Part 1 Translating the Corporate "Suit": Your Guide to Q1 Earnings

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3:34Start now. And welcome back to Investing for Beginners. My name is Stephen Morris. Across the way is Andrew Sather. And today we're going to talk about earnings call jargon. And that's one of my biggest pet peeves, actually. I hate how Wall Street, how the upper echelon, if you will, has decided that everything needs to be so complex and sounds super difficult. When you get actually into the meaning of everything, it's not that big a deal. But like they use all these words that make it seem more complicated than it is. and so in my opinion like that's one of the most or at least for me i guess that was one of the more intimidating things about getting into the stock market andrew is like when you know i started hearing people talking about puts on calls and i'm like um what's a put and then everybody's like oh just do it and it's like okay yeah so there's there's too many words like that there's too many and it feels like a completely different language it does and i mean it's there are so many different forms of trading let alone just on your brokerage app you know that that gets super complicated the the metrics all get super complicated and then you have you try to do your research and all the all the words are even super complicated because it's not normal English and so um while I do respect I have a very firm respect for the need for uh what what's the word not analogy um oh I'm drawing a blank what's the word uh when you take a you take a word make it short Oh, acronyms.

5:29Acronym, thank you. Yeah, so I'm from the military, so we have literally like a 300-page book of acronyms that we use. And to the day I retired, I would still every once in a while hear an acronym. I don't even know what that means. But I have a respect for that. But at the same time, let's just make things easy instead of more complicated 100%. So the first one we're going to dive into is prepared remarks, Andrew. When you hear prepared remarks on an earnings call, what does that mean? Yeah, this one's simple. Let's keep it easy. You'll hear oftentimes in the quarter, the Q &A, the question and answer part of an earnings call, that management will say, well, we refer to our prepared remarks.

6:22and the prepared remarks is just the first half of an earnings call. Every earnings call is different. Companies do it different ways. I was just listening to, I think it was Lyft's earnings call. Might have been Lyft. I can't remember the exact company, but they didn't have a prepared remarks. They just dove straight into the Q &A, which was kind of cool. Other companies will go for a half hour of prepared remarks and 80 % of it is flowery and pat ourselves on the back and look at how awesome and spectacular we are. So you do have to sometimes parse some of that. Sometimes I skip the prepare remarks, sometimes I don't.

7:02But when just understanding that that's the general structure of an earnings call, the first half is generally prepare remarks, second half is generally question and answer. And if you use the quarter app, which is Q-U-A-R-T-R, they have a button where you can skip prepare remarks, go straight to the Q &A. And I like to do that, especially for the companies I already own, because I don't need the whole overview of what makes this company special. I've already become familiar with that. So that's a few things to keep in mind. Right. Is there ever a time when listening to the prepared remarks is actually super important to you?

7:42Yeah, I would say so. I go through these emotions where sometimes I'm really excited about a company and other times I find myself. just not jazzed at all. And so if I'm in that second category where I'm like, I just can't find positive things to think about the company, I oftentimes will listen to their prepared remarks because those tend to be pretty optimistic, pretty bullish on where the company is and where the company is going. So that can be super helpful. And then if I am completely, I don't know, Kind of like reading a book, too. I tell my family, or I've told them in the past, when they ask, what do you want for Secret Santa?

8:25I say, get me a book, but I don't want one that's super long. Like, shorter, the better. The bigger the words, the better the book. I feel that way about prepared remarks, too. If it's not too long, I'm much more likely to listen. But it can be a good way to get yourself some background knowledge about a company that you might not have and just start immersing yourself with some of, not just the jargon, but the industry speaks. So we're hopefully decoding a lot of common jargon that you'll hear with every earnings call. But some of these companies and industries, they use their own industry jargon, which is so frustrating.

9:01And I don't know how to shortcut learning those things other than just listening to, just getting out there and listening to the calls and trying to follow along as best you can. Yeah, I mean, what's the old adage? learn by osmosis i guess you just learn by putting yourself in it makes total sense the next one is one that i really really hate because it's so stupid and that is color yeah

9:35it's all they're saying analysts will ask management hey can you give us a little bit more color on what happened in quarter two and what they were just really saying is can you give us more context can you speak eloquently just give us more details that's that's all it really is i don't know who started doing black and white drawings and decided they need a color to add along to our earnings calls but for whatever reason that's a word and that's what it means yeah i mean it's i don't know i i mean i guess it makes sense right when when you know what it means but it's just i don't know that that's the one that that frustrates me the the next one we're going to is outlook and guidance when we hear the ceos start talking about outlook and guidance what is he talking about that's pretty common the most common thing is when you hear for outlook they're generally talking about the next quarter so if the core if the call is about q2 the outlook is talking about q3 and most companies provide guidance and there's good intentions for the guidance and it's something all analysts and investors want to learn more about because we want to learn what to expect.

