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Guiding expectations: Of course we do

May 9, 2013

It’s as close as possible to unanimous: 97% of investor relations professionals say their companies attempt to manage expectations of shareholders, according to a survey of corporate members of the National Investor Relations Institute (NIRI).

No surprise, really. The results published today by NIRI just affirm the definition of IR as cultivating accurate understanding among investors of a company’s business, performance and prospects – communicating all that goes into valuing a stock.

IROs said the biggest focus (61%) is on guiding expectations for the current year, with smaller numbers of companies focusing on longer-term expectations.

What approach do companies use to manage expectations? Some 70% release financial metrics such as goals for revenue, margin or earnings; 27% offer “micro” industry-level metrics; and 22% give “macro” business-environment expectations.

Most CEOs and CFOs know instinctively that their job includes painting the clearest possible picture of the direction and prospects of the business. Exactly how to manage  expectations varies greatly from company to company – and executive to executive. You’ll find details and examples in the NIRI survey – and other sources.

As to the imperative of communicating with the market, it’s unanimous: We all do.

© 2013 Johnson Strategic Communications Inc.

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3 common mistakes in small-cap IR

December 29, 2012

Small-cap company boards should help CEOs and CFOs face the difficulties of connecting with investors and analysts, governance adviser Adam Epstein argues in a roundtable on investor relations (“Communicating with the Street: Addressing Small-Cap Challenges”) in the Nov-Dec 2012 issue of Directorship magazine.

Here, for example, are three prevalent mistakes that small caps make in IR:

  • “A failure to communicate clearly with an appreciation for the audience [emphasis mine]. … A mix of small, growth-oriented institutional investors and retail investors typically owns shares of smaller public companies, and many lack technical educations and backgrounds. Accordingly, communications with the Street will resonate with only a small portion of investors unless that technology-speak is simplified and more emphasis is given to what most small-cap investors care about—growth and financial performance.” (David Enzer, Roth Capital Partners, small-cap banker)
  • Small-cap habits that “destroy management’s credibility [emphasis mine] and make investors run for the hills and on to the next opportunity: One, a failure to communicate on a consistent, scheduled and timely basis, regardless of whether the news is good or bad. Two, a failure to translate non-GAAP metrics into GAAP metrics, e.g., no one except management knows what ‘orders’ or ‘bookings’ means in terms of revenue. And three, chronically overpromising and underdelivering.” (Timothy Keating, Keating Capital, small-cap investor)
  • “A systemic failure to treat investor relations as a strategic imperative [emphasis mine] … Electing not to put the proper investor relations policies and procedures in place to offer management the opportunity to present a cogent business plan, with proper forward guidance to targeted investors and analysts, will all but guarantee life in the ‘boundary waters’ of Wall Street for small-cap companies.” (John Heilshorn, Lippert/Heilshorn & Associates, IR consultant)

IR is about the basics, in other words. CEOs and CFOs of smaller companies, especially, tend to be so focused on daily demands of running the business that they don’t devote the time or resources needed to communicate well. Where boards can help is by identifying a lack of engagement in IR – and encouraging more. It takes commitment to identify your audience, speak their language and explain who you are. And more commitment to maintain a consistent, proactive outreach.

Although the Directorship piece focused on small caps, commitment to excellence in IR really is the issue with many companies – from micro-cap wannabes to global mega-cap giants.

© 2012 Johnson Strategic Communications Inc.

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Google gags on Q3 snafu

October 18, 2012

In the “Things Could Be Worse Department,” an investor relations nightmare struck Google Inc. today: Not only did third-quarter 2012 earnings decline and miss expectations, an unfinished draft of GOOG’s Q3 release was filed prematurely on the SEC’s EDGAR website, triggering a big sell-off before trading was halted.

