Reviewing the Proxy, Transcripts,
Website, etc.
Alexander Motola, CFA
Alexander Motola, 2013
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Quality of Earnings, Ch. 3
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“Annual Report to Shareholders”
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The Coleco story

The beauty contest – ““It is not a case of choosing those [faces]
that, to the best of one’s judgment, are really the prettiest, nor even
those that average opinion genuinely thinks the prettiest. We have
reached the third degree where we devote our intelligences to
anticipating what average opinion expects the average opinion to
be. And there are some, I believe, who practice the fourth, fifth and
higher degrees.” (Keynes, General Theory of Employment Interest
and Money, 1936)”
Alexander Motola, 2013
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Earnings Season
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Pre-Call
◦ Tighten model, understand consensus, note
key metrics that we or others might be
focused on
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Call
◦ Quickly check guidance, #s, stock reaction;
then update model from press release, and
read everything, then listen
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Post Call
◦ Send out updated model, commentary, and
any change to the recommendation
Alexander Motola, 2013
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Earnings Season
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Aftermath
◦ Get Q – update numbers, check language
◦ Hold call w/ Management, ask questions, etc.
◦ Follow up with Sell side if necessary
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Quarterly Earnings are REALLY
IMPORTANT because you only really get
significant information about your
investment ONLY 4 times each year…
Alexander Motola, 2013
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Press Release
Headliner is:
Alexander Motola, 2013
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Press Release
Data center revenues
 There is a lot of competition here, are
they hurting (is this CTL/Savvis specific, or
industry wide)?
 Is the churn caused by the acquisition?
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Press Release
Buy back is good
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Buying back $2B in stock? You can announce and not execute…
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Companies also buy back stock to offset dilution from options

We can and should audit this
◦ Is the share count actually going down?
◦ What is the company paying?
◦ If part of your recommendation is a big buyback, AND the sharecount is still rising,
then that’s bad… on you
Alexander Motola, 2013
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Press Release - Guidance
Alexander Motola, 2013
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Press Release – Pro Forma
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Press Release – Segment Data
Pretty good amount of info, 3 categories
within one of the four segments, plus
margin information, etc.
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Press Release – Pro Forma
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Earnings Call, Webcast, Transcript

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Usually have the A team on deck
Transcripts have a list of participants
◦ Even someone seems to have a great line of
questioning, try to get their report
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Format
◦ Safe harbor
◦ Canned remarks
◦ Q&A
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Transcript

They talk more about the buyback
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“Finally, I'm pleased with the strong progress we made on the share
repurchase program we announced in February. Through May 2013, we
repurchased 19.2 million shares, or 3% of our outstanding common stock,
for a total of $682 million. We repurchased shares aggressively over the
past few months, and we expect to opportunistically buy stock going
forward. We do expect to complete the $2 billion repurchase by February
of 2015.”

We can track their progress. We also want to learn if they plan on
announcing another buyback once they complete this one.
Alexander Motola, 2013
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Transcript – Q&A

First question “David Barden - BofA Merrill Lynch – Analyst - Nice quarter, to start off the year. A couple of questions if I could. First, Stewart, the buyback was very
aggressive. You've got about a third of the $2 billion buyback that you've budgeted over the two years behind you now. When you say opportunistic, should we imagine
that what you're really going for is a strict $1 billion of buyback this year, a strict $1 billion of buyback next year, or if the opportunity presents itself, how aggressive
would you be prepared to be within the context of the full $2 billion buyback authorization?”

Answer “Stewart Ewing - CenturyLink, Inc. – CFO - So David, I'll answer the first question, so we were aggressive. By being opportunistic, we will potentially spend
more than half of the program in 2013. It really just depends on the stock price, and the opportunity to accumulate more shares at lower prices. So I think we were
pretty aggressive. We're not going to continue in all likelihood at the same pace that we did. We still expect to get the program done within the two-year period that
we announced, but I would expect us to probably end the year at a little bit higher than $1 billion. Again, just really depending upon opportunity.”

So, we can’t assume they are going to get super aggressive
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Transcript – Q&A

Other topics raised
◦ Data center weakness (industry has been
strong)
◦ Margins on Consumer business
◦ Consumer demand (will be weak)
◦ Follow up on repurchase (would you
borrow?)
◦ Debt issuance in March
◦ Cable competition
◦ Network speeds
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Transcript – Q&A – final thoughts

Analysts (sell and buy side) always do calls
after the earnings call
◦ The tough questions come out then, but you
can get a sense from the transcript of who’s
soft balling and who’s hard balling
◦ The sell side analysts are “advertising”
◦ Mgmt. picks the order (carefully), and some
people are excluded
◦ How mgmt. handles questions says a lot about
them
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Investor Presentations

Mgmt. or IR presents; most sessions are
20-30 minutes
◦ Usually a breakout session will follow
◦ Conferences are well attended, and popular
stocks are usually standing room only

Walk through Presentation (notes)
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Proxy Statement
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Form DEF 14A
Voting procedure
Conflicts of interest, board member CV
Board and executive compensation
Audit fees, information, and who is on the
audit and comp committees
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How Does the CEO get paid?

Proxy Analysis – do bonuses depend on sales growth, ebitda growth, stock price growth, market share?

“Reflective of our compensation philosophy, the compensation of our named executive officers is
significantly affected by our financial results. As in previous years, the annual non-equity incentive
financial performance metric for our named executive officers in 2011 was operating income.
Based on the Company’s 2011 operating income of $889 million, which represents a 2.3% increase over
operating income in 2010, each of our named executive officers earned slightly above the target
payout for annual non-equity incentive awards in 2011. However, in 2011, the long-term equity
incentive element of our named executive officers’ compensation was negatively affected by the
performance of the Company’s stock price during 2011.” (ALV, 2011 Schedule 14A “Proxy” filing, pgs.
30-31)
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How Does the CEO get paid?

What does this mean? ALV goes on to explain the formula:
◦ —
Threshold: If the Operating Income is 70% or less of the previous year’s
Operating Income, the Company does not pay any annual incentive.
◦ —
Maximum: If the Operating Income is 130% or more of the previous year’s
Operating Income, the payment equals two times the target amount, the maximum
payout under the program.
◦ —
Target: Where the relevant Operating Income is between 70% and 130% of the
previous year’s Operating Income, the incentive is calculated through linear
interpolation (“along a straight line”) between said levels.

Incentives matter, so understand what your management is paid to do
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