Earnings Calls are conference calls between the management of a publicly-traded company, sell-side analysts and other attendees to discuss the firm’s latest financial results. Each earning call is split into three major sections:
- The prepared remarks made by executives
- The questions from the sell-side analysts
- The unscripted responses by executives to analysts’ questions
Executives are generally CEOs and CFOs.
Exhibit 3 shows an example of a recent Earnings Call transcript of Verizon Communications Inc. made for the company’s Q3 2018 results.
Reading earnings call transcripts adds more information into the Sensefolio scores as our algorithms can assess and monitor both sentiment-based signals as well as behavioural-based signals.
Exhibit 3: Verizon Earnings Call Transcript for Q3 2018 Results:
Sensefolio utilizes the Gunning fog index, which is a readability test for English writing.
The index estimates the years of formal education a person needs to understand the text on the first reading.
The index takes into account the average words per sentence, as well as the number of complex words in a call. The “complex” words consist of three or more syllables without including proper nouns, familiar jargons, or compound words. As an example, a fog index of 12 would require the reading level of a US high school senior (i.e. Around 18 years old).
Sensefolio considers the analyst favouritism into its model. Indeed, companies might select the most bullish analysts to ask questions in order to hide their results and show a more optimistic view of the company prospects to others.
Finally, Sensefolio counts how many numerical values are presented during the earnings call. The more numerical values are presented, the more likely the executives want to conceal the unfavourable future of the company.