Managing Corporate Access as the Relationship between Investors and Investment Banks Evolves

For years, a mutually beneficial relationship existed between corporate management teams, investment banks and the buy-side regarding corporate access as represented by non-deal roadshows (NDRs) and conferences. Now, like many elements of this relationship, the process is undergoing a major revision with implications for all relevant parties. For corporate management teams, the bottom line is two-fold: a much more vigilant supervision of the sell-side must become standard practice, along with much more proactivity in terms of direct outreach to the buy-side. Recent news that a consortium of large institutions is banding together to further disintermediate the sell-side NDR/conference model for management access by setting up what have been called “sponsorless conferences” draws a brighter line under this point.

There are many reasons for this shifting relationship, but they can be summed up in two general themes: tighter regulation of commission payments and collapsing fee structures. Each of these developments have either forced or incentivized the buy-side to have a much stricter accounting of their overall payments to investment banks and the services for which they are willing to pay.

From a regulatory standpoint, MiFID II was designed to create much greater transparency around the payments made from the buy-side to the investment banks because those payments are the property of the fund shareholders, not the buy-side analyst or PMs. There has been a view amongst regulators and pension fund consultants that the buy-side was far too cavalier with their external research budgets, which are paid for with shareholder assets. And, from a financial standpoint, the advent of passive investing had greatly pressured the profitability of the buy-side, causing greater internal scrutiny on research payments as well. Recently, a major buy-side firm in Boston announced they would be “cutting off” six major investment banks and declining to receive any services from them.

Unsurprisingly, the investment banks have reacted by steering their services toward clients who are willing to pay the most. In most industries this would be the normal, if not applauded, course of business, but in the world of Wall St., issues of equitable dissemination of information, fair disclosure and advantaging the large over the small always loom largely. In the arena of corporate access, this is forcing the investment banks to make choices about their needs relative to the needs of their corporate clients, and the results do not always skew in the client’s favor.

Where does this leave an IRO trying to maximize the utility of his or her CEO’s time? How should a management team handle a situation where a major shareholder and a sponsoring bank don’t have a relationship? These are among the relevant questions that must be asked because turning over the responsibility of an NDR to a sponsoring broker and waiting for a completed schedule to come back will likely create substandard outcomes, particularly amongst small-cap life sciences where demand is more limited.

The answer is that the existing client-investment bank relationship is no longer sufficient. As the partnership evolves, a hybrid solution will likely emerge where sponsoring banks will play a role as a regional guide, but the IRO will be making a far greater number of outbound calls. This paradigm will require IROs to have a much more detailed map of the landscape and a much more nuanced appreciation of the dynamics. In terms of direct outreach, an IRO will likely need to be calling not just shareholders in a given region with whom he or she has likely formed a relationship, but also secondary and tertiary investors who were previously unknown. These investors may be valuable targets as potential shareholders, but they may not be clients of a given investment bank. The banks can and will be helpful in targeting these investors, but may not be willing or even able to contact them for financial or regulatory reasons. An additional complication will result from the fact that different banks may have relationships with different investors in a given region. While this has always been true to a degree, the range of the difference in these relationships is likely to widen markedly. Engaging with multiple banks to manage a given roadshow, as is common practice on IPOs, may become more common in the aftermarket. An additional practice that may become standard is direct follow-up from the IRO to the investor following the meeting. Currently, the bank is responsible for post meeting correspondence and feedback solicitation. This process is imperfect for many reasons, and taking this interaction “in house” may correct some of the current issues while offering the IRO a bridge to maintaining a dialogue with the investor.

These are just a few of the incremental wrinkles being creating by an evolution in standard practices in corporate access that has been in place for decades.  While much is uncertain, what is certain is that the IRO will have to take a much more hands-on role to ensure a positive outcome. If you have questions about managing corporate access and what it means for your company, contact us today.

Matt Lane, Managing Director

Earnings Video Conference Calls

Must see T.V. – Thoughts on using video broadcasting for earnings conference calls

Earnings calls are arguably the most important form of communication that companies have with the investment community. Investors expect management teams to discuss business updates and financial performance every 90 days. This is the best opportunity management teams have to broadly disseminate material information and provide context to the formulaic legalese of quarterly SEC filings while gaining Reg FD cover.

