The ritual starts here.

Photograph: View Pictures/UIG via Getty Images

Search for Meaning in Earnings Calls

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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The quarterly earnings-conference call has become so ubiquitous that we barely notice how weird it is. Executives at almost every significant publicly traded company in the land (and lots of insignificant ones) huddle around a speakerphone or some other communication device once a quarter to talk to brokerage analysts. And while only the analysts may ask questions, anybody can listen in over the Internet.

At most companies it is the chief executive officer on the line fielding questions, accompanied by the chief financial officer and sometimes other top managers. This is one of the only managerial tasks, New York University accounting professor Baruch Lev observed a few years ago, that almost never gets delegated. There are a few prominent companies (Amazon, Google, IBM) where the CFO handles the call and the CEO demonstratively stays away, but that elite club lost a key member last year when Microsoft’s new chief, Satya Nadella, broke with company tradition and started participating in the calls. Apple’s Tim Cook has also become a conference call regular, while his predecessor only dropped in once in a headline-making blue moon.

The heavy CEO presence makes a certain amount of sense, given that the quarterly earnings call has become the main way in which companies communicate with investors and financial markets. This is one consequence of the Securities and Exchange Commission's adoption in 2000 of Regulation FD (for Fair Disclosure), which barred publicly traded companies from giving information to some investors and analysts and not others. Since then, most other, more-private communications channels have been closed down.

And so, four times a year, executives and analysts go through this ritual. As best I can tell it dates back to the early 1990s or maybe late 1980s, although it only became public and near-inescapable after the rise of the Internet and the adoption of Reg FD. January is probably the most important earnings call season, because so many companies are reporting annual as well as quarterly numbers.

The calls start with 10 to 20 minutes of prepared remarks by the executives, which usually feel like a total waste of time. Then it’s on to 30 to 45 minutes of Q&A. Today’s back and forth is less chummy than it was in the pre-Eliot Spitzer era, when I can remember analysts regularly prefacing their questions with “Great quarter, guys.” The only thing close that I encountered this month was in Apple’s call, where a couple of analysts couldn’t resist blurting out appreciative remarks about the astounding iPhone sales numbers. In general, though, it’s pretty business-like.

It’s also usually not all that revelatory. And why would it be? If you’re an analyst with a unique and brilliant perspective on a company, are you really going to want to spill it out in a conference-call Q&A? And if you’re an executive, you generally don’t want to reveal important new things in the Q&A that you didn’t already disclose in the earnings report.

Still, a decade of academic accounting research shows that there is information in the calls, if you look hard enough. The widespread availability of transcripts allows scholars to subject the calls to textual analysis, then compare the results to subsequent stock-price movements and other events. They have found, among other things:  that the Q&As are more informative than the executive presentations (big surprise) and are especially informative after a bad quarter; that a positive tone in managers’ answers can make up for bad numbers but substantive discussions (with lengthier answers and a higher ratio of numbers to words) are more effective in countering bad news than big-picture words like “strategy” and “growth;” and that  CEOs who use significantly more “extreme positive emotion” words than the norm are more likely to have to restate earnings down the road. Also, at least one linguist, Belinda Crawford Camiciottoli of the University of Pisa, has taken to studying the rhetoric of conference calls, and found -- again, among other things -- that executives are more reliant on “logos” (reasoning) than “pathos” (emotion) in making their case.

All this research inspired me to try a little amateur textual analysis of my own on a few of this month’s calls. I started at the natural first stop of the textual-analysis newbie, Wordle, where I made this word cloud of Caterpillar executives’ reactions to a very tough quarter:

Caterpillar's Jan. 27, 2015 earnings call, starring Michael Lynn DeWalt

That tells you something, I guess. Although one of the main things it tells you is that Michael Lynn DeWalt led the call (he’s Caterpillar’s vice president of finance services). So I tried a simpler, starker approach, using the free text-analysis site Textalyser, which gave me the 10 most-used words in the Caterpillar earnings call, minus people’s names as well as “the,” “and” and such. They were:

You, our, sales, year, just, oil, quarter, what, think, down.

That actually sounds about right for the Midwesterners at Caterpillar and the quarter they just had. No-nonsense, monosyllabic, a bit downbeat. After doing this to a few more companies’ call transcripts, I decided to sift out a few frequently occurring and not-very-interesting words: “you,” “your,” “our,” “year,” “quarter,” “business” and “question.” What I got were word lists that not only reflected the ethos of a corporation and its current business situation, but sometimes contained a little poetry as well. To wit:

Caterpillar: sales, just, oil, what, think, down, now, much, bit, lower

Pfizer: billion, expect, adjusted, due, expenses, potential, operational, products, impact, diluted

Apple: iPhone, very, Apple, new, think, thank, billion, what, just, going

Microsoft: Windows, revenue, think, growth, Office, cloud, services, commercial, thank, billion

Facebook: Facebook, people, think, just, how, video, ads, what, billion, growth

McDonald’s: markets, customers, create, McDonald, these, see, menu, taste, those, sales

Procter & Gamble: share, growth, market, pricing, line, sales, going, markets, continue, where

Now I doubt anyone could or should make investment decisions on the basis of this information. But it’s a lot better than having to listen to all those conference calls, isn’t it?

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Justin Fox at

To contact the editor on this story:
James Greiff at