Earnings Confidential: Marriott, Xyratex

The draft goes through a lengthy review process internally, making sure that all the numbers are accurate before they're released to the general public. In a post-Enron world, many companies don't stop the review process there; they'll also hand their draft financials over to their external auditors -- these are the firms they're required to hire to draft an opinion about the accuracy of their financial statements and controls.

This review can take a long time because auditors really take out a magnifier to look at where the financial numbers came from, and whether or not they paint an accurate picture of the company's operations. At large companies, auditors are present year-round, getting a sense of the accuracy of the numbers investors look at to make investment decisions.

In the case of my client, we were making sure that the tables and numbers found throughout the text were backed up.

After taking a look at the draft financials (and the "Management's Discussion" and "Analysis," in the case of a 10-Q), necessary changes are discussed and approved before they're finalized. (For more on why a company's net income is usually not the same as its cash income, check out "Getting Started: The Income Statement").

An earnings release often goes beyond accounting numbers. When you look at a press release or SEC filing, you're bound to see non-accounting estimates and analyses. These are just as important as the financial numbers because they're often the basis for performance predictions. When a company says that it expects to grow its overseas business by X%, that statement can be crucial for an investment decision.

For an investment manager, "assets under management" is one of the biggest measures of stature. Even though it wasn't an accounting number, it was a number that we had to verify before we could sign off on their earnings release.

The Impact of Earnings

All of this work has just one goal: to provide comfort over the numbers handed over by a company's management. However, for many investors there's a disconnect between a company's "books" and its stock price. From the perspective of an auditor though, stock price and financials are inseparable. The impact of an earnings release is the best example of that.

Ultimately for my client, a slightly worse than expected loss brought shares down 11% in the days following the release. This season, expect more of the same. Data storage company Xyratex (XRTX) fell almost 13% in one day on lowered earnings projections for this quarter. Marriott (MAR) slipped 3% for similar reasons. And earnings season hasn't even started yet.

In a matter of minutes an earnings release can send a stock on a double-digit downward spiral or a hundred-point ascent. Even though understanding the earnings release lifecycle won't give you the psychic powers to predict a 12% increase in EPS or an 8% decrease in revenue, a better understanding of the earnings process will help you anticipate the impact of earnings and help you plan your next investment move.

Get Ready

What will happen this quarter? Only time will tell.

Earnings season kicks off next week on Tuesday, Oct. 7, when Alcoa (AA) releases their numbers. Analysts are waiting with baited breath to see how companies have fared over the past few months in an economy that's been anything but kind to investors.

Good luck this earnings season.

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