As Jim Cramer likes to say repeatedly, an investor's "homework" must include listening to conference calls. In fact, I would go so far to say that you should not make an investment you plan on holding for more than a minute until you have scoured a company's SEC filings and listened to its most recent and next scheduled conference call.
There's really no excuse for not listening to calls. Rarely, if ever, do you have to pick up the phone and dial in to a call these days. Most companies not only webcast them live, but they make them available online for a period of time after the call. Practically every day during earnings season, I take a break from music and keep a conference call or two on in the background. Then, to make sure I actually heard what I think I heard, I review the transcript of the call on Seeking Alpha.
You can pick up so many things -- direct material things and read between the line intangibles -- by listening to calls. In this article, I discuss several things to look for supported by recent examples.
In an article I wrote about Sino Clean Energy (OTC:SCEI) ahead of its well-publicized implosion, I raised several red flags about the company. While I never claimed that the company was committing any type of fraud, the performance of its CFO on the call made it certain that I would not be buying shares. You can read the article I wrote just after the call in April to see what was, admittedly, an extreme case of a horrendous conference call performance.
While you might expect a less-than-stellar performance from the CFO of a Chinese reverse merger, you certainly don't expect the red flag of imprecision and uncertainty to come from the CEO of one of Canada's biggest tech companies. That's exactly the air Research in Motion (RIMM) co-CEO Jim Balsillie gave off earlier this year in the call that prompted me to wax extremely bearish on the company for the last seven months or so.
Consider how Balsillie described demand for RIM's PlayBook tablet on his firm's Q4 2011 conference call back in late March:
It's not in the hundreds of thousands. No, I mean, clearly, it's a major, major launch that we expect to be a growth driver for a long, long period of time. And I just don't want to get into sort of semi-guiding, but the interest is extremely high. This is a shift in computing globally. The demand -- let me put it this way. I've got many corporate clients that have approached us about each wanting tens of thousands, several tens of thousands of PlayBooks. And that is what they're looking at, that is what they're assessing, and they're looking at tablets, and they like the PlayBook architecture.
That was beer league type stuff. The moment I heard what sounded like an interview with a hockey player, I was pretty certain that PlayBook would be a complete dud. If you did not listen to the call and relied on most news reports, you would not have heard exactly what Balsillie said and, more importantly, how he said it.
Specifics And Consistency
Contrast that to what you hear from Apple (AAPL) on each and every call it does. On every conference call, at right about the same time, Apple CFO Peter Oppenheimer details the level of iPhone and iPad penetration the company is seeing in the enterprise market. Here's just one example from Apple's Q4 2011 report earlier this month:
iPhone continues to be adopted as the standard across the enterprise with 93% of the Fortune 500 deploying or testing the device, up from 91% last quarter and 60% of the Global 500 testing or deploying iPhone, up from 57% last quarter. A recent example of iPhone's enterprise success is Lowe's. Lowe's is in the process of rolling out over 40,000 iPhones with a custom application to allow their store associates to execute realtime inventory checks, product orders and interactive customers with how-to videos.
Additional examples of companies around the world supporting iPhone on their corporate networks include L'Oreal, Royal Bank of Scotland, SAP, Texas Instruments, Jacobs Engineering Group, Tenet Healthcare, Jaguar Land Rover, Takeda Pharmaceuticals, Lincoln National and CSX Corporation.
Some Apple bears scoff at the action words "testing" and "deploying," but that type of noise misses the point on several counts. These bears argue that any company will happily take a free iPhone and iPad and "test" it without any real intent on ever using the thing for wide-ranging business purposes. If you think that's true, you live in quite the fantasy world. But we could argue that point until we're blue in the face; that type of critic should probably not be taken seriously anyway.
What I like more about this approach from Apple is that the company sets itself up to be held accountable. The numbers Oppenheimer cites, quarter-after-quarter, also helped tipped me off to the fact that Apple was actively eating RIM's lunch in enterprise. And, if Apple stops reporting these numbers or I see a meaningful decline or change in them from one report to the next, reason for concern might exist. When you put out key statistics like this on a call, you effectively set a standard for yourself that you'll keep doing it. That's a confidence I like to see from a company.
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That excerpt comes from the Q1 call. I'm not sure where that stands, but, apparently, deciding not to report churn caught the eye of the SEC. In hindsight, it's clear that this "metrics evolution" was just one of the many signs Netflix flashed regarding its pending implosion.
