On April 2, 2013, the Securities and Exchange Commission (SEC) issued a report that outlines how companies can use social media outlets to disclose information and remain in compliance with Regulation FD. The report was the result of the SEC’s investigation of statements made on Facebook and Twitter by Netflix CEO Reed Hastings, where he announced a “viewing” milestone for his online movie and TV rental company. While the investigation centered on whether Hastings violated Regulation FD, Hastings has maintained that his disclosures were neither material, nor exclusive.
From my vantage point, while the SEC’s new report opens the door for companies to disclose information via social media, it’s only propped open a crack and not enough that I’d encourage every company to use social media for this purpose. For one thing, a company is compliant only if it has previously communicated to investors that it plans to use certain social media outlets for news and information, and if access to these social media outlets is unrestricted. Following is more information about the report, what it means for your company, and what the risks are for communicating material information via this means:
What has changed?
The use of social media outlets is now included in the SEC’s interpretive release (34-58288), which in 2008 allowed company websites to be used to make disclosures under Regulation FD. The appropriate use of social media, like websites previously covered under this release, is the responsibility of the company. Websites and social media must be used according to the following rules:
- They must be recognized as a channel of distribution of information to the market
- They must be a source of broad dissemination to the market
- There has to be a reasonable waiting period for investors and the market to react to any posted information
What does it mean for your company?
Sell ratings got you bothered? Can’t shake the feeling that an analyst is holding a grudge? Wish you could just make them go away?
Let’s discuss your negative analyst strategy in 3 steps:
- Remember the big picture
- Avoid the pitfalls
- Engage and execute
1. Remember the big picture.
There will always be analysts who are negative on your company. They won’t go away. Why?
A “miss” relative to a company’s financial guidance can happen to even the best management teams. Misses can arise from a hiccup in company operations or they can be related to factors outside your company’s control. In either case, the ways in which you assess the problem, communicate it, and follow up in later quarters will have a powerful and lasting impact on the Street’s views of management’s credibility and thus your stock’s long-term valuation.
Assessing the problem
Before you communicate with the Street, make sure you’ve honestly assessed the reason for the miss and its ongoing impact to your results. Was this merely a soft quarter for seasonal or other factors, or was there a one-time event? While it’s possible that ongoing results won’t be impacted, it’s also possible that greater forces are at play: a business segment could be maturing, or your internal growth expectations may have to be moderated. Even if the miss is truly related to an issue out of your control, such as a reimbursement change, make sure you critically evaluate the impact before you communicate any revised guidance.
If it seems to you that there is an investment banking conference every week, you’re just about right. Investment banks routinely hold investor conferences that tend to focus on certain industries (like healthcare or technology). A few Wall Street firms also hold what I’d call “best idea” conferences, which include representative companies from different industries.
Attending a conference can be a valuable part of your investor relations strategy. It’s a great way to get more investors to know your company, and to make vital business connections. But, if you have, say, 15 analysts covering your stock, and each one hosts a conference, that can mean you’re getting invited to 15+ conferences a year. How can you possibly accept every one of these invitations?
Before deciding “yea” or “nay” on attending upcoming conferences, it’s important to understand why they’re held. Decades ago, Wall Street’s equity divisions made money primarily by underwriting stock offerings and trading stocks. As institutional commissions have shrunk, trading has become much less profitable. However, while the buy side is no longer paying as much for trading execution or research services, buy side firms and analysts will pay for access to management. Therefore, Wall Street has strong incentives to arrange venues where they can introduce companies to investors.
Our clients often ask, “Why did account X sell my stock? Our last meeting with them went so well.” Generally speaking, there is one reason investors buy a stock: the assumption that its price is going up. There are, however, countless reasons why stocks are sold. Sometimes when a company’s fundamentals seem to be improving it’s not always clear why a portfolio manager might sell a particular stock. We want to shed some light on the factors that can lead to the “sell” decision via this month’s Top 10 list.
- Locking in gains. No one has ever been fired for locking in gains. Even an investor who’s held your stock for years can’t be faulted for taking some money off the table.
