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Three steps to a more productive earnings call

3. Stop talking so much about EPS

Given how little investors care about EPS and how far GAAP is away from true operating metrics in many cases, there is still too much emphasis on both in earnings calls, press releases, and announcements, at least with US companies. Managers should leave those numbers to the accountants and lawyers and focus instead on more operating-oriented numbers that make sense for their business. In the simplest form, these would be true pre- or posttax operating-earnings numbers, adjusted for amortization of intangibles, other nonoperating charges like the nonoperating portion of pension costs, and nonrecurring charges.6 Investors are likely to react positively to such a shift, and some large companies are indeed already reporting a non-GAAP operating margin.

In extreme cases, however, managers should be even more creative, especially those with business models where GAAP rules significantly distort economics. For example, capital expenditures, operating income, and other consolidated GAAP data do not reflect the underlying economics of one large industrial company, which is forced by GAAP to recognize some revenue as product revenue and some—from similar assets and contracts—as lease revenue. Managers and investors would be better off focusing their dialogue on a restated set of numbers that treats all revenue equally.7 Other examples can be found in businesses that combine manufacturing and large projects, where percentage-of-completion accounting, and in extreme cases even real-estate accounting, can significantly distort aggregated data to the point of irrelevance for a value assessment. Here, managers should clearly separate the data for different businesses and focus on non-GAAP metrics to convey the state of the business.

Finally, managers should eliminate the need for the endless clarifying questions that take up the bulk of most earnings calls by releasing more—and more transparent—data. That means full operating-income statements and key operating-balance-sheet items for business units, ideally by geography, reconciled to the consolidated statements. A number of companies routinely publish full income statements and balance sheets for their financial businesses, either in their regular filings, like GE, or as a separate full report, like Caterpillar Financial Services. Nonfinancial companies that come closest to the ideal, such as Novartis, often offer a full income statement and capital schedule per business unit, in annual statements. These data are typically available internally, and given the size of larger business units, investors deserve a deeper look into the financials than they are getting from the required disclosure.


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