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Breaking Down Q4 2022 Earnings with Nick Mazing

Key Takeaways

Nick Mazing of AlphaSense is back to cover a whirlwind of info related to Q4 2022 earnings. The crew covers what companies are saying about crypto, interest, inflation, and more hot topics in their annual reports. Plus, we asked ChatGPT to come up with our closing question of the day. What could go wrong? Listen in!


Season 4, Episode 16: Breaking Down Q4 2022 Earnings with Nick Mazing | Transcript

Nick Mazing: Well, you know, the stock prices, actually what happened last year is there was a very big dispersion. I think the technology sector in the S&P 500 was down about 30%. I think energy was up around 60%, right? Because energy stocks did very, very well last year. And almost everything else did poorly, with technology doing extremely poorly after a decade-plus bull run. 

Steve Soter: Well, I suppose the lesson is if you're an activist investor, never let a good crisis go to waste I suppose. Hello, and welcome to Off the Books where we surf the uncharted waters of accounting, finance, risk, and wherever else the waves take us. This episode is brought to you by Workiva, the one platform that brings financial reporting, ESG, audit, and risk teams together the way the business reporting gods always intended. My name is Steve Soter, accounting enthusiast, Diet Coke aficionado, and I am looking forward to debiting a great conversation, and I'm so happy to have you with us. I'm also very happy, as always, to have Catherine Tsai joining me. Catherine, do you want to introduce yourself? 

Catherine Tsai: I am not an accountant or Diet Coke aficionado, but I like asking questions of smart people. So I'm here to do some of that. Regular listeners of the podcast will be happy to hear we have a friend of the podcast back on the show, Nick Mazing. Nick, why don't you introduce yourself?

Nick: Hi, I'm Nick Mazing. I'm the director of research at AlphaSense. I'm based in our headquarters in New York City. AlphaSense helps SEC reporting teams identify benchmark language across peers, stay informed about accounting standards, changes, and much more through AI-powered search. I'm also a true podcast recidivist. This is my sixth time here, and because of Catherine's and Steve's very bad influence, I just launched our own corporate podcast thinking it would be easy, but I really should have known better. So I don't know what I'm doing here.

Catherine: It's a good podcast! 

Steve: We know what you're doing here. That's right. You're here to talk. Nick, it has been way too long since you've been on this show. I think it might be close to a year, which is certainly bad on us. Before we started recording, I was just telling y'all how excited I am. I feel like we got a year's worth of questions pent up. But it's no secret, Nick. With annual reports coming out, earnings season in full swing, it seemed like a great time to do a bit of an earnings wrap-up, as we have historically done with you in the past. 

Catherine: And we definitely want to ask you about a few things. We want to ask you about artificial intelligence, interest rates, inflation, and then if there's time at the end, we were also hoping we could do a speed round with you, so maybe we can get started and talk about AI. Tell us what you're seeing there. 

Nick: Certainly the ChatGPT from OpenAI made a big splash, and you're seeing a lot of big companies now demoing their own products. To be clear, we were already using a lot of similar natural language processing based tools such as, let's say you use Gmail. You may see the autofill that would suggest words, right? It's basically a probability-based suggestion on what is most likely to follow based on what you have just written. The voice assistants like Alexa, like Siri, they use similar technology. So this is the next step I think is going to be big. I'm very excited about it. I play with ChatGPT quite a bit. So some of the things that I did is help the kid with homework. My wife is a physician. She entered actual patient symptoms to see what happens, and it's actually pretty good, like, to give me a top five possible diagnoses. Factual accuracy still a little bit off, but I'm very excited about specifically about text summarization because, you know, being a nerd, the first five things I did was actually pasting the risk factors, and you can say, "Well, can you summarize this at the high school reading level," and it will summarize it for you. I've also done a quarterly call question and answer: Can you summarize this for me? So, yeah, you know, the CEO said this and this. So even though there are concerns about bias in the training data set of the factual accuracy—like I had it write me basically a New York Times article "Why Hillary Clinton Won in 2016." Beautifully written piece, but obviously factually extremely inaccurate. So I think text summarization is going to be something that will be a standard part of many, many software products. And if you saw the Microsoft demo, they actually did a demo on the Gap earnings release. They actually looked at the press release. So, you know, I really think when you think about, you know, what are the applications, I think the applications, like crypto, which I know we want to talk about later, the applications are incredible. And, you know, it'll be an assistant. Like you try to book a vacation. You say, find me a vacation for four people under X thousand dollars, less than five-hour direct flight from the airport in a minimal four-star hotel. It'll do it for you rather than you actually have to do the work and the search. And I think as far as SEC reporting is concerned, I think it's very interesting because when—Steve obviously knows way more about this than than I do—but when you look at the kind of the plain language rules, maybe as you're putting your 10-K together or 10-Q together in the Workiva platform, maybe you may have an assistant on the side say this is how it's likely to be summarized by a chatbot that probably the investors are going to be using, right? So I think the quality of disclosure will increase, and the assistance will help surface this obviously legalese and things like that. That will be summarized. And it already does a pretty good job because literally in the prompt, you can say, "Give this to me at the high school reading level," and just paste the risk factor, and it works fairly well. 

