Many finance chiefs would like to have the recent investor-relations problem Ciena CFO Jim Moylan has. In his fifth year at the communications-equipment supplier, Moylan says his latest challenge is keeping sell-side analysts realistic about the timing of an upcoming communications-network upgrade cycle that is expected to boost Ciena’s revenues. “The sell side is trying to anticipate when that uptick in sales growth will occur,” says Moylan. “We don’t want them to get ahead of themselves.”
But the other goals of Moylan’s IR team are more familiar. He is trying to realign Ciena’s investor base so that its stock is more of “an investment vehicle than a trading vehicle.” And Moylan wants to help equity analysts get their financial models right so they can value the company correctly. Simple enough, right?
The familiarity of those tasks makes them no less difficult. The rockiness of the equity markets and the prevalence of high-frequency trading and exchange-traded funds make cultivating the investor base tougher than ever. Given the “risk-on, risk-off” climate of the equity markets the past two years, CFOs also have the basic problem of just getting investors to listen and comprehend the investment case for an individual stock.
But a good story can decouple the stock’s performance from the macroeconomic forces and risk aversion driving the financial markets. “Many companies were frustrated that their share price appeared to be out of their control as macroeconomic factors seemed to dominate decisions last year,” said a 2012 IR survey report by Citigate Dewe Rogerson.
To help, here are five things CFOs can do to cut through some of the noise in the markets, make their stock stand out, and improve IR generally.
Hammer home where growth will come from. Equity analysts are tired of hearing about how cost cutting and greater efficiency will lead to profit growth. But against the backdrop of a national economic slowdown, growth stories have to be compelling. Moylan and his IR team at Ciena make sure analysts understand the business of the company’s customers, since the customers’ capital expenditures are Ciena’s revenue.
There are five major trends affecting big network operators’ spending patterns: growth in demand due to growth in handheld devices and video content, local macroeconomic factors, business models, the state of the customer’s network with regard to upgrades, and regulatory and political environments. “We try to pull it all together and give [analysts] a picture of our major customers,” Moylan says.
Ciena’s presentations focus on not just the absolute level of these companies’ capital expenditures but also which bucket customers are allocating capex. AT&T is one of Ciena’s largest customers, but “it spends [its money] on all kinds of things, from laying fiber in the ground to wireless networks to all sorts of devices for wireline networks,” Moylan says. “We discuss how that capital allocation is going to affect us.”
The sell side is still important . . . Earlier in the decade, 10 Wall Street brokerage firms paid regulators $1.4 billion for issuing dubious equity research. That tainted sell-side analysts’ reputations, but they are still a key audience for a stock’s story. Sell-side analysts write research reports, but they also set up meetings between company management and buy-side clients that want face time with management: so-called corporate access. Going through the sell side to get to investors is cheaper, observes Chris Taylor, managing director of global investor relations at Ipreo, a provider of corporate IR services. “The sell side provides services during road shows at no charge. Otherwise, those costs would come out of the company’s pocket,” he says.
. . . But the sell side has to be managed. Sell-side coverage is a case of the haves and have-nots. Small-cap companies are undercovered by analysts. Because sell-side research reports on them are sparse, they have to interact directly with the buy side, says Taylor, and communicate their story, investment thesis, and strategy. Small-cap companies can accomplish this through “nondeal” road shows and small investor dinners. While sell-side industry conferences are an option, small-cap companies not being followed by an analyst usually don’t get invitations.
Large-cap companies have the opposite problem: they tend to be overcovered. Tech giant Apple, for example, has 144 equity analysts covering its stock, according to S&P Capital IQ. Typically, only 25 to 30 analysts follow large companies. Moylan says 26 sell-side analysts cover Ciena, and he meets with 70% of them each year. A company’s executive management seldom sees value in having more than about 10 analysts cover the company’s stock.
“It’s a burden to manage these folks,” says Taylor, so companies have to focus on a core group of analysts who understand the story and have the most influence. An IR team can’t ignore the others, but it doesn’t have to give them the same amount of time if they’re not writing regular updates on the stock but only publishing reports after quarterly earnings releases, for example. “You can’t cater to everyone,” he says.
Giving enough guidance? Many companies provide guidance on company performance in future quarters, with the most common metrics being revenue, capital expenditures, tax rates, and earnings, according to the National Investor Relations Institute (NIRI). And most companies are satisfied with the amount of guidance they give. But analysts often need more than the standard numbers to project the company’s financials out for more than a year. Ciena provides ranges for earnings and revenue in future quarters, Moylan says. But because the company has been in a financial transition, it has also occasionally given the sell-side targets on sales growth rate, gross margin, and operating margin. “We give it to them not so much with a timetable but as targets,” he says. The targets help analysts build their three-year financial models.
Finding the right base. Ciena has been conducting two to four road shows every quarter to target a different investor base, one that reflects a company that has moved from being highly cyclical to one with a broader, diversified set of products, geographies, and customers. “We tend to be owned by a higher percentage of aggressive growth or momentum investors, who jump in and out of the stock,” explains Moylan.
As Ciena exits a period of integrating a large acquisition and into one of sustained profitability, Moylan is targeting shareholders that are focused on reasonably priced and value stocks and not as focused on quarterly results. Those investors now constitute 33% of the company’s shareholder base, up from 20% at the beginning of the year, he says. About 84% of IR personnel reported engaging in investor targeting for their company, a NIRI survey found this year, and 82% saw results in one year or less.
Locating and targeting investors whose portfolios suit the company’s valuation, capitalization, and geographical region is smart, Taylor says. But trying to shift a shareholder base radically, from aggressive growth investors or hedge funds or any other group deemed undesirable to a much different investor type, is difficult to do. “The story of your stock, your valuation, your fundamentals, is what drives investors to your shares,” he says. “Unless you change those fundamentals or your strategy, it is very difficult to alter the makeup of your shareholder base.”
The Holy Grail for IR officers is “buy-and-hold” investors, those that make the shares less volatile. But “that’s not the way the stock market works,” points out Taylor. “The companies that have long-term buy-and-hold investors tend to be undervalued, and those investors have the patience to wait for an event that will raise the valuation. So CFOs had better watch what they hope for, because if they attract many buy-and-hold investors, the company may be at a valuation that the CFO doesn’t like.”