“I think this is probably the worst technical screw-up I’ve seen in an earnings release in 20 years. I can’t think of anything as bad. I mean, clearly this was a premature release – it was put up on EDGAR prematurely. It even has boilerpate text in it that says, ‘PENDING LARRY QUOTE,’ “ said Bloomberg contributor Paul Kedrosky, a Kauffman Foundation fellow and blogger at Infectious Greed. ”The result, however, combined with how poor the numbers actually are, is pretty dire.”

Oh, yes, pretty dire. GOOG closed down 8% on nearly five times average volume, a haircut of about $20 billion for shareholders. No telling whether the stock price would have reacted as violently if bad earnings had been released in a more orderly way – say, after the market closed.

So Google is the lead news story on all the financial sites – with headlines like “Google results, filed by mistake, miss; shares dive” (Reuters), and “Live: the Google Earnings Disaster” (live blogging on WSJ.com). And, of course, the tribulations are even trending No. 1 on Google Finance.

The erroneous press release from EDGAR may become a collector’s item, something to post over your desk as a warning:

It will take time to sort out what all went wrong. Google blamed the early release on R.R. Donnelley, the financial printer that does a lot digital work for IR departments. No doubt there will be further statements and explanations.

For now, what is certain is that “Google – October 18, 2012″ will become a case study for investor relations officers in the future. A case of what not to do.

And each of us working on Q3 earnings for other companies should remember, “There but for the grace of God go I.”

© 2012 Johnson Strategic Communications Inc.

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Trading at the speed of light

August 10, 2012

The rapid meltdown of Knight Trading, whose nifty new software went berserk last week and racked up $440 million in losses in about 30 minutes, immediately reignited the debate on high-frequency trading and how to regulate it.

Many investor relations professionals already held automated trading in contempt. Algorithms, derivatives and lack of fundamental reasons for buying or selling leave IR out of the picture – and focusing on milliseconds seems like the ultimate short-termism. Really, hypertraders care about tiny price moves, not companies.

Since there isn’t much “warm and fuzzy” in high-frequency trading, critics are quick to blame quants and computers for all the perceived wrongs of the stock market. Personally, I’m skeptical of attempts to regulate this kind of trading out of existence. I prefer a free market approach, with losses for players who make mistakes as Knight did – and rewards for smart investors or traders.

The most interesting piece I’ve read since the Knight Trading fiasco was not in the financial papers, but in Wired Magazine: “Raging Bulls: How Wall Street Got Addicted to Light-Speed Trading” is somewhat critical of high-frequency trading:

Faster and faster turn the wheels of finance, increasing the risk that they will spin out of control, that a perturbation somewhere in the system will scale up to a global crisis in a matter of seconds. “For the first time in financial history, machines can execute trades far faster than humans can intervene,” said Andrew Haldane, a regulatory official with the Bank of England, at another recent conference. “That gap is set to widen.”

This movement has been gaining momentum for more than a decade. Human beings who make investment decisions based on their assessment of the economy and on the prospects for individual companies are retreating. Computers—acting on computer-generated market trend data and even newsfeeds, communicating only with one another—have taken up the slack.

What I found most interesting are the insights science writer Jerry Adler offers into the mechanics behind making our computer-driven marketplace ever faster and faster. If you like tech, read the Wired piece: This is science fiction becoming reality in the capital markets where we labor as IR professionals.

Technologies continue to advance, trading times are still accelerating and we probably haven’t seen our last scary moments in the stock market. To most IR people, super-fast trading is just “noise.” To me, it’s a very different kind of investing – not for me, but not a phenomenon I want Congress to try to ban. Politicians could wreak unintended consequences by trying to codify whether 15 or 20 milliseconds is too fast, 5 or 10 simultaneous orders are too many and so on.

An IR professional, I think, should stick to the job: Understanding markets for the company’s securities, telling the story to investors who do have an interest in the business and its value, and building relationships across the capital markets.

What’s your take on computerized trading and what it means for IR?

© 2012 Johnson Strategic Communications Inc.