Catherine: Have either of you heard of companies already starting to use AI in preparing their filings? 

Nick: Not the summarizations. I'm not aware of that. I do know that companies look at prepared remarks, full transcripts, and look at how the models might treat sentiment and things like that. 

Steve: Yeah, well, I mean, you know, AlphaSense actually is a great example, right? I mean, that to me would be an example of a company that would be using a form of AI for that. And then I'll just tell you for my part, I geeked out on ChatGPT. I actually asked it for a foreign currency risk factor for a description of my business, and it did a phenomenal job actually. And what was so interesting, I mean, I can't comment of course on, you know, Workiva's product roadmap. Obviously this isn't the forum for that. But you can start to envision a world where, OK, if I knew the disclosure requirements, I gave the AI some little bit of input, and then it was able to summarize at least a starter disclosure, for example, well, now suddenly I'm not having to start writing a new disclosure from scratch. At least I have a starting point. You start to really carry that out. Again, I don't want to geek out too much because there's probably a whole other podcast episode, but it starts to get to where the writing and communicating component of accounting, which I would argue is every bit as important as the numbers, that starts to change pretty fundamentally if you start to play this out over the course of a number of years. Anyway, it is super exciting. And yeah, if you haven't got in and played with it just for episodes, like definitely do it. It's hysterical, and it's fun, and it's inspiring all the same time. 

So Nick, wanted to talk about interest rates. That's something that I've been watching pretty closely. Obviously, with rates changing, you've got all kinds of different things that can happen, impairment analysis and all sorts of things. I'm just wondering, as we've just seen significant increases in interest rates over the last year, what are you seeing? How has that impacted the companies who've reported earnings so far?

