Its earnings call time again! One of my favorite times of a new quarter where executives share the results of their previous quarter and talk about the business outlooks for the rest of
the year and beyond.
One of the reasons why I so enjoy earnings call season is that I personally get to conduct a Business Acumen training session called “Decoding the Earnings Call” for past participants of Business Acumen programs that I’ve delivered at their companies. What’s so great is that there is no mandate to go, and we pretty much are at capacity for all the different types of clients we have. I will conduct more than 10 of them this quarter alone.
In going through my preparations, I started to notice some common themes and questions I receive from participants so I thought I would turn them into a nice blog so you can use them if you are listening to your own company’s earnings calls.
Adjustment of Foreign Exchange or “Currency Translation”
This is a concept that confuses a lot of people. During the earnings call, the CEO may say something like, “We had revenues of $3 billion this quarter, but when you adjust for foreign exchange, it was $2.7 billion.” Wait a second! What happened to that $300 million? Here’s how it works: Let’s assume your company has a UK subsidiary and reports its financial results to the parent in the British Pounds Sterling. The parent company also sells products directly to European countries, and those transactions are settled in Euros. At the end of each reporting period, it is your job to consolidate the company’s financial data. Since the parent company is in the US, the parent’s functional currency, the main currency in which an entity conducts its business, is the US dollar. In addition, you have also determined that the reporting currency, the currency the consolidated financial statements will be reported in, is the US dollar.
The UK subsidiary’s functional currency is the British Pound, but since the reporting currency is the US dollar, you will need to convert the UK financial statements into the US dollar as of the end of the reporting period. This is referred to as the “translation adjustment” and is reported in the statement of other comprehensive income with the cumulative effect reported in equity, as other comprehensive income. In this example, because the dollar got stronger, and the Pound got weaker, the value of the revenue being reported from the UK is $300 million less today than when it actually came in last week.
GAAP vs. Non-GAAP
This is another one that usually gets a lot of questions because many corporations report both GAAP and Non-GAAP Financials. The best way that I explain it is that GAAP is the official system and the one that everyone uses so you can compare apples to apples and Non-GAAP is the unofficial method that has a lot more flexibility, but you are now comparing apples and oranges.
Generally accepted accounting principles (GAAP) were formed by the Financial Accounting Standards Board (FASB) and are governed by the Securities and Exchange Commission (SEC). GAAP gives companies uniformity in their financial reporting practice because it's a standardized and straightforward way of accounting.
Non-GAAP is an alternative accounting measure that both private and public companies can employ, although public companies must also use GAAP accounting principles. A company must disclose when it uses non-GAAP reports. It's important to make note of these types of items if you want others to fully understand your business operations.
Non-GAAP can provide more information on any variations, inconsistencies, and circumstances that are outside of what you would normally find in a GAAP report. Non-GAAP reports may include or exclude items like unusual expenses or non-cash costs, such as when a company goes through a restructuring or acquires another company. They may also list when a company performs a singular adjustment to the balance sheet such as writing off an acquisition that has gone bad.
Identifying Cost Synergies
This is one of my all-time favorites and there are times I must hold back from laughing while watching executives trying to convince their own people that three sweet little words like “identifying cost synergies” could be so harsh to people and their jobs.
You will typically hear the term cost synergies when executives are talking about mergers and acquisitions. It’s fancy for, “Oh, you have an IT department, and we have an IT department, so when we merge, we don’t have to have all that redundancy.” In other words, we can cut staff because bigger is more scalable. You will hear a lot more about cost synergies in Q3 and Q4 when companies are trying to hit their profit targets by cutting costs.
I hope you find this helpful best of luck listening in on the call!