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Congratulations, FB, and good luck

May 17, 2012

Facebook pulled it off.

- The New York Times “DealBook” site, May 17, 2012

A nice summary by NYT “DealBook” writers Evelyn Rusli and Peter Eavis. Facebook did pull off the IPO of the year, pricing at $38 a share for a total sale of $16 billion. The market initially valued the company at $104 billion.

Congratulations, FB!

There is a sense of relief, after the IPO with more media hype than any in recent memory, in seeing it priced and starting to trade. Following a few more days of craziness, no doubt, investors can settle down and begin looking at Facebook as they would view any other public company.

Here are a few bits of information for the curious investor relations pro:

Being public will impose a new sort of discipline on Facebook the company. Thinking about disclosure vs. trial balloons and leaks. Telling investors the basics like revenue and earnings. Meeting quarterly expectations or taking a beating. Perhaps a future day when hedge funds and analysts call for a new CEO.

I’m not going to second-guess the valuation, roughly 100 times trailing 12-month earnings. Or $115 for each of those ballyhooed 900 million users. Enough market gurus already are opining on FB, and people were willing to pay the $38.

Rather, I’m looking forward to watching the biggest social network as it grows and matures in the coming months and years. The “DealBook” writers comment:

The question is whether the company’s management will make it work.

Facebook, in many ways, is like a mining company sitting on valuable deposits that are hard to dig up and refine. At a market value of $104 billion, investors believe Facebook is sitting on gold. But the share price could tumble at any sign that Facebook’s management can’t unearth it.

© 2012 Johnson Strategic Communications Inc.

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The public markets’ competitor

May 11, 2012

Q: Do you ever wish you were publicly traded?

A: Oh God, no. I have the greatest job in the world, because I work for a guy who runs the company for the next 20 years, not the next 90 days. It’s tough being a public company, and I wouldn’t wish that on anyone.

 –  Steve Feilmeier, executive VP & CFO
Koch Industries, Inc.

As investor relations people, we rub elbows mostly with publicly traded companies. We think about how to get our message out to the capital markets in competition with other public companies, especially our peers within narrow industry sectors.

But a whole other class of competitors exists in a parallel universe – competitors for capital and, in our businesses, for customers. Maybe we ought to pay attention.

What started me thinking was Steve Feilmeier, CFO of Koch Industries, who spoke this morning to the Kansas City chapter of Association for Corporate Growth. Known to outsiders mostly for media attention in political controversies, on the business side Koch is a $125 billion company with 67,000 employees – the No. 2 privately held business in America. No. 1 in profitability, Feilmeier hastens to add.

Right at the start, Feilmeier says being privately held is a competitive advantage:

We benefit from not having to report earnings every 90 days. All of our decisions are based on, How is this going to work out in the next 10 years?

And it’s working out just fine for Koch (sounds like “coke”). The firm is doubling revenue every five or six years with a dozen operating companies in agriculture, energy and manufacturing. Although Koch doesn’t report publicly, Feilmeier makes it clear those businesses are delivering even better growth in EBITDA (slides here).

An example of Koch’s presence: AngelSoft, its toilet tissue brand, is the No. 1 SKU in Walmart stores. No. 1. Feilmeier says 60 truckloads a day leave Koch’s Georgia-Pacific subsidiary loaded just with AngelSoft four-packs bound for Walmarts.

The ongoing shift in institutional investor preferences among asset classes is the other thing that got me thinking. I keep hearing about pension funds, endowments and real people putting more money into alternative investments – capital that isn’t flowing to publicly held companies represented by IR pros.

Consider these stats: In 2001 U.S. pension funds held 65% of assets in equities, but that dropped to 44% by 2011, according to the Towers Watson Global Pension Assets Study 2012. in those 10 years, the “Other” category in asset allocation – real estate, private equity and hedge funds – quintupled from 5% to 25%. Apply those changes to $16 trillion in U.S. pension assets and you’re talking real money.