Nick: Yes. So there is a couple things going on. I mean, fundamentally, interest rates are the price of money, right? You want to use money? This is how much it costs for whatever period of time on whatever credit, terms, and things like that. And it affects everything because a lot of things are priced, let's say, off of the U.S. Treasury 10-year. And the U.S. Treasury 10-year went from 0.6 in 2020 to a little bit over 4% recently. It's a little bit under right now as we record, right, which has massive implications. So the two things that I'm going to highlight is, number one, what we're seeing in 10-Ks accelerating is measures of SOFR, which is the LIBOR replacement, right. LIBOR, when you read an 8-K with a credit agreement, it used to be, let's say, you know, it is three month LIBOR plus 200 basis points with 1% floor or something like that, right. That was the floating rate. That rate has been replaced now by SOFR, and you're seeing a lot more 10-Ks that have SOFR. That started two, three years ago. At some point of time, I think nobody will talk about LIBOR anymore. The bigger picture with rates is that the increasing rates influenced long-duration assets, and duration is a bond market concept. I explain it to myself as how far out are the cash flows, right. So a bond that is, you know, comes due in one year is not going to be as affected by interest rates as a 30-year bond. And you can apply the same to stocks. And what we saw is long-duration sectors such as biotech and technology got affected because their cash flows are much further out. So if you could take your typical biotech stocks, and there are a few hundred of them that are, you know, trading in the U.S. market, you know, let's say a phase one single asset company. Pretty typical. They won't make any money for 10 years. Well now you have to discount that at a much greater rate over 10 years. So what happened with the XBI, the biotech index, it dropped by about 65% from the 2021 peak to the bottom of last year, which is deeper than 2008. The SaaS index dropped about 55% during that time. And you're seeing a lot of SaaS companies are dialing back on growth plans and they're more focused on cash flow generation, right? And that really affected stock prices, fundraising abilities, and so on. So related to that, obviously, why did the rates go up? For many reasons. One of them is inflation. Huge topic. Obviously, the drivers are different across different geographies, and a specific company's basket is different than the CPI, right. If let's say you're a commodity heavy company, obviously the spike in or after the invasion or things like that would affect you more broadly. So what they looked at yesterday is I was looking at 10-Qs that mention inflation, and the number of 10-Qs that mention inflation at the end of last year was about triple the corresponding quarter in 2020. So you know inflation is becoming a topic in filings, as is Taiwan, by the way. We were in the Financial Times with that. When you look at 10-Q risk factors, that's been going up because geopolitical uncertainty has increased, and companies are obviously adding language around that. And again related to that U.S. dollar and FX effects, right? You're talking about FX risk factors. Obviously when the dollar is strong, even if your sales in Europe are flat, you're reporting a decline in U.S. dollars. And what was interesting, and this is actually related to earnings 8-Ks, is I did some research, which was in the CFO Journal in The Wall Street Journal. Companies are using the term "constant currency" much higher in their earnings press release now than they used to. And that, obviously, is included in the 8-Ks because they want to highlight the kind of the like for like comparability because of the strength of the U.S. dollar, which has eased now somewhat but because I think we avoided kind of a worst case scenario in Europe over the warmer winter and things like that. 

Steve: It's so interesting when you hear people talk about interest rates, Nick, how this is a brand new world for a lot of people, right? I mean, in fact, I was just, you know, this is a dumb story, but I was driving down the freeway with my wife, and there was a big billboard, and it was advertising like a 6.5% 30-year fixed mortgage rate. She's like, "Wow, can you believe how high that rate is?" And I actually used to work in the mortgage industry in college anyway. And I remember 6% was like a really good rate not that long ago. I mean, it's like just a whole new world. Nick, let's talk specifically about inflation. Hit on it just a little bit, but let's maybe now connect the dots to what else might be happening just with all the market turmoil and inflation related and everything else. 

Nick: Yes. So inflation certainly came in higher than anybody expected. As a result, what ended up happening in the markets broadly, we had a bear market, right. The S&P 500 dropped 25% at the bottom in October. But what was unusual this year is that because of the inflation, a big spike in the rates bonds also dropped. So you look at the aggregate, the Barclays Aggregate Bond Index, which is the U.S. investment grade universe, it dropped about 20% at the bottom, and it's not really supposed to work this way. Bonds are supposed to diversify. So the typical 60/40 portfolio, which would be, you know, individuals or really mimics institutional allocations as well, it dropped. It was the worst year since like 1937 or something like that, and probably even worse than that in real terms. So as a result, this created, and I think what we're seeing in the financial markets now are opportunities for activists to become more active, you know, pun intended. So if you look at, for example, there is a large software company, there's a Dow Jones index that is like five activists in that, right. I don't know what they're doing, but, you know, they're active in that and are making noise. If you look at a large media company that the activist situation actually just concluded. I think, Steve, you know better about the universal proxy access. The director that the activist was trying to place on that board was on the company ballot. And they had their separate. But now if you remember it, they used to be separate, oh vote the gold ballot for the activist slate, we're more competent, blah blah blah. And now if you go, the website got taken down, but you can actually still see the filings. They have actually side by side. Well, this is the corporate ballot is the exact same as our ballot, but make sure you cross out the person we're trying to replace, and vote for our guy. So I think really one of the big arguments that the activists get in that situation is well your stock is down 40%. Like you can't argue with that. And I think that created an opening where, you know, maybe we'll see more proxy fights this season. My guess. 