11:02The problem with outlook and guidance is the future is so uncertain. And so as much as we crave the certainty of knowing where projections are, where the company will be in the future, that's all it really is at the end of the day. It's a projection, it's a guess, it's an estimate. And estimates and guesses and projections are quite often wrong. And if you don't believe me, and if you think we've become so technologically advanced where that's not a thing anymore, Um, just start using your, your weather app and let me know how those projections are going for you. So that's the outlook. That's the guidance.

11:37Um, it's interesting to watch. I don't know how much you've observed just what different stocks you own when companies come out and say, Hey, we're, we're revamping our guidance or we're, we're raising our guidance and the stock can, can go up quite a bit from that. that's an interesting that really shows you like how much wall street cares about expectations more so than the actual numbers when they get super juiced on what happens with guidance i mean and i have noticed that i think for me andrew i i care more about intent and then i do their guidance i want to know where they want to go in q q3 q4 whatever next year with the understanding like you said life happens to individuals life happens to companies um 2020 a great example of life happening to a company so did they meet their intentions in 2020?

12:48Probably not. Very few companies did. But I tend to care more about their future outlook of what they want to do versus their guidance. And I guess that's kind of, I don't know if you would call that naive, I guess, because the guidance is more of how they plan to get there but honestly i really don't care how they plan to get there most of the time most of the time i just i care about the big picture and and not so much on the gritty details does that make sense or am i looking at that completely wrong i i don't think that's naive at all i don't think you're looking at it wrong at all it's it's a very practical and like intuitive understanding that there are things that a company can control and there are things they can't control and so you want you want to know what are they gonna control like what are they gonna focus on and and the results have to take care of themselves um it's it's it's funny how the numbers can seduce us into thinking everything's so orderly organized like everything just happens at a at a five percent gain every year and no stop you know we have companies like coca-cola who seem to be able to do that but for the vast majority of businesses that's just not reality um so i i actually get kind of peeved when when analysts stick on guidance too long it's like okay like quit splitting hairs like guidance is an opinion let's get to the things that matter and so yeah i'm i'm uh it's good to hear that like you have that kind of a viewpoint just intuitively because as investors that's what we should care about too right and to me it just makes sense because i i i have the same 24 hours in a day everybody else does and you know we're trying to look at you know more companies than we can handle and and i mean i we just don't have the time and the day to to pay attention to all that stuff and it just to me it just stresses me out so it's like no no we're gonna we're gonna skip that but uh so next we're gonna move on to to a term that i i would hope everyone understands but just in case we're gonna cover it And that is capital allocation priorities.

15:25And, you know, if you've read anything from Warren Buffett, you understand how just insanely important capital allocation is. And so walk us through, Andrew, what that means. Yeah, this is the one that makes my ears perk up when an analyst finally asks it in the earnings call. because I want to just press that button that shortcuts us straight to the capital allocation discussion. But if Warren Buffett says a CEO's role, job number one is capital allocation, it's this idea of where the company is putting the money that they are making, the cash flows they are receiving, the profits they are doing.

16:08What are they doing with the profits? Yeah, it's great that you have profits and you had a great year, but let's figure out how are they going to plan to use those profits and as investors we can decide whether we like that direction or not so a couple of really big tangible examples of that today which okay we won't have to talk about like where where people's feelings are on them because we could debate that for a long time but you can you can look at um microsoft amazon and google alphabet and meta too they're all spending like crazy on new data centers because they are investing in the future of ai and we're talking about tens of billions of dollars and you are seeing it in their cash flow statement so in their earnings calls they're going to be very clear about this is what we're doing with that capital allocation if if those questions aren't asked We don't always know what the exact direction is or what the focus is.

17:11So to me, it's something that we really want to hear is what are they going to do with the capital? Are they going to step up the buybacks? Are they going to go acquire new businesses? Are they going to invest in data centers like Meta and Microsoft are doing? These are all things that we want to hear and we want to know and have certainty on. not certainty is not the right word we want clarity on it so we can decide whether we're on that train or not and in my opinion this is probably the most important part of any earnings call is the answers around this we have the inside scoop on something that's absolutely taken over the internet by storm live shopping on whatnot is exploding i've seen the shows firsthand the amount of product that sells through is just amazing to see really a breakneck pace Whatnot has climbed to the top of the app store and sellers are earning.