Without getting in over my head further on macro views of the capital markets, my point is that public companies ought to think strategically about their investors. Institutions and individuals don’t have to invest in any particular public company. They might even flee the stock market, with some of their funds, for “alternatives.”

And this brings me back to Koch. Feilmeier’s description of why Koch keeps growing at the top line – and especially the bottom line – holds lessons that public companies and IR people might take to heart. A few interesting ideas:

  • Do investors see management-by-quarterly-numbers, or something like Koch’s “patient & disciplined” creation of wealth? How do we discuss performance?
  • Can we demonstrate how our incentive pay turns managers into entrepreneurs, who get paid when they deliver (and not when they don’t)?
  • Do we have real accountability? Koch doesn’t believe in subsidizing any of its businesses, so operating execs are responsible for balance sheets and P&Ls.
  • How do we make decisions? Koch demands rigorous comparison of every capital project with alternatives – will this investment deliver the best return?

Koch, of course, is a giant company. There are well-managed and poorly managed firms of every size in both the public and private arenas. But the principles Feilmeier discussed are common private-equity approaches to driving performance.

Private vs. public is a common debate among CEOs and finance folks. Some private companies long for public status – and a fortunate few make it through the IPO process to get listed. On the other hand some micro-cap and even mid-cap public companies wish they were private, to escape the hassles of quarterly reporting.

Whether public or private, maybe we need to get back to basics of running companies by rigorous disciplines of wealth creation. And public companies need to communicate how those disciplines create real shareholder value.

What do you think?

© 2012 Johnson Strategic Communications Inc.

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Metrics are the message

March 26, 2012

Flipping through the annual report of an oil company I own a few shares in, I skimmed over the usual headline cliches (“proven business model,” “rigorous execution,” “strong results”). As a shareholder – and a practitioner of investor relations – I’m glad they don’t have a discredited business model, lackadaisical execution or weak results. But maybe there’s something more to take the measure of this company.

As a casual weekend reader, I passed over the gray-looking shareholder letter. I did have to circle back and see if there was an explanation of that puzzling schematic diagram on the cover – it was an engineer’s view of the company’s proprietary oil sands technology, of all things, decorating the cover of the annual report.

Finally I landed on a page headed Financial Highlights. And there I dug in.

You often hear investors say, “It’s about the numbers.” Or if you talk a bit more, the numbers and management – because having the confidence to bet money on a company includes believing in the management team.

But the numbers – more particularly, key metrics - are the main thing investors are looking for in a company’s disclosures, reports and presentations.

The metrics and what management is doing about them are the strategic message.

When I landed on the financials in this report, my eye was drawn to the 5-year history of sales and a similar line for net income – both up nicely in 2011, looking like the last time oil prices were high, in 2007-08. I scanned down to ROE and ROCE, both of which which this company provides – nicely. Other metrics of interest … well, they weren’t there, until I went to work on the financials with my calculator.

My thought is that investor relations people ought to make key metrics – those viewed by management and your investors as driving the share price in the long term – easy to find in news releases, reports and presentations. Because key metrics are what investors, whether institutional or individual, are looking for.

A few metrics are likely to be top-of-mind for nearly any company:
  • Earnings per share. Sure, I know the theories about cash flow or some other measure being more important, and some managements are passionate about EBITDA as the key metric. For most shareholders EPS is still the bottom line.
  • Growth rates of sales and earnings. Whether the picture is pretty (sales up 23% in the current period) or ugly (earnings down 14%), companies ought to make growth rates easy to find. And do the math for investors; don’t make ‘em get out their calculators.
  • Return on equity - or capital employed or assets. To know whether a business is attractive as an investment, the most basic question is whether it earns more than its likely cost of capital. If  ROE is 27.5%, as an investor I’m comfortable on that issue. If it’s 7.5%, I’m going to look a little closer.
  • Profit margin & its trend. Gross margin seems to be the most popular, or operating margin. Investors want to know the power of a business to take raw material or merchandise, sell it and turn a profit. Margins provide an objective view of the impact of rising costs, dropping prices or lack of scale.