Steve: Well, it is interesting how, the way that you describe it, yeah, you see it exactly side by side. And it didn't, you know, it wasn't always that way. And so there was even just logistical challenges, right, in order for the activist investor to even get all that process kind of put together. The SEC, of course, has clarified that with the rules that passed a couple of years ago and just went into effect last December, I believe. And I hadn't really connected the dots on the stock price in that way, but you're exactly right. You know, the stock price is up, everybody's happy, right? But suddenly when it goes down—

Nick: Exactly. If the market is down 20% or 25% or whatever it was at the bottom, this means that there are stocks that are down 50%. That is a prominent company that you have heard of, right. And this creates an opportunity for exactly this sort of thing because nobody can argue. Well, you know, the stock price—what happened last year is there was a very big dispersion. I think the technology sector in the S&P 500 was down about 30%. I think energy was up around 60%, right? Because energy stocks did very, very well last year, and almost everything else did poorly with technology doing extremely poorly after a decade-plus bull run. 

Steve: Well, I suppose the lesson is if you're an activist investor, never let a good crisis go to waste, I suppose. 

Catherine: Well, Nick, we have a few more questions for you, but before we get to the lightning round, we're going to take a quick commercial break. 

Mike: Today's episode of Off the Books is brought to you by Workiva. But I'm not here to talk about Workiva. I'm here to talk about grilled cheese sandwiches. Have you ever thought about how perfect yet so simple the humble grilled cheese is? It's just bread and butter and cheese, but it is so much more. It melts. It stretches. It is gooey, which is not an adjective I use lightly, dear listener. More importantly, it pairs well with all sorts of delicious things. Tomato soup? Oh, absolutely. Onions and prosciutto? You know it. Peanut butter and Fig Newtons? I have not tried that, but I'm sure it wouldn't be that bad. The point remains. Things are better when you combine good things with other good things, which is the whole basis of the Workiva platform. Bring your SOX compliance and internal audit and SEC reporting and ESG needs and all that other financial and non-financial work into the same platform, and heavenly flavors will emerge from the ether, and angels will sing. Yes! Workiva. Get gooey with it, and learn more at 

Catherine: All right. We are back with Nick Mazing, who's already told us about AI. He's told us about interest rates and inflation. But before you go, Nick, we have a special lightning round that we want to throw out a few questions for you and see what your research has turned up. So are you ready for this? 

Nick: Let's go. 

Catherine: All right. So let's start with 10b5-1 plans to bring some structure to insider trading when they want to trade their own stock. What are you seeing there? 

Nick: So it's a good thing. I'm not aware of any big scandals around those pre-arranged trading plans. However, the consideration was that they're very open to abuse. In other words, you don't have proper cooling-off periods. You may enter into a plan for a single large trade and so on. And I think straightening that out and improving disclosures around it and things like that is actually a great thing for transparency in the capital markets. 

Steve: And I know I'm not part of the speed round, but if I could just add, I feel like that levels the playing field as well for the other employees of the companies who certainly don't have the perspective that, you know, a C-suite person would who, you know, don't have, I would say, the legal support in order to, you know, create all these kind of different versions of a plan. That's something that has occurred to me over the years, actually, as an employee with stock at certain companies. I don't have the visibility that they do, and I don't have an army of, you know, attorneys at my disposal to put all these things in place. And I actually feel like if for no other reason as a rank and file employee who might have some stock, that should be comforting that, you know, again, everybody's a little bit on the same playing field as it were. I think quite a bit different than it was prior to these rules. 

Nick: Yeah. I mean, related to that, you know, the improved disclosure around stock pledges is also very useful. Right? Right now, some companies say, well, we have a no pledging policy, and other companies allow stock pledging, which is essentially you're monetizing the stock, right, without actually selling it. And, you know, anything that helps with visibility there, I think would also be useful. 

Catherine: I like having both of you in this lightning round. So next question. We have to ask you about crypto

Nick: It's a liability now. Just ask my girl, Kim Kardashian. She can tell you. She got charged by the, you know, under the anti-touting provisions. But, you know, I mean, listen. It really is a liability. Every day, it's like a train wreck. Right. Wells notices, bankruptcies, fraud charges, etc., etc., etc. So unlike ChatGPT, where everybody on this podcast immediately saw many applications, crypto has been around for 10-plus years, and unless you're an enthusiast, you're not really using it. So I think, at some point of time, if the word on the street that the SEC wants to tighten everything and bring it under control and things like that, I think that would be the way to go forward.

