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Category: MANAGING EXTERNAL STAKEHOLDERS After an earnings disappointment, ADC Telecommunications makes a Wall Street connection.
Lori Calabro, CFO Magazine
October 1, 1999
Robert Switz says he'll never forget his embarrassment on January 15, 1998. That's the day the CFO of ADC Telecommunications Inc. had to level with Wall Street that the company was going to miss its first-quarter earnings estimates.
"Up until that time," recalls the 52-year-old Switz, "ADC had a record of 29 consecutive quarters of meeting or beating Wall Street expectations. It was embarrassing to all of us to preannounce that we weren't going to make our numbers." But the embarrassment, he says, soon gave way to shock when "our stock subsequently dropped 30 percent in value."
That shock deepened on January 23, when Switz was forced to issue a second press release because "business was going to turn out even worse than I had stated [initially]," he says. In response, ADC's shares dropped another 40 percent, completing a downward spiral that sent the stock of the $1.5 billion supplier of voice, video, and data systems tumbling from a high of $43.63 on December 31, 1997, to $16.75 on January 26, 1998.
To stem the tide, Switz launched a campaign to uncover the root causes of the sell-off and regain investor confidence. By constant communication and a simplified message, Switz spread the word that ADC was a solid buy for the long term. And in the year and a half since the crisis--which Switz calls "a cathartic force"--the stock has regained its strength and then some. In fact, the company was recently added to the S&P's 500 Index, a testament to its staying power.
"Reputation is everything on Wall Street, and Bob earned his stripes with direct candor when it was needed most," says Kenneth M. Leon, global sector head of ABN AMRO Inc. After the earnings disappointment, he adds, "Bob did not hide or blame others. He took a negative [situation] as an opportunity to work harder with analysts and institutional investors. He was honest about what ADC could do to improve its business, and what was beyond its control."
Ultimately, the effort was "a major factor in our recent growth in market capitalization," says ADC CEO William J. Cadogan. It also won Switz the 1999 CFO Excellence Award for Managing External Stakeholders. For Switz, however, the ordeal was instructive. "Just because people own your stock, don't assume that they understand your company." "The fundamental lesson here," he says, "is that you need to know as much about them as they know about you."
To say that the stock drop was a surprise to ADC executives is an understatement. Until January 1998, the Minneapolis-based company was actually "a bit of a darling of the communication-equipment sector," says Switz. Between October 31, 1988, and October 31, 1997, the stock had grown from $1.45 to $33.13- -a compound annual growth rate of 41.6 percent.
Most of the IR thrust until then "focused on the technologies of the business," he says. When Switz joined ADC in 1994, he lobbied to "spend less time talking about bits and bytes" and more time talking about how market strategies translated into financial success. But as a newcomer, Switz was ignored. The status quo, after all, was working just fine.
Then in late 1997, a combination of factors shook confidence in the company. First, the Asian crisis began to be felt. In addition, analysts refused to account for seasonality issues. "Every year, the first quarter would drop from the fourth," says Switz. "In 1998, however, the fourth quarter was so strong that Wall Street ignored the seasonality." Most alarming to investors, though, was that rapid consolidation in the telecom industry "throttled down business in a very rapid time frame."
Any one of those factors, says Switz, would not have damaged the stock price. But taken together, they were calamitous. Still, he says, "we felt that with our reputation and performance, the market should have been more forgiving." Particularly bewildering was the fact that the first quarter was a record one for ADC, even though the company missed expectations.
To revive the stock, Switz believed he had to figure out why ADC was being pummeled in the first place. Once the initial crisis had been resolved (by weeks on the phone reassuring investors), Switz took to the road, spending most of February and March 1998 meeting with institutional shareholders. "What I discovered," he says, "was that numerous groups of shareholders owned us simply because we had great financial performance and a good track record of meeting or beating expectations. They didn't know anything about ADC, and they took its performance for granted."
Many investors "simply didn't understand ADC," explains Switz. Their confusion is understandable, given the company's diverse markets, customers, and technologies. Where many of its competitors deal in one particular communication technology, ADC operates in a segment of that market known as the local loop- -the portion of the network linking the service provider to the home or business. This segment encompasses everything from broadband connectivity to systems integration, and serves business, residential, and mobile customers. Says Switz, "it was very difficult to understand ADC in 20 seconds."
To help with the problem, Switz hired Mark Borman as vice president of investor relations in February 1998. Together, they simplified the ADC story, starting with the IR presentation, which had leaned too heavily on charts and schematics. Kicked off with a new tag line--"Total Solutions for Last-Mile Networks"--the new version clarified ADC's products and strategies and its happy prospects for growth.
The Web site was then retooled to bring this message to a wider audience. The new site has been so successful that traffic has increased 234 percent.
Other efforts included changing the earnings release to show results in each product group, preparing "Plain English" annual reports, discontinuing the practice of prereleasing estimated revenues, and starting a direct stock purchase plan so individuals can buy ADC stock at low commissions.
What worked best, though, says Switz, was "going out and pressing the flesh." During 1998, Switz and Borman presented at more than 20 conferences. In fact, in 1998, Switz averaged two days a week with current and potential investors. "Over the long haul, it is my job to cultivate interest in and demand for ADC shares," he says.
Switz says he started seeing results in August 1998. "When the stock moved back into the $30 range, I began to feel that investors were buying into what we were saying"--helped by a solid second-quarter performance.
There were other telltale signs. "We had an awful lot of new investors pick up ADC," he says. East Coast ownership increased from 31 percent to 45 percent between the end of 1997 and August 1998. Sell-side coverage increased from 6 analysts in 1994 to the current 23, who maintain a consensus buy rating (see chart, above). And inclusion in the S&P 500, he says, was a testament to ADC's "consistency." After all, he adds, "we are working on meeting or beating analysts' expectations in 35 of 36 quarters."
ADC stock took another hit in the October 1998 fallout of tech stocks, dropping to $18 per share. But by this past September, it was trading around $40 a share, down from an all- time high of $52.25 on April 9. Switz is philosophical about the whole experience. In the end, he says, "there is no substitute for honesty, candor, and consistency," especially in a crisis. In retrospect, Switz, who describes himself as "a high-metabolism person," doesn't believe he could have done anything different or better. Whether the analysts will ever forget that there was such a surprise, however, is another story. "Forgive is probably a better word," he says.