Part 2 Translating the Corporate "Suit": Your Guide to Q1 Earnings

0:00So last week we took some time to talk about earnings call jargon and what the terms were and what they mean. We covered things like caller, outlook, guidance, and some of the more common accounting terms. Today we're going to continue that conversation. We're going to get a little deeper into the weeds when it comes to the earnings call jargon, a little more of the advanced topics. So strap your belts on and let's go. This show is sponsored by Liquid Ivy. With the days getting longer and warmer, I'm spending way more time outside. But lately I was hitting a massive afternoon slump. I quickly realized that plain water just wasn't cutting it.

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3:19to focus on what works, compounding, discipline, and the conviction to buy wonderful businesses and stick with them. Your path to financial freedom. Start now. Welcome back to the Investing for Beginners podcast, everybody. My name is Stephen Morris. He is Andrew Saylor. And one, thank you for joining us today. We're so glad you're here. And two, Andrew and I were talking about doing the last episode. I was looking at the list and And it was like, oh, we'll blow right through this. We'll have time left over. What are we going to talk about at the end? And honestly, Andrew, we didn't even get halfway through the list.

3:56Yeah. So typical. So typical. So, yeah. So let's just go ahead and dive right in, Andrew. And the first term that pops up on our list is so, I don't know. It's funny because it's a nautical term. it's an aerospace term but um the headwinds and tailwinds well and when it comes to a ceo doing an earnings an earnings call why what is he talking about i i never i've never taken flight school so when i heard these terms i have actually i have flown the plane before once believe it or not i was a kid my uncle had a little small one but uh yeah i was terrified i was like i just don't want to die yeah i don't even i don't like just holding the controls counts as flying but yeah like you said it's a it's a flying uh aerospace kind of metaphor it's basically um talking about if a company is going to have struggles or if they're going to have an easier time.

5:12And a lot of times when I hear it in an earnings call, it's in the context of the industry. Sure, they could be talking about the company, but usually when you hear it, they're talking about bigger, broader industry forces. Great example of that lately has been AI. anything with AI anything related to AI if industry has not been perceived as being disrupted by AI then people say they have there are tailwinds because of AI so semiconductors is a great example semiconductors making up the backbone of electronics and they've had major tailwinds from AI because now all these companies are thirsty for data center chips.

6:00And we've seen, which amazingly, I saw this this morning, the memory stocks, we did an episode earlier in the year about how last year memory stocks were among the best performing in the S &P 500, tripling, quadrupling. They are still on the tear at least in the month of March. So memory being a great example of, man, if you're in that industry and AI came, AI was a huge tailwind for the industry. On the flip side, some common headwinds you'll hear about. I feel like we talk about restaurant stocks almost every podcast at this point, but they're easy to understand. So cost inflations, food inflation, labor inflation, those are all headwinds that companies will talk about.

6:51They will hit and affect all the restaurants and all the competitors. And so analysts ask questions around that because they want the color or flavor. I heard that word today. Add a little bit of flavor to just to understand how management's dealing with headwinds. So we can try to get a good sense of whether we think that strategy will work out or not. so um that's the meaning obviously is pretty simple but that's kind of the communication that's trying to happen back and forth when you hear headwinds and tailwinds is there ever or have you ever noticed a time when they were talking about headwinds or tailwinds where it wasn't just BS.

7:43Yeah. I, I, this is one of those. I, I do like, like it's a good, but I'm not a pilot. So yeah, maybe I'm a little unqualified. No, I was just wondering, cause I mean, on the reverse side of, of the company, when you're an employee, a lot of times, um, um, the the headwinds and the tailwinds if you will i don't they don't call it that but um are a little more rosy i guess you could say and so i was wondering if you've ever noticed the company doing that on the on the flip side on the investor side when they talk about it yeah um it is there's one that comes to mind a stock we just sold or he's talking about tailwinds from data centers.

8:41And I'm like, come on. It is such a small percent of the business. Don't be trying to jump on that gravy train. It's not lying, but it's a little bit misleading. So, yeah. So the next one, I've never actually heard of, Andrew, or heard used, and that's green shoots. It sounds like my yard. What the heck are green shoots? Yeah. Um, green shoots, uh, basically when companies have new growth projects and they're starting to see results from those growth projects, that's what they refer to as green shoots. I guess with the, the idea that when you plant seed, uh, some of those growth projects might not pay off.

9:32So, uh, green shoots being something that communicates, okay, maybe we took a risk or we went to expand somewhere and it was a little more cavalier is not the right word but maybe a little trailblazing and so the the green shoots are a good signal and it's a decent descriptor i guess because when you have new growth projects especially in technology or even I think it's used in the oil and gas industry. If you're on the exploration side, there's a little bit of speculation involved with that. So maybe it's a decent way to communicate because you might have progress in a project, depending on what business you're in.