Amid the wave of social media proliferation and big data, investors now have more resources than ever to do their due diligence on companies.  Using mediums like Twitter and LinkedIn for corporate communication requires companies to be aware of all content creation and dissemination to ensure consistent messaging.

To stay in line with this progression and take complete control of messaging to investors, some companies have started video broadcasting their earnings calls. The early pioneers of this are telecom, media and tech companies, who can use earnings calls to demonstrate and promote their own products, services and values in order to create a deeper connection with customers and shareholders. T-Mobile and Netflix stream their calls on YouTube. Recent IPO Zoom used their own video conferencing software to host their first call as a public company. We’ve watched these calls, and here is a breakdown of the structure of each.

T-Mobile US (TMUS) Q1 2019 Earnings

T-Mobile has been video broadcasting earnings calls for about four years, and they are certainly leaders of the format. From their IR site, the video stream is as easy to find as the webcast. During the call, the management team is situated in standard press conference position, with leadership seated on one side of a table and the company logo and ticker behind them. As would be expected from a large-cap company with significant resources, the production quality is high. Multiple cameras are used, one on the whole team and others focused separately on individual speakers. For the prepared remarks, CEO John Legere reads from a script on the table in front of him. Q&A is moderated via telephone operator, and camera angles adjust to t focus in on the speaker. The flow and structure is similar to a standard earnings call.

Netflix (NFLX) Q1 2019 Earnings

Earnings reports from Netflix are unique because they forego the standard call format; instead, they publish a letter to shareholders and then hold a video conference call that consists only of Q&A moderated by a sell-side analyst. The discussion lasts around 30 minutes, and sections of the shareholder letter are expanded upon and referenced.  The structure is very conversational.

Zoom (ZM) 1Q FY2020

In an effort to highlight their technology, Zoom webcasts their earnings report using their own software. The video conference includes live video of management delivering prepared remarks along with corresponding slides. This webinar format is familiar and works well for an earnings call. When it comes time for Q&A, analysts ask questions on video. This demonstrates an important connection between participants.

Conclusion

In each of these video-broadcasted earnings calls, Q&A is what sets this format apart from the standard audio call. Video enhances the experience and allows for more engaging discussion between management and analysts. Body language and facial expressions convey information and tone that disembodied voices on a Polycom do not. Much like a one-on-one meeting, there is value in seeing how someone answers a question. Video provides management teams with the ability to show genuine confidence, conviction and excitement about developments and initiatives. Investors and analysts appreciate this level of transparency. Overall, the video experience fosters highly effective communication.

Unfortunately, a quality production requires additional preparation, logistics, time and resources, but in terms of effectiveness, it is hard to identify shortcomings. Now that video streaming technology is widely available and accessible, we expect to see this format become more prevalent over time. To make this transition easier for companies, consider starting with one video report a year, such as the annual report.

Could video broadcasting earnings calls make sense for your company? Contact us today to set up a meeting with our team. We’d love to work with you and strategize what is best for your company.

Philip Taylor, Associate

Quarterly Earnings – Do We Really Need to Read The Script?

As we think about best practices for earnings and quarterly reporting, we focus on the message in its totality and how to best prepare. This means the press release, scripted remarks, Q&A preparation, analyst after-call preparation, and slides (if relevant). We spend time reviewing perception, consensus expectations, specific analyst areas of focus, and competitive commentary as well as sector sentiment – all in relation to current and expected future performance.

That said, we have been recently asked about the necessity of actually reading a script of prepared remarks to analysts and investors. In an increasingly digital world, it seems a bit inefficient to force the Street to furiously take notes and quickly draw conclusions on relevant information and metrics…then form their questions so they can ask provocative questions in the Q&A session. We decided to explore this further and here is what we learned.

Here is the question we posed: Would it be better to post management commentary in the form of a shareholder letter, give the analysts 30-60 minutes to read it, then host only a Q&A session which is shorter and to the point?  The answer is not necessarily – at least not in the healthcare sector. But, we do see value in making prepared remarks available to your analysts and the Street by disseminating them after the webcast and/or posting them on your IR website. We also think supplemental materials can be valuable, especially for companies with multiple business segments and/or clinical data sets.

