experience). 42/x
But this is one reason why “estimates” and “consensus” are not the same thing. 43/x
Like anything else there is safety in the pack, and little incentive to have numbers that are hugely out of whack. 44/x
Perversely, sell-side analysts bullish on a stock therefore have an incentive to keep numbers in check, and easy to beat. Analysts bearish on a stock have an incentive to set numbers high, to make things difficult. 45/x
The buy side, of course, is not stupid, and knows this. 46/x
They have to be right.
Their models will therefore typically be reflective of this fact.
And this is one reason why the buy side is ALWAYS ahead of the sell side (even if I don’t like to admit it, it’s true) 47/x
Their models will therefore typically be reflective of this fact.
And this is one reason why the buy side is ALWAYS ahead of the sell side (even if I don’t like to admit it, it’s true) 47/x
But even today I still don’t tell management teams what my “number” is...
48/48 fin.
48/48 fin.
Epilogue - my manner on these callbacks has evolved over the last dozen years or so...