10:19And there's not necessarily the numbers tied to it, but you can see the evidence that, okay, this is going to be a profitable thing for us. So maybe that's the idea behind describing it that way, or I could just be completely way over interpreting reading into it, which is entirely possible as well. But that's just another one I've heard and have noticed that that's the context around. Yeah, I don't think maybe maybe they've said it and I've just missed it. But in the earnings calls I've listened to, I don't think I've ever noticed them saying green shoots or just went completely over my head and just whatever.

11:03But yeah, that's that's real interesting. And I think I don't know. I don't want to get on my rant about how why why we can't just call things what they are. And we got to create fancy terms for them. But everybody heard that last week. But no, it makes sense. And I would I understand why this is something you would definitely want to listen for. And I guess I guess in the long term. That kind of helps us so we can kind of tune out the entire thing and just listen for their buzzwords. And as soon as we hear their buzzwords, it's like, oh, they're about to talk about capital allocation. And it's like, oh, I need to listen to this.

11:49otherwise they're just talking about nonsense we don't care about right so the next one is funny to me because I would assume all companies have it and that is appetite for M &A yeah so actually a lot of companies don't M &A is one of those things that But as a beginner, when I learned that M &A is not looked down on, but there's a lot of healthy skepticism around M &A. Because it's a great way to take investor capital and light it on fire. I remember a few years ago hearing about a study by the Harvard Business Review. And they looked at mergers and acquisitions. And what was the results? I mean, a merger and acquisition, obviously you're getting bigger.

12:48So just because there's the merge doesn't mean that you've had a successful decision with the money. So they looked at was value created and it was somewhere between, according to Gemini, somewhere between 70 to 90 % of M &A was actually considered a failure from a value creation standpoint. so that's um that's something that if i hear a company as if it's not in their dna and they have too much mna it it's something that actually turns me away because of that um but there's been a lot of great mna that has happened to and you hear those stories all the time like Google acquiring YouTube meta and it was Facebook at the time, Zuckerberg acquiring Instagram.

13:46Both of those M &A acquisitions were considered really expensive and value destructive at the time. And looking with hindsight, those were two of the arguably best decisions in business that we've seen in the last 20 years. So the appetite for M &A is really going to be, because of all the factors I just mentioned, that appetite is really going to be dependent on the company and their track record and the opportunities moving forward. Another thing about M &A, and this is true for companies who are actively involved in M &A. if you look at Watsco as a company I used to own and have talked about on the show, they would talk about their appetite for M &A would depend on how expensive or cheap the stocks in the HVAC industry were trading at the time.

14:40So you can look at a multiple of EBITDA or something and say, okay, if Watsco's management is saying this multiple is really high compared to what we want to pay, their appetite's lower and that tells us as investors okay maybe we don't expect as much growth as in the past because things are really heated they're really heated prices are expensive that could mean that the industry's got great tailwinds but it also could mean that maybe some people are getting carried away and so a company is gonna pull back and be a little more conservative Those are the types of things that I would like to hear as an investor who's pretty conservative.

15:23And I don't like the idea of companies overpaying for acquisitions. So that's what I listen for. Maybe other more growth minded, higher risk investors like just give me all the appetite for M &A. And that's fair, too, because there have been companies who have been really successful doing that as well. So that's, I guess, some thoughts around appetite for M &A. And it's a common question, more common for the companies that are actively involved in doing that. 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.

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18:03Go to quince.com slash beginners for free shipping and 365 day returns. Quince.com slash beginners. 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. Yeah, and you brought up Facebook's acquisition of Instagram.

18:51Zuckerberg got put to the test on that one. And there were a lot of investors that weren't happy, if I remember right, because at the time, Instagram was a non-profitable business. And no one could understand why he was going to buy it. So, Andrew, I don't know if you have the answer to this, but is there anything that stood out to you and what Zuckerberg did, what Facebook did once they acquired Instagram that eventually made Instagram profitable? It's a great question. And you're kind of doing a great segue into our next thing that we're about to cover, Ebony synergies. but to your point um i haven't followed the whole history of it super in depth but i did hear a podcast episode by the acquired podcast talking about the history of facebook and meta and uh instagram was one of those things if i remember correctly they were not monetizing it at all which is insane there were no ads so zuckerberg took what they learned about facebook and specifically the lessons around monetizing Facebook mobile.

