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The Westwicke Blog is designed to deliver information and insights into the ever-changing world of investor relations and the capital markets, with a specific focus on the healthcare industry.

How to Answer the Buy Side’s Trickiest Questions

Posted on October 12th, 2016. Posted by

How to Answer the Buy-Side’s Trickiest Questions

“The analysts are projecting your revenue for next year” — a year in which you have not provided guidance — “at $50 million. Are you comfortable with this projection?”

Most CEOs and CFOs of public companies have heard a question like that — a “trick” question for which it seems any answer you give can potentially cause you problems. If you say you’re not “comfortable” with that revenue number, for example, do you risk projecting weakness to the investor community? On the other hand, do you want to effectively provide guidance before you formally release it?

The right response is to decline to take the bait. Advise your questioner of when you plan to release your guidance for next year, and say you can’t comment on analyst speculation in the meantime.

But what about other trick questions that you’ll likely hear? I asked our team to help me compile a list of common ones, along with some help on how to answer them.

Mike Piccinino
Managing Director

“Your guidance implies growth at a rate that is lower than recent quarters or than the Street expected. Are you being too conservative?”

Even a great company with highly differentiated technology and a superior management team is unlikely to outperform its sector peers and benchmark indices if it misses its near-term estimates. That’s why the question of whether your guidance is “too conservative” is difficult to answer.

We suggest focusing your response on the facts: “The Company’s guidance reflects management’s current expectations for revenue/EBITDA/margins/EPS, etc. and represents a realistic appraisal of the range of financial performance.”

Chris Brinzey
Managing Director

“What do you think about your stock price?”

Having spent 15 plus years on the buy side, I did have a quiver full of questions I liked to ask management teams. Some form of the question above was one of my favorites because it would tend to give you a true picture of what motivates a management team. While I admit it’s important for management to be aware of the need to create shareholder value, I found it a red flag when a CEO or CFO would dwell on something like stock price — which, on a day-to-day basis, is truly uncontrollable.

With healthcare companies in particular, I would look for a management team that was passionate about what it was doing, promoting awareness about what it was doing, and truly focused on helping patients. A management team with this kind of laser focus and enthusiasm for executing on its mission was the type of team that had a motivated employee base with an understanding of its purpose; would more consistently deliver on promises; and whose focus was on delivering long-term value.

Peter Vozzo and Patti Bank
Managing Directors

“What keeps you awake at night?” or “What do you worry about most?”

Buy-siders will often ask one of these questions as a way to ascertain what investors should also be worried about. Sometimes it can be used to bait a CEO into revealing a weak spot or open up on a previously unidentified issue. In response, don’t be overly obsessed with one or two issues to the point of losing your objectivity. Be straightforward and use the opportunity to outline some of the most important risks and uncertainties in your business and carefully explain your plan to mitigate those risks.

We typically tell CEOs to be careful not to reveal too much, keep the answer “tight,” and phrase the response in a positive tone whenever possible. For instance, maybe you have spoken before about the challenges of ramping up your manufacturing capacity. Instead of saying “We have a lot to do to get our manufacturing process commercial-ready,” say “It doesn’t really keep me up at night, but we continue to improve our manufacturing capabilities so that our manufacturing efforts are in line with our commercial strategy.”

Robert Uhl
Managing Director

“When does your current cash run out?”

“Which value-creating milestones can you fund with your current cash?”

“Hypothetically speaking, how low would you let cash go before doing another financing?”

“In an ideal world, when would be the best time for you to raise additional capital?”

For companies that are not cash-flow positive, a significant portion of the “trick” questions, like the ones above, involve cash, which is a valid concern for these types of companies. The best approach is to come up with a statement that you are comfortable with concerning your use of cash and stick to it as the response for all of these questions.

An example would be, “Management believes that current cash will fund operations through the end of next year,” or another appropriate time point. When an investor goes down the path of multiple questions about cash you can say again, “The only guidance we have provided on our use of cash is that we believe our current cash will fund operations through the end of next year.” Once you have repeated the response several times, investors will move on to another topic.

Asher Dewhurst
Principal

“Is 12%” — or some other number — “a good growth rate to use for next year?”

Buy-siders often want management teams to bless financial assumptions for future periods. We advise management to err on the side of caution and say that they have not provided guidance for that period and simply remind them of the guidance ranges that you have already discussed publicly.

John Woolford
Managing Director

Any question about non-public information.

Sometimes investors may have non-public information, or even information that you don’t have, at their disposal. If asked about such information, resist the urge to comment. It could open you up to Reg FD problems or impact future messaging decisions.

Did you notice a pattern with these “trick” questions? Pretty much all of them are designed to bait you into revealing information about your company that you haven’t – and shouldn’t. Don’t take the bait. Work with you IR team to anticipate and plan answers for tough questions. When their questions get asked, stick to the script.

For our best advice on the entire investor relations process for public companies, don’t forget to download our comprehensive new eBook, Westwicke Partners Insider’s Guide to Investor Relations. Or for a conversation about questions you’re not sure how to answer, reach out.

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