Every industry and many companies have their own key metrics. Same-store sales growth. Net income margin. Proven reserves. Milestones in drug development. Whatever investors see as driving the value of the company for the future.

Of course, companies also offer up all kinds of non-GAAP metrics like “adjusted EBITDA” or “ongoing operating earnings” – which investors may or may not trust. If it works for you, OK, but you may want to validate that with your investors.

In any case, settle on your key metrics (not 20, just a few) and then use them …

Investor reporting ought to emphasize, say, three or four key metrics – make them highly visible in words, tables and graphs – and explain what you are doing about them. When they improve, take credit on management’s behalf – this is what we did to add 50 basis points to margin. When they go the wrong way, acknowledge it and tell shareholders what management is doing now to turn the situation around.

I see metrics as the core message of investor relations. What do you think?

© 2012 Johnson Strategic Communications Inc.

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Facebook IPO: Should we “Like” it?

February 5, 2012

Yes, I know, investor relations people should be thrilled to see life returning to the IPO market in 2012 – and here comes Facebook, the biggest Internet IPO of all, to stir up interest in public markets. But I’m wavering on whether to click “Like” or “Not-so-much.”

I can’t help feeling that all the hoopla around the social media giant’s pending public-company status may be a sign of a frothy top in the stock market. I hope not – and I do wish Facebook success in its IPO. It’s a wonderful growth story.

The stock market has had a good run recently, despite some nervous days. The S&P 500 is up 110% since about this time in 2009. The Nasdaq Composite has reached a level it hasn’t seen since 2000, not the top of the dot-com bubble but the time when prices were still deflating. And the market may keep rising for now.

Two things bother me a bit about the Facebook IPO:

Valuation. The prices being bantered about seem a little unhinged from reality. Andrew Bary’s commentary this weekend in Barron’s is interesting:

The best businesses can be poor investments, if you pay the wrong price. That’s worth considering as Facebook readies the most closely watched initial public offering in years—a deal that could value the seven-year-old company at $100 billion. …

Assume Facebook comes public at around $40, a slight premium to its private-market price. That would value the company at $92 billion, based on 2.3 billion shares outstanding. At $40, Facebook would trade for 93 times trailing earnings and 25 times 2011 revenue of $3.7 billion. … If Facebook’s profit doubles in 2012, topping the 65% gain in 2011, it would earn 86 cents and trade for nearly 50 times earnings.

The FB offering brings back “eyeballs” as a major performance metric – in this case, Facebook’s 845 million users and the assumption that there simply must be ways to make lots and lots of money off of all those eyeballs.

Exuberance. That gee-whiz enthusiasm, built on a rising market and a technology so popular grandmas are using it to follow the kids’ activities online, is just a little scary. The New York Times‘ Jeff Sommer commented this weekend:

THE financial system may not be in great shape, but why dwell on it? Stocks are rising and I.P.O. euphoria is in the air. … Greed in the market is rising, and for some seasoned investors, there is an uneasy sense they’ve read this script before.

“It’s like we’re finally emerging from nuclear winter for I.P.O.’s but we’ve forgotten our history,” said Harold Bradley, chief investment officer for the Kauffman Foundation and a former executive with the American Century mutual funds. “If we don’t start paying attention, we’ll be making the same stupid mistakes all over again.”

If the stock market teaches anything, it is to keep historical perspective, watch the broader context of the economy and markets, and not bet too much on an upward-sloping line you can draw through the past couple of years’ performance.

Good news for investors is that Facebook’s S-1 filing reports five years of rapidly rising revenues and three years of real earnings, also fast-growing. So this isn’t an “idea on a cocktail napkin” IPO from 1999. But neither is it J&J or Procter & Gamble.