20:07So today technology is so ubiquitous, I guess, that we look at something on a website, on our desktop, on a laptop. We look at that as almost the same as on our phone and on an app. But when mobile first came around, it was really hard to get into mobile. and people were like, why would you even go in? Why would you even invest into mobile? There's no way to make money. You know, you think about a desktop and you have all this space for advertising and then you have a small little mobile screen. Zuckerberg really pioneered the idea of making money off mobile and by investing in their efforts to make.

20:48So he did two things that people just scratched their heads at and they're like, what are you doing? They invested really heavily on Instagram mobile and tried to make that a revenue generating platform. And then they use those learnings to, to make money on Instagram. I don't know. Like, have you, have you used Instagram? Like, uh, do you, have you used it? Have you used it for a long time? Because I remember using it in the early days back before the logo turned ugly and it was, it was a completely different product. um honest i i didn't even know instagram's logo changed if that answers your question yes it does yes it does um i am not a uh social media type of guy um i guess like when it comes to like videos and stuff but obviously youtube um but i don't i guess i don't consider youtube a social media platform um but i would say that youtube's as close as i get and of course i have linkedin but i can't remember the last time i actually like looked at it so gotcha um yeah social social media is not my jam um but yeah that was kind of where i was going with that it is our next uh uh trigger or buzzword is uh m a synergies uh so we just talked about you know the their appetite for mergers and acquisitions what what is m a synergies when you hear him talking about that yeah so that's one i mean that's an example of just completely knocking out of the park and just

22:41creating honey out of a dirt patch. But most of the time when you hear M &A synergies, it's similar, but it's more on the cost side. So the idea is we're going to leverage the company's size, their scale, and use economies of scale to provide synergies. And you do see that often with companies. If a big company buys a small company, they don't need two legal teams. They don't need two admin teams. They can consolidate. So there is savings there. But going back to the Harvard Business Review study, a lot of times the actual synergies are the actual amount that is saved is less than what investors are all hoping.

23:33rooting for. So the synergies is one of those places, kind of like the tailwinds that you were mentioning earlier, where it can be hyped up and communicated as better than reality. So we have to be careful. And that's one of the things if I'm listening for parts of an earnings call that I'm going to pay attention to, this is one where I have a healthy amount of skepticism. and if a management is overly optimistic about the amount of synergies that they're going to get, I get a little worried. Maybe worry is not the right word, but it's something that's like, all right, let's stay a little closer to reality.

24:19But yeah. So you're saying you don't want to hear Eli Lilly talking about buying a homebuilder's company no no no um but yeah i mean like even if they were to buy another pharma company the synergies you would think are just massive and it's not always the case so that was one of the things that surprised me that um because because companies would use that as an excuse to overpay for acquisitions. And you have to be careful. Yes. You have to be careful because a CEO can look really good because he does a lot of acquisitions. And so he says, look, we have lots of revenue. We have lots of profit growth, like basically building his empire of businesses.

25:13But if they are paying, overpaying for that, that's all money that should have gone to investors that did not. so we have to it's not really fun but we kind of have to police and make sure because chances are if if management's destroying capital over the long run that's not gonna be good for investors so the next one i don't know i think this one's funny uh it's down the pike um well what do they mean uh when they start talking about down the pike it's just like in the near future coming ahead i don't even know where the the metaphor begins or be so i think isn't a pike a road like referring to the road down the road like a turn bike gotcha i don't know i'm guessing i guess i can google it real quick so not only is it like it has to be something that's not flying or boating but now we're in a car but then it also needs to be from like last century and not this century i guess i need to be a little more specific in my google Well, I got the medieval weapon and a fish.

26:35Not the not the pike I was looking for. But I believe, I don't know. I've always heard down the pike meaning. Referencing like down the road. So, you know, where's Jimmy? He's down the pike. But I think that's the thing. I don't know. I've always assumed that now I'm severely questioning. But yeah, so when they say that in the earnings call, that's literally what they're talking about is what's coming in the near future. Yeah. Just as this might be a ridiculous question, is there a limit to how near in the future that can be? Because I mean, in the grand scale of 100 years, five years is near in the future but is is there a scale we should uh put to that like in the next year this is going to happen or next two years this is going to happen yeah it's a good question uh i don't have a solid answer for it with all of this jargon especially the ones that we're covering today a lot of it is uh kind of like what they say when you're reading books and you don't know what something what a word means the idea is you go a little bit before and a little bit after what's written in the word and hopefully you can deduce what that particular word is referring to that's kind of what I've done for these earnings calls and just have listened to a bunch of them and noticed oh okay when they talk about this they talk about that so down the pike that's that's just a weird one I don't know it doesn't communicate anything for me and I don't know why they don't just say like can you be specific like six months 18 months and that would make more sense in the future so i mean no i totally get it uh and that's maybe maybe that's the the next book we should write andrew like because i was talking about in the last episode how the army has like a 300 page book of all its acronyms.