Speaking of Netflix, listening to a CBS conference call earlier in the year helped add to my bearish conviction towards NFLX. On the CBS call, company president Leslie Moonves and CFO Joseph Ianniello could not stop talking about how money it would receive from Netflix thanks to streaming deals would positively impact the CBS bottom line. You can read the specifics in my article here, but this is the key paragraph -- which you simply could not have gotten on a Netflix call -- that drove home the full meaning of Netflix's reckless and unsustainable spending on content:
After Moonves spoke, CBS CFO Joseph Ianniello discussed the company's revenues, including "content licensing," making it a point to note "that these results do not reflect the impact of our new Netflix deal, which starts in Q2." For Ianniello to explicitly point to the "new Netflix deal," a significant chunk of those "hundreds of millions of new dollars" must be coming through as we speak. CBS reported $3.5 billion in revenue in Q1; it's not going to focus on one deal like it did the "new Netflix deal" unless that deals represents something significant relative to total revenues.
Cut Through The Noise
No company's conference call better helps you wade through inane noise from short-hungry bears than Amazon.com's (AMZN). It stuns me to read flimsy bear case after flimsy bear case suggesting investors short AMZN without even a passing mention of what executives, particularly CFO Thomas Szkutak, had to say on the call. That's where you make sense of margins and guidance, not on a piece of paper that lays things out in dry and impersonal fashion.
On Amazon's live Q3 2011 conference call, you get a direct question like this,
Tom, could you please speak to what's pressuring margins in Q3 and particularly Q4. I guess the implied margin for Q4 is effectively 0 at the midpoint. It, again, answer the question, what's the financial model going forward? Is it to try to maximize growth on the top line even at 0 growth -- 0 margin?
followed by an informative answer like this:
What you're seeing, and again, it relates back to the growth, we're seeing really unprecedented growth. We're seeing the best growth which we've seen since 2000, meaning in 2010 and so far over the past 12 months ending September. And so with this strong growth, we're investing in a lot of capacity and that's what we've been talking about over the past couple of quarters and that's what you're seeing in our Q3 results specifically. If you take a look at our operating expenses in Q3, as a percentage of revenue, you see -- and if you compare that to Q2, as a percentage of revenue, you're seeing very similar trends for marketing and G&A. You're seeing a slight uptick in tech content. It's about 10 basis points and then you're seeing fulfillment up approximately 80 basis points. The reason why that's growing so much, as a percentage of revenue, is again the capacity that we've been talking about. Many days ago, I've mentioned that we were -- we had announced 15 new fulfillment centers this year that's on a basis of 52 from last year. And then we'd likely open one or two more. We are actually going to be opening 17 new fulfillment centers. And so you're seeing that impacting our fulfillment expense in Q3, as well as the bottom line in Q3...
We are also investing in a number of different areas. We're investing to support retail growth fulfilled by Amazon growth, fast-growing AWS business, as well as infrastructure to support our retail business. We're investing in our Kindle and Digital business. I mean you're seeing that reflected in our Q4 guidance as well, all of these things. And so if you take a look at our Kindle business, for example, we've launched 4 new products at the end of September, and we're very, very excited about those products. They're at great prices, and they are certainly premium products. And so we're very excited about those. And we think about the economics of the Kindle business, we think about the totality. We think of the lifetime value of those devices. So we're not just thinking about the economics of the device and the accessories. We're thinking about the content. We are selling quite a bit of Special Offers devices which includes ads. We're thinking about the advertisement and those Special Offers and those lifetime values. So those are the things certainly that are impacting, as well as investments in other areas impacting our Q4 guidance. But we feel very good about where we are right now and the opportunities that we have in front of us (emphasis added).
Most bear cases against Amazon ignore what Szkutak said on the conference call. Some detractors even attempt to make a comparison between Amazon and Netflix by contending that Amazon faces margin pressures, etc. because of spending on streaming content. The CFO told you the real deal, straight up, on the conference call: You're seeing a slight uptick in tech content. It's about 10 basis points and then you're seeing fulfillment up approximately 80 basis points.
You need to listen to conference calls to get that data without having to give yourself a stress headache in the fine print of a 10-Q. The real spending has to do with fulfillment, which has to do with rapid and "unprecedented" growth. This should be sweet music to long-term investors' ears. And it is. That's why the AMZN rebounded nicely and represented nothing but a risky, short-term short. You don't get that from news reports and bias bull or bear accounts; you get it from listening to the conference call, making up your own mind and only using the rest of the noise to help inform your well-researched perspective.