- Macro concerns or sector rotation. Even for a company that derives zero revenue from Europe and does not sell directly to the federal government, events like foreign debt defaults and sequestration cause fund managers to lighten up on stocks. In uncertain times, cash is king! Similarly, depending on the outlook of the firms’ economist, portfolio managers shift money between sectors, increasing and decreasing their exposure based on the economists’ suggestions. If healthcare is deemed an underperforming sector at a particular time, your stock might be caught in the sector rotation. Continue Reading
All management teams and boards of directors want to know how they’re doing. For public healthcare companies, the wide variety of stock indices makes it easy to draw a comparison with peer companies. But finding the right index is key to making a meaningful comparison. Just because an index includes “technology,” “healthcare” or “mid-cap” in its name doesn’t mean it’s right for you. And the most popular indices are not always the right choices.
Fund managers, especially those who may not understand nuances in various healthcare sectors, will use an index to evaluate your firm’s performance. But, comparing against the wrong index can have serious implications: for instance, if an index that includes many larger cap companies (over $1 billion in market capitalization) is rising, but smaller companies aren’t sharing this momentum, then your smaller firm will compare poorly against the index – and undeservedly so. Further, smaller companies are more vulnerable to certain financial issues than multi-billion dollar firms; access to capital, product pipelines and market volatility can have an outsized effect on a small-cap firm’s stock performance.
As CEOs and CFOs, you no doubt think long and hard about the investment bank with which you want to work. Most management teams consider which investment bankers can best help meet their company’s capital raising and strategic needs, as well as which bank’s sell-side analysts will provide quality research coverage of the company. However, it is also important to consider how impactful the bank’s institutional equity sales force is.
Whether you are already public or thinking of going public, you want to work with a sales force that has real influence in the investment community. Importantly, you want to engage a team that has solid, long-term relationships with those investors who will be buying your stock.
Smaller-cap companies, like many of those in the health services, life sciences and medical technology sectors, experience more volatile stock price action than some of their mid- and large- cap peers. These small companies tend to lack the liquidity of larger firms and are therefore more vulnerable to news events (and often, big price movements will occur for no reason at all). For the executives and investor relations professionals of these companies, such price movements can be gut-wrenching.
In their quest for a solution to stock price volatility, some management teams monitor stock price movements on a daily basis and try to find explanations for this movement. This short-term focus is often non-productive and can even be distracting. It’s better for executives to concentrate on building long-term, sustainable shareholder value by providing the Street with identifiable milestones and successfully achieving those milestones.
While every quarter is different, the “playbook” for preparing senior management for a successful earnings conference call is largely the same. Specifically, the best prepared CEOs and CFOs follow a set of key strategic and tactical steps designed to bring them through a review of all of the essential elements pertinent to the investment community’s analysis of quarterly earnings. In short, CEOs and CFOs that have allocated adequate time to understanding the results, in the context of both internal and external expectations, and are capable of addressing all possible topics with ease and transparency will succeed. Drafting the conference call script is just one piece of this important process. Below, we walk you through these best practices of an effective earnings call.
1. Establish a timeline of deliverables at the outset so all participants know what is expected of them and when.
- Map out the mission-critical items, such as preparing the earnings press release and all the necessary financial tables and disclosures; the requisite SEC filings; the drafting of the conference call scripts and any supporting documents (e.g., slides); the creation of a Q&A document; and the dry-run.
- Include administrative tasks such as arranging for the call itself, creating the queue order in which analysts will ask questions on the call, obtaining the proper pre-clearance of the press release with the Nasdaq or NYSE and so forth.
- Be mindful of potential bottlenecks such as audit committee approval and legal review.
When done well, an Analyst Day (or Investor Day) is an extremely valuable investor relations tool. Typically a half- or full-day event your company hosts for buy- and sell-side analysts, an analyst day meeting can significantly enhance an analyst’s understanding of your company’s fundamentals, as well as aid them in better valuing your stock. At Westwicke, we have participated in hundreds of analyst days over our careers, and this experience lends valuable third-party perspective that has helped many companies hold successful analyst day events. To that end, I offer some do’s and don’ts for analyst days compiled over Westwicke’s years on Wall Street:
Do hold an analyst day every 18-24 months. The event provides investors with a deeper-than-normal dive into your company, and helps demonstrate your management team’s breadth and strategic vision.
Do provide unique content. Think about including members of the management team that investors don’t normally interact with. Consider bringing in physician experts or customers to provide an outsider’s perspective on your products or market. In the planning stages, ask both buy- and sell-side analysts for input.