Steve: It makes me wonder, actually, if all of these enforcement efforts about crypto had sort of capitalized on just the complete collapse of the value, it feels like—I mean, unless it's like a Ponzi scheme or something like that, right, when everybody's making money, then it's kind of, you know, nobody wants to be the one who has to like, turn out the lights and tell everybody to go home. But now the flip side, right? Everybody's losing money. Nobody's happy about it. OK, well, you know, now maybe the music has stopped and, you know, suddenly everybody's scrambling to find a chair. I just wonder if perhaps the SEC—because Gary Gensler specifically has been talking tough on crypto for quite a long time, but it doesn't feel like until recently, and, you know, FTX, a great example. OK, well, that was sort of the watershed moment opened the doors. And even just recently over the last couple of days—as of today when we're recording this episode—there's actually been some big news coming out of the crypto space for sure, with some enforcement actions on the SEC. 

Nick: And I think part of the regulatory issue in the U.S. is that it sounds like there had been a long-running disagreement between the CFTC and the SEC, and I think a lot of that could have been avoided if maybe they could work together and kind of determine, OK, is this sort of thing a security, staking a security? Well, Coinbase just issued a big letter, no staking is not a security. Well, SEC, "no, it's a security," right. So, I mean, I don't recommend fighting with a regulator, but these things should have been straightened out years ago, in my view.

Steve: Yeah. Yeah, I completely agree. Having been part of that at the very early days at a previous company, 100% agree. I do feel like a lot of that has been somewhat self-inflicted, you know, on the part of the SEC. I certainly don't have their purview, so there's probably more to it than that. But from my limited opinion, I think you're right. I think some of that could have been avoided for sure. 

Catherine: I hate to move on, but I'm falling down on the job on keeping this a lightning round. So let's move onto our next topic here. What about ESG reporting? What sorts of trends are you seeing there? 

Nick: Well, my highlight on ESG reporting was the SEC enforcement action against a mining company regarding what they said was, you know, dam safety, which was a tragic incident in another continent. And the SEC was actually citing the ESG report, which some people said is a novel enforcement approach. But I think certainly the profile and, you know, I'm using layman's terms, the tightness that needs to happen around ESG reporting, I think went up quite a bit after that enforcement action.

Steve: Yeah. And I would just say, Catherine, from my part—here I am like totally inserting myself into this lightning round...

Catherine: Please do.

Steve: ...that's actually meant for Nick. Here I go. But no, I mean, I think that you see these sort of things flare up, like Nick just mentioned. At a broader level, I think everybody's kind of in a bit of a wait-and-see mode. The SEC has the climate proposal supposedly slated for some kind of final rule in April. As I've said before, I'd probably take that timing with a grain of salt. Could come sooner, could come later. We're of course also awaiting a human capital proposal with more quantitative prescriptive guidance on human capital metrics. Again, that's supposed to be proposed in April. But I think everybody's kind of waiting to see what happens because that's going to, I think, have an enormous impact on, again, how all this stuff comes into filings, stays out of filings, the role of audit and assurance. Are we doing Scope 3? Are we doing the 1%? Again, I think a lot of companies are hanging out. I would still say—sorry now I'm like soapboxing in this lightning round. It still is time to prepare though, right? Even if they pass a slimmed down version of what's in the rule, I just think there is so much risk by just hanging out and waiting for a final ruling because the SEC is already asking questions. And that's before, you know, a final climate proposal's even gone out based on guidance that's over 10 years old. 

Catherine: Yes, I have so many more questions, but we'll bring Nick back on to ask more. So a last question for the lightning round. I wanted to ask about IT spending because Morgan Stanley did a survey recently that's saying maybe growth in IT spending might be slowing a little bit, but still some signs of life in software spending. What do you think, Nick?

Nick: Oh, it's absolutely a thing. So if you look at the big cloud providers, let's take AWS as an example. And they do disclose that line item. I always check it. It is growing at 20%. It used to grow 30-plus percent in recent quarters. So you're seeing the slowdown there. And you can use this as a proxy. Obviously, much larger base, etc., etc., etc. But no doubt when you read the filings you can see it. Another thing I look at is transcript trends: what is being said to investors in conference calls. And in the second half of last year, if you look for things like "longer sales cycle," it spiked in the last six months of last year. And obviously a lot of the technology companies spoke about that. If you look at things like "vendor consolidation," that also went up in the second half of last year. So basically the CFOs with sharp pencils are back in vogue. 

