Earnings Call Preparation: The Office Depot FD Lesson

A company should prepare for an earnings call by publishing its results and the call details first, holding the call open to anyone by phone or webcast, and keeping later conversations with analysts to information already made public. The SEC's 2010 case against Office Depot shows the cost of skipping that discipline: the company paid a $1 million penalty after one-on-one analyst calls signaled an earnings miss.

What does Regulation FD require for an earnings call?

Regulation FD requires that material information reach the public broadly, either through a Form 8-K or through another method reasonably designed for broad, non-exclusionary distribution. An earnings call can meet that test when it is open to everyone and the company gives advance notice of how to join.

A WilmerHale guide written when the rule was adopted says disclosure on a call open to the public through a webcast and dial-in number is generally sufficient, provided the public gets adequate notice of the call and how to access it. A Cooley handbook describes the usual notice as a press release or website posting giving the date, time, subject matter and access details.

That is why most companies issue the earnings release first and then hold the call. The release carries the numbers to the whole market, and the call lets analysts ask questions about information that is already public. The mechanics of the release itself are covered in the guide to earnings release Form 8-K filings, and the wider rule is explained in the Regulation FD guide for investor relations.

What did Office Depot do wrong in 2007?

Office Depot's chief executive and then chief financial officer decided to steer analysts toward lower estimates through private calls instead of a public announcement, according to the SEC's allegations. The SEC announced the resulting enforcement actions on October 21, 2010, covering conduct from June 2007, and the company settled without admitting or denying the findings.

According to law firm summaries of the SEC's complaint, the CEO told Office Depot's board on May 31, 2007 that the company would probably miss the analyst consensus of $0.48 per share. The executives were uncomfortable issuing a press release because internal estimates were not final. They had the investor relations director call 18 analysts individually and refer them to recent earnings announcements from two comparable companies.

The calls worked, which was the problem. By the end of the second day, 15 of the 18 analysts had lowered their estimates, and the consensus fell from $0.48 to $0.45. Six days after the calls began, Office Depot filed a Form 8-K saying its earnings would be hurt by soft economic conditions.

Why did hints count as earnings guidance?

Hints counted as guidance because the SEC treats earnings information as likely to be material, even when it is conveyed indirectly. The SEC did not allege that Office Depot told analysts outright that it would miss. It alleged that the message was signaled through the company's references to peers' results and its own earlier cautionary comments.

The SEC's order, as quoted by Arnold & Porter, warned that an issuer official who speaks privately with an analyst about earnings estimates takes on a high degree of risk, whether the signal is express or implied. The Office Depot action was the third Regulation FD enforcement action in 13 months, according to a Mondaq summary.

The talking points the CFO helped prepare are worth noting for communications teams. They pointed analysts to peers' earnings releases and described those releases as interesting, language that sounds like ordinary industry commentary. The SEC read it as a signal because of who was speaking, to whom, and why the calls were being made at that moment.

The SEC also highlighted that Office Depot had no written Regulation FD policy and had never run formal Regulation FD training. In the settlement, the company paid the $1 million penalty, and the CEO and the former CFO each paid $50,000, without admitting or denying the findings, according to the National Law Review.

How should an IR team prepare for the call itself?

An IR team should prepare for the call by fixing the information boundary before the call starts. The steps below are this article's reading of the Regulation FD sources and the Office Depot facts, not an SEC checklist.

• Issue the earnings release and the call notice first, with the date, time and phone and webcast access details, and post the same details on the investor relations website.

• Write a prepared script and a list of likely questions, and have legal counsel mark which answers would reveal anything not in the release.

• Decide in advance how the company will answer a question about next quarter, and give the same answer to every analyst.

• Name who may speak. Regulation FD covers senior officials and other people who regularly communicate with analysts and investors, so rehearse those people, not only the CEO and CFO.

• Record the call and keep a replay available, so a company can show later what was said and to whom.

Timing matters as much as wording. In the Office Depot case, the public Form 8-K arrived six days after the private calls began, which left a window in which a group of analysts and institutional investors knew more than the rest of the market. A company that expects a miss and is not ready to publish numbers has a cleaner option: say nothing selectively, and wait until the information can go out to everyone at once.

The most useful rehearsal question is simple: could any answer in the prepared Q&A move the stock if it were said only to one analyst? If so, it belongs in the release or on the call, not in a follow-up.

What should happen after the call ends?

After the call, executives and IR staff should discuss only what the release and the call already made public. A Winston & Strawn guide for public companies advises that comments on analyst models or forecasts should be given only on a public call after an earnings release, and that companies should not review or comment on draft analyst reports.

A hypothetical shows how this works in practice. An analyst phones the IR director the next morning and says her model assumes margins of 11% when the call suggested 9% to 10%. The IR director can point her to the numbers and the range already given on the call. The director cannot say the model looks too high, because that confirms where the company expects to land in a way no one else heard.

The same rule applies to casual contact. Companies that handle shareholder questions in smaller teams can build the habit with the steps in the overview of small-cap investor relations programs, and the Regulation FD and social media case shows what happens when a metric is shared outside the usual channels.

Frequently asked questions

Does an earnings call satisfy Regulation FD?

An earnings call generally satisfies Regulation FD when it is open to the public by phone or webcast and the company gave adequate advance notice of the call and how to join. Law firm guidance on the rule describes that as a method reasonably designed for broad, non-exclusionary distribution.

Can executives talk to analysts one-on-one after earnings?

Executives can talk to analysts one-on-one after earnings, but they should stay within information already made public. The Office Depot case shows the risk when private calls are used to guide estimates, even by hints.

What happened to Office Depot after the SEC case?

Office Depot settled without admitting or denying the findings. It paid a $1 million civil penalty and agreed to stop future violations, while its chief executive and former chief financial officer each paid $50,000.

Do small public companies need an earnings call policy?

A small public company should have a written Regulation FD policy and basic training, because the SEC pointed to the lack of both in the Office Depot case. The investor relations services page outlines the support available to public companies preparing for earnings season.