Reading an Earnings Report

Quarterly earnings reports are the most important events for individual stocks. Learning to read and interpret them helps you make informed investment decisions. [DEFINITION] Earnings Report: A quarterly disclosure of a company's financial performance, including revenue, earnings per share, and guidance, typically released 4-6 weeks after quarter end. ### Components of an Earnings Report **The Press Release:** - Revenue (top-line sales) - Earnings per share (EPS) - Key metrics (subscribers, same-store sales, etc.) - Forward guidance **The 10-Q/10-K Filing:** - Detailed financial statements - Management discussion and analysis (MD&A) - Risk factors - Segment breakdowns [EXAMPLE] Netflix Q4 earnings: Revenue $8.5B vs $8.4B expected (beat by $100M). EPS $4.27 vs $4.21 expected (beat by $0.06). Subscriber adds 7.66M vs 5M expected (big beat). Stock gaps up 8% on subscriber surprise. ### The Four Key Numbers [KEY] Every earnings analysis starts with these comparisons: 1. **Revenue vs Expectations:** Did sales meet forecasts? 2. **EPS vs Expectations:** Did profits meet forecasts? 3. **Revenue Growth YoY:** Growth rate vs last year 4. **Guidance vs Expectations:** What's the outlook? ### Beat, Miss, and the Stock Reaction - **Beat and raise:** Usually positive reaction - **Beat but lower guidance:** Often negative (the "beat and retreat") - **Miss but raise guidance:** Mixed, depends on story - **Miss and lower guidance:** Usually negative [TIP] The stock reaction often depends more on guidance than the actual results. A company can "beat" expectations but fall if next quarter looks weak. ### What to Look For **Positive signs:** - Revenue growing faster than industry - Expanding profit margins - Strong cash flow - Confident guidance raised - Healthy customer metrics (retention, growth) **Warning signs:** - Revenue beats from one-time items - Declining margins despite revenue growth - Lowered guidance - Large inventory buildup - Customer concentration risk [EXERCISE] A company reports: Revenue $5B (vs $4.9B expected), EPS $2.50 (vs $2.75 expected), next quarter guidance $4.8B revenue. Analysts expected $5.1B guidance. How would you interpret this? |ANSWER| Mixed but concerning: Revenue beat (good), EPS missed significantly (bad, margin pressure?), guidance disappointing (bad signal for future). The EPS miss and weak guidance outweigh the revenue beat. Stock likely declines. ### Earnings Call Insights After the report, management hosts a call: - **Prepared remarks:** Scripted highlights - **Q&A session:** Analysts probe for details - **Tone and confidence:** How does management sound? - **Specific metrics:** Drill into what's driving results [WARNING] "Non-GAAP" earnings exclude certain expenses to show better results. Always check the reconciliation between GAAP and non-GAAP earnings. Companies can be creative about what they exclude. ### Building Your Earnings Checklist Before earnings: 1. Note analyst expectations (revenue, EPS, key metrics) 2. Understand what matters for this company 3. Check recent guidance and investor presentations After earnings: 1. Compare results to expectations 2. Read guidance carefully 3. Listen to earnings call or read transcript 4. Watch for any unusual items 5. Assess whether your investment thesis changed