If I were the IRO for Facebook, I would be emphasizing three messages to investors:

  1. Revenue and earnings. We have ‘em, and here’s why they are sustainable. Investors should understand the varied revenue streams and their profitability. The IR story is about financial returns, not the social mission.
  2. Value for customers. Not the 845 million – users are essential but aren’t the ones who pay Facebook. The business is selling access to FB’s users to advertisers, application developers and the like. How much value does Facebook deliver to these customers – now and over the next few years?
  3. Durability. Investors must be concerned about what happens if Facebook’s “cool factor” wears off and users start taking photos and events and friends to newer, cooler platforms. Facebook needs to communicate its strategies for sustaining the dominant position in social media.

A friend tells me his worst investment decision ever was Apple: He bought AAPL at $15 a share and sold when it hit $35 – and he’s been kicking himself all the way up to $450. I must admit my investing instincts run in that same vein. Apple is a great example of “cool” staying cool – for consumers and shareholders. So Facebook may soar in its IPO – and continue to fly in the years to come.

What are your thoughts on the Facebook IPO?

© 2012 Johnson Strategic Communications Inc.

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All I wanna know is, how much?

December 20, 2011

Private companies contemplating an IPO – and small caps debating whether it’s worth it to stay public – sometimes tally up the costs of complying with Sarbanes-Oxley, filing SEC reports, releasing earnings and so on.

Now Ernst & Young has gathered data from 26 companies that did IPOs in the past two years to come up with an answer. As reported in “The True Cost of Going Public” in CFO magazine’s December 2011 issue:

Operating as a public company adds about $2.5 million, on average, to a company’s cost structure, with $1.5 million of that devoted to higher compensation for CEOs, CFOs, and others in the finance function, such as investor-relations professionals, according to the survey. That figure also covers increased board costs, as more than 80% of companies had either added new members to their boards or increased director compensation prior to their IPO.

The accounting firm said companies spent an average of $13 million on advisers to help with the IPO – plus $1 million a year in various other fees for advisers. Where does all this advice come from?

Most companies retained at least 11 third-party advisers in connection with the IPO, the survey found, including, universally, investment bankers, attorneys, and auditors. About 70% of companies hired an investor-relations firm, while 40% hired a road-show consultant.

The benefits of being public vary – among them access to capital, liquidity for founders or venture capitalists, reduced cost of capital, currency for acquisitions, higher visibility and stock-based compensation. All figure in the reasons companies cite for going public and staying that way. Ultimately, each firm and its own shareholders must decide whether the benefits do outweigh the costs.

What do you think: Is being public worth it?

© 2011 Johnson Strategic Communications Inc.

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Shareholders & ‘the ADD society’

October 14, 2011

Andrew Ross Sorkin, the New York Times M&A columnist, CNBC “Squawk Box” co-host and author of Too Big to Fail, says we’re kidding ourselves when we say we want corporate leaders to think long-term. The problem, he says, is all of us.

“We are the ultimate ADD society,” Sorkin said today in a speech to the Association for Corporate Growth Kansas City chapter. Patience is nowhere to be found, and that goes for the stock market and demands it places on managements, he said:

We keep saying we want more shareholder democracy because we want executives to think long-term. The problem is not that the people in power are short-termists, it’s that we are short-term thinkers.

As Exhibit A, Sorkin cited the statistic that the average shareholder holds onto a stock for only 2.8 months. Less than one quarter. Of course, high-frequency automated trading turns stocks over in milliseconds, and multiple times every day. But even individual investors can be fast-moving and fickle:

I would love to find a way to get our country back to being an investing society, not a trading society.

Sorkin acknowledged there’s no sign of that happening anytime soon. (Coverage of the rest of what Sorkin had to say is here or here.)

The investor relations person in search of a patient investor, in this environment, is something like a mythical but tragic hero. Solutions, anyone?

© 2011 Johnson Strategic Communications Inc.

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