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20:01Join the hundreds of thousands who've already streamlined their finances with Found. I finally had a light bulb moment about a stock we've all heard about, growing 18 % a year out of 15 PE. I share this insight in a special deep dive report to subscribers of my research service, Value Spotlight. The report is called A Generational Moment, reigniting human connections through a tangible network of intangible assets. For a limited time, you can access this research at a discount at einvestingforbeginners.com slash reignite. That's einvestingforbeginners.com slash reignite. I agree completely. Capital allocation is, you know, when I guess the way I look at it is I look at where the company wants to go.

20:46And instead of guidance, I pay attention to capital allocation as as okay so this is where we want to go and this money is how we're going to get there and it's real easy to see you know uh i can't i blank on a company sunrun maybe um our favorite one to pick on it it's really easy to see when they're talking about this is where we want to take the company but then their capital allocation doesn't match up with where they want to take the company that's an instant red flag and you know that that just instantly forces you to start diving deeper yes yeah i've definitely i won't say a name but there is at least one stock where everybody on x has talked about like this is one of the best compounders of all time but i'm just like okay that's great but you've kind of squeezed that fruit what what are they going to do next and can they replicate that strategy somewhere else?

21:49And it's it's it's really important. And to me, it can be a make or break like either either. If you don't see that future, why would you invest in it? Yeah. Yeah. Well, why would you invest in a company that doesn't have a future like that? Just it's counterintuitive, right? So moving on, the next one is one that just hurts my head and that are and i think it probably hurts everyone's head and i don't know if you're an accountant you know feel free to add in the comments below um what made you love being an accountant because i just it hurts my brain to think about it but anyway account accounting terms you know we got tam opex capex non-gap uh the most annoying one ebita um and just the i don't know there's probably a list of a hundred of them um well let's just break down the most common which are i guess the first one actually the first one i want to cover is ebita um the breakdown what ebita is yeah or ebita If you want to be the fancy person.

23:09Is that like tomato or tomato? Yeah, tomato, tomato, potato, potato. I've never in my life traveling the world heard someone say potato. No. What about potatoes? You heard that one. Is that how you say it? Taters. Taters drives me nuts. I like potato. Enunciate. Yeah. But yeah, my dad. or my dad he says taters he says uh he says worse like he'll say washington it's like come on bro

23:50anyway keep it up yes all right earnings before interest and taxes depreciation and amortization earnings has a lot of things that can dilute you know getting from what what we're trying to do is understand what the operations of a business is resulting in there are lots of pieces on the chessboard that make a business run there are a lot of things that contribute to a company's profits and their bottom line and i don't want to dismiss any of those pieces they are all important And if they're not all working, then it's going to be a problem for the company. But as investors, if we're looking at a 10-year period, we care a lot more about that core part of a business than we do all the other pieces.

24:37So the intent behind EBITDA is to strip all of those other pieces out and just get to the core of a business. The problem with EBITDA is because they are stripping out some parts, which can be very important. It can be used for manipulation, for sometimes straight up fraud, but maybe in more cases, just like misrepresenting what the true realities of a business are. A management could use EBITDA or adjusted EBITDA to just make things look a lot rosier than they really are. And as investors, obviously, that can be very frustrating. So we have to be careful when we hear EBITDA because it is a tool that has been used very poorly in the past by managements to deceive investors.

25:35So it's just one metric. And just because their EBITDA looks great doesn't mean the business as a whole is doing great. Right. And then the next one we'll talk about is Nongap, which has direct correlation with EBITDA. and to your point you know people using it to uh manipulate if you will um there are there have been numerous companies that have created their own own metric if you will of some sort and you're looking at it and you're like what the heck does that even mean And so that's where that stuff lives and these invented metrics. I can't remember the one, I know you know the one I'm talking about with the company I just mentioned.

26:27I had to look it up. So remember WeWork? Yeah, WeWork. They called it community adjusted EBITDA. Okay, there's, go ahead. Which is saying that like we're profitable if you just ignore the fact that we were paying a ton of money for marketing like other than the fact that we had to pay millions and millions of dollars to get people to use our offices besides that we're profitable it's like come on well and sunrun had one too what was sunrun's sunrun was um they call it cash generation but they would take cash from debt that they issued and call that cash generation i don't know in the world i live in I'm like, I don't go spend on my credit card and call it cash generation.

27:17So I don't know where they get. It's just interesting. I understand they have a different business model, but at the same time, come on. Right. Well, yeah, exactly. And again, if you find something about Sunrun you love, we're not saying don't invest in it or invest in it. We're simply just saying these are things that we saw when we were looking at it that made us go no. And that is exactly where non-GAAP and EBITDA, or why non-GAAP and EBITDA are important, is because that's where you find these things like cash generation from debt that make you go, eh, probably not. But anyway, explain what non-GAAP is real quick, Andrew.