Steve: Yeah, I think Catherine, from my standpoint anyway, during the boom times, if you're able to convince your C-suite executives that we need to invest in this technology in order to achieve this growth, yeah, most of the time you're probably going to get approval. But the flip side, and I'd actually tie this to the beginning of our conversation about interest rates, especially if I'm a highly leveraged company, the cost of servicing my debt doubled, maybe tripled, maybe even more. Well, suddenly there's just not much available cash for additional investments. I mean, I would tell you I think companies are still making technology investments. I just think the scrutiny is a lot higher, and you really got to have technology that's maybe solving more than one problem, not just this one discrete item that maybe all things considered might not be as important as at least that person says it is who's asking for the money. 

Catherine: And making full use of the technology that you already have, too. 

Steve: Yeah. Yeah, exactly. Exactly.

Catherine: Well, we've reached the point of the show where we get to ask the closing question of the day. And, Nick, I understand you asked ChatGPT to help us come up with the closing question today. 

Steve: The question that ChatGPT generated for this podcast: if you could design a financial reporting superhero, what would be their superpower, and what would they be called? I love it. Just genius. Genius. So, Nick, how are you going to answer ChatGPT's question?

Nick: The name is easy: Edgar. After the SEC database, electronic database retrieval, something something. I'm forgetting what it stands for. Superpower? Maybe something about being accurate and on time. I don't have a strong view, but, you know, feels like that should be a superpower.

Steve: I love EDGAR. I love it. Catherine, what do you think?

Catherine: I have two possibilities. One would maybe be leaping financial deadlines in a single bound. So I would always be, like, a day early with wrapping up reports. But actually, I was kind of thinking, maybe, Steve, you and I could be superheroes and help people, like, with their little R or big R restatements, and we could be called the Blunder Twins. 

Steve: The Blunder Twins. 

Nick: That's hilarious. 

Steve: Oh, man. You're going to bring back memories of actually having to have gone through that painful work, Catherine, that I'm not sure I'm super excited about. 

Catherine: What was your answer?

Steve: The Blunder Twins. I don't know. I like your rapper name C-note. But here's my twist. So actually, in preparation for this, I asked ChatGPT to answer its own question. It actually made a really long three-paragraph answer. I was like, oh wow. But here we go. I'm just going to read the middle part. ChatGPT in answer to its own question: I would call this superhero the Fiscal Analyst or the Financial Forecaster. They would be known for their sharp analytical skills, their ability to provide sound financial advice, and their unwavering commitment to helping businesses and individuals make smart financial decisions. Their signature outfit would feature a sleek suit, complete with a pocket protector, a calculator, and a pair of glasses that gives them X-ray vision into the world of finance. Oh man. 

Catherine: Stereotype number 16. 

Steve: Yeah, Yeah, I know. Just add it to the list of stereotypes. You get a whole bucketful of those in our accounting movies episodes, that's for sure.

Nick: Well, you know the joke that actuaries are people who are too boring to be accountants, so it's not at that level. 

Steve: Familiar with the joke, Nick. It's still not funny, but I'm familiar with the joke. 

Catherine: Well, thanks, Nick, for coming back on the podcast. We hope to have you back again soon. 

Nick: Thank you for having me. 

Steve: Yeah, thanks again, Nick, and thank you, dear listener, for surfing along with us. I'm Steve Soter. That was Catherine Tsai, and this has been Off the Books presented by Workiva. Please subscribe. Leave a review. Tell your buddies if you like the show. Now, if you're watching this on YouTube, please drop us a note in the comments. Tell us what you liked or what you didn't like. Or feel free to drop us a line by email, especially if you're old school like me, at Surf's up, and we'll see you on the next wave. 

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Season 4, Episode 16 Off the Books Podcast: The 2022 Q4 Earnings Recap with Nick Mazing


30 minutes


Steve Soter, Catherine Tsai, Nick Mazing

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