28:52Maybe, maybe the next book we should write are just wall streets, jargon wall streets, acronyms. So I actually have more acronyms for you in our next episode that we've planned. And so I've saved them, especially for you. Lovely. I look forward to it. So the next one is, an extremely painful phrase and that is getting ahead of our skis have you ever actually have you ever gotten ahead of your skis Andrew no but I was literally talking to a buddy yesterday whose wife broke her wrist I didn't get details on whether she got ahead of her skis or not but that's pretty intense she broke her wrist skiing yeah like It's like last week on Friday.

29:46I've never broken anything. I have gotten ahead of my skis before. And it sucks. There's nothing worse than doing a scorpion in snow when you're going 30 miles an hour down the face of a mountain. What do you mean doing a scorpion? You don't know what a scorpion is? No. A scorpion is when you fall face first and your feet come behind you and almost touch the ground in front of your head it's called it's called a scorpion yeah ouch yeah it's really painful you see a lot of skateboarders doing it or stuff like that like yeah it hurts but anyway uh so i mean obviously we know what getting ahead of our skis means and the actual skiing and stuff like that it's when you dig the front of your skis into the snow but what what do they they mean in a corporate sense of getting ahead of their skis uh really just kind of being too aggressive going back to our conversation about appetite for mna that could be an example of getting ahead of your skis just not keeping your costs in control maybe maybe management is investing in um certain types of marketing and getting too ahead of your skis would be over allocating to that budget or maybe a really common one it would be just hiring too many people and it's like okay we have all this great revenue growth but if you onboard thousands of people and your infrastructure is not ready for it you could get ahead of your skis in that way so i don't know if it go if the metaphor goes as deep as like when you're when you were trying to get ahead of your skis were you trying to go faster and that's why you fell or is it 100 % like yeah okay because like you lean into it because you snowboards this similar to snowboarding like you lean your weight towards the front to make you go faster and you just you get your weight so far forward that it pushes the nose of your skis down causing one or both of your skis to catch and then that flips you face first gotcha yeah yeah so like i'm a little more on the safer side that probably doesn't surprise you but i'm not leaning forward to try to go faster like like the snowboard goes fast enough for me well i guess i guess i'm a risk taker i like to go fast you go black you go black diamond huh i have a few times um and never again so okay that's fair i uh i i can't so so i uh the the few times i did it or one was in germany one was in switzerland when I was living overseas.

32:44And I don't know if they're the same here in the U.S., but, yeah, the elite slopes, not for this guy. No. So, in fact, I told you a while back that I, because we were talking about it, and I asked if you'd ever hit a tree. Right. i've seen a person hit a tree before yeah and it was on the elite slopes so yeah yeah no i'm good are you like crawling down like just scooting scooting down to finish the black diamond no um no i guess i guess my ego is too big um i didn't want to look like a schmuck so um but it's just i i'm not i'm just not uh what was a good word uh efficient not efficient i'm not uh as capable i guess you could say on my skis as the others i i've skied for a long time it's just i'm not that great so um i did it because my friends wanted me to and uh you know that old-fashioned peer pressure and I regretted it both times so I will stick to the intermediate or beginner slopes well I mean it's back to like it's not fun if you're freaking out the entire time right like right right like if you're stressed to the entire ride then there there's no fun in And so like, I can have plenty of fun on the intermediate slopes and where I don't have to like worry about it.

34:38Well, if I go too far to the left, I'm going to die. So yeah. Anyway, sorry. Why were you going to say? Just like there's some parallels there where you often see businesses in the stock market. the thing that can take them down um is this idea of it's kind of ego ego based but they want to keep up with the joneses they want to keep up with what the other people are doing in their industry and so when we think about the terms or the the things that make my ears perk up in an earnings call this is one that actually is um music to my ears and one of the jargon that i love to hear is when management says we're trying to not get ahead of our skis because it tells me that they can all fall to that temptation of just doing what everybody else is doing and having all the fun that everybody else seems to be having.

35:38But when an industry is overdoing that, that can have bad repercussions for the long term for companies. And so if a company is just being more prudent and management's being more prudent and understanding, yeah, we're going to lose some growth because we're not doing this, but we're looking out for the long term, then it's something I like to hear in a learning school. All of you small business owners are familiar with the same challenges we all face. You're wearing so many hats. There's always so much to do. You feel like you never have enough time to get it all done. and you discover time spent on the wrong things just keeps setting you back.

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