28:07Yeah, GAAP is another way to say G-A-A-P, which is four big words that tell you that these are the standards for accounting. And every company needs to follow these standards. And the auditors will audit the company's financials and make sure that all those metrics are in line. So things like revenue, everybody needs to report top line revenue. bottom line profits everybody needs to report it like that is universal and it is gap all of these other things that can be more company specific is non-gap so there are good non-gap metrics if i look at i just mentioned lyft earlier in the episode so if i'm looking at like uber lyft airbnb one of these platform companies knowing what their mouths are or their monthly active users is very important because that tells you the size of their network and if it's growing or if it's shrinking that is not non-gap because you don't have mouse for a plastics company so not all non-gap is bad but we need to take it with a grain of salt because the the auditors are not looking at that like they look at every other metric which is how we lead into people getting scammed companies yeah falsifying everything and of course we're not you know not all non-gap and stuff like that is a scam like andrew said um lyft is a you know fairly decent company um so i mean but that is something you really need to pay attention to because there have been numerous scams that cost people their life savings.

30:02Yeah. Actually, if you want to start finding them, just look at the companies that are really, really small. There is a bunch of them. If you're really brave, go into the pink sheets and just start buying stuff over the counter. That is a great way to get involved in a scam. Right. so uh next one up is tam what does tam mean yeah this one's short for total addressable market basically what is what is the room that a company is going to grow into what is their total addressable market more common with growth companies than with more mature companies but i think there are some good mature companies that talk about tam as well and that's important because if a company's at a billion dollars and their TAM is only two billion, but you run a projection on your DCF and you're saying they're going to 4X, how are you going to 4X when your ceiling's only two billion?

31:04So we got to know what the TAM is because that gives us context and a measuring stick on how optimistic we're being about their future and whether we can imagine in that future or not and if it's realistic or not. Definitely. And we had a comment a couple of months ago about Coke and the person mentioned that it blows their mind how profitable and growth the Coke has been over the past decade, decade and a half since we've kind of switched from the cola craze to a more health minded society. but yet Coke has still seen fairly decent growth, still putting out great numbers. And a lot of that is because of the markets they grow into.

31:59You know, energy drinks was a big one for them. And now like flavored waters, carbonated waters, things like that, getting more into the healthy side of the market. And that's really what you're looking for in that is how Coke, such a massive company, is still going to grow even as the markets shift. Yeah, fantastic example. Next, we're going to swing over to OPEX. Hmm. Now we're getting into the fun stuff. Companies' expenses. So OPEX, short for operating expenses. It's really diving into that profit and loss part of a company. And it's important because if costs get out of hand, then that could have effects down the line.

32:53I like to always buy stocks on the assumption that margins are going to stay the same and whatever revenue growth they have is going to be profits growth. But real life will show us that margins are not always the same. And the companies that navigate those pressures are the ones that are going to do the best. There was a video from Wall Street Journal the other day talking about Texas Roadhouse. How does Texas Roadhouse manage to keep their margins looking good despite beef prices just going through the roof? So as investors, you can look at how companies are reacting to different pressures in their industry and how is that affecting their OPEX, which affects their margins.

33:42And the idea is the good ones with the good moats and the best competitive advantages will navigate those the best. that's the hope and that is that is a good way to do it but then you can verify and check if companies are executing by listening to where their op x is where their op x is going to be microsoft is cool is a cool earnings call to listen to because they've always outlined their op x and they'll they'll outline it for the next quarter too so if you want their guidance they don't just give it to you you have to do a little bit of math to get to it but it's kind of a cool example of a company having a good grip on their operating expenses because it's very very important I'm glad you brought up Texas Roadhouse because my wife and I actually that's where we ate for my birthday and that was phenomenal I love their prime rib man like mmm their prime rib is always solid and you know as we talk about you know i absolutely die for their butter like their cinnamon honey butter or whatever it is oh it's so freaking good i could literally just eat that just rolls in their butter as a meal it's so freaking good anyway um a great example uh my wife and i uh one of like we don't do fast food a lot but if we do one of our favorite is charlie's the the cheesesteak uh place and for us to go there it's going to cost us anywhere from depending on what she has put on her french fries anywhere from 60 to 70 dollars for fast food yeah for charlie what yeah it's crazy expensive dude crazy insane and um we went you know to texas roadhouse and spent like 55 yeah um she got ribs i got obviously prime rib um totally stuffed you know had to take some home because the you know the servings are too big and it's it's literally massively cheaper than than or it's either the same price are massively cheaper than a lot of the fast food places around here even and we were talking about it and as you mentioned beef prices are skyrocketing um you know got a couple of pandemics overseas um other things going on here in the u.s and so how how does texas roadhouse manage to keep their prices so low compared to everyone else's.

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