1 | The data – a recent NIRI thread. NIRI recently published results of a survey1 on best practices for earnings, and a related question was posed – specifically, “Which companies with a $1 billion market cap or greater issue prepared remarks in written format and host a call for Q&A only?” Below was the answer:

  • Ciena Corp (CIEN; $6B Mkt Cap) – Beginning Dec. 2017 Ciena Corp posted their prepared remarks 90 minutes before their conference call, then hosted a very brief segment of CEO and CFO comments with a longer Q&A session. We would characterize this as a “light version” of the Q&A only approach
  • Five Below, Inc. (FIVE; $7B Mkt Cap) – Five Below is interesting in that Q2 2018 was a traditional call; in Q3 2018, the company posted their prepared remarks and only hosted Q&A, but in Q4 2018 reverted back to the traditional format. We aren’t sure what to make of this.
  • Greif, Inc. (GEF; $2B Mkt Cap) – From 2015 to 2017 Greif posted prepared remarks and hosted a call with Q&A only. As of 2H 2017 through the present, the company is following the traditional format of reading prepared remarks and hosting a Q&A session
  • Netflix, Inc. (NFLX; $160B Mkt Cap) – Netflix is interesting because they host Q&A only with a twist – they have sell-side analysts ask questions sent in by investors
  • Tesla, Inc. (TSLA; $46B Mkt Cap) – Beginning in 2011, shortly after its 2010 IPO, Tesla has posted prepared comments and hosted Q&A only. Now, however, Elon Musk is taking a few minutes to emphasize key highlights at the start of the call, before Q&A
  • Ubiquiti Networks, Inc. (UBNT $11B Mkt Cap) – Ubiquiti posts prepared remarks then hosts a call for Q&A only

So, while a small number of companies, mostly in the tech sector, have migrated away from the traditional earnings call format, there aren’t many. And in certain situations, whether it be to address a complicated message or for other reasons, a few of these have migrated back to providing prepared remarks in addition to the Q&A session. As we consider precedent setting – we would caution that if a company decides to evolve in this direction, they are confident they won’t want to revert back to the more traditional format in subsequent quarters to address potential confusion.

2 | Disseminating prepared remarks – regardless of call format. As analyst time is becoming increasingly stretched, we are competing for mindshare. With that in mind, we believe that if we can make it easier for the analysts to understand quarterly results, messaging and guidance, then companies will get a better result. On busy days, analysts will have as many as six companies reporting earnings at the same time and will be juggling calls. And we know that if forced to choose, they will migrate to the most controversial situation as opposed to a conference call with straightforward looking results and guidance. With that in mind, we view it as best practice to disseminate the prepared remarks to covering analysts as soon as the call ends. This gives them a chance to read the commentary and come to the after-call with more informed questions. It also means that they are hopefully less apt to misinterpret something and print a mistake or have line items in their models that are inconsistent with management commentary. We also suggest posting the prepared remarks on the IR website. In fact – in a recently published NIRI survey, of the companies that post their scripts online, roughly 80% keep them archived for at least a year.

3 | Materials – what supplemental materials are helpful? For SMID-caps, we generally believe that the press release (including financial tables) and prepared remarks will suffice – with the 10Q and 10K documents on file with the SEC shortly after or simultaneous with the call. That said, for large diversified businesses and/or those with multiple clinical data sets, it can be beneficial to include a slide deck with the earnings report. In the recently published NIRI survey on Earnings Best Practices, roughly 40% of mid ($2-10bn) and large ($10-25bn) cap companies – across all sectors – included slides in their quarterly earnings presentations.

4 | Healthcare analysts – their feedback. We queried several healthcare analysts at bulge bracket, emerging growth and boutique banks on this topic. A couple of them were receptive to the idea of companies posting their prepared remarks online, with the caveat that the call should necessarily be shorter (i.e. limited to 30 minutes). More, however, felt that they are inundated with written and digital material to read. The process of being required to dial into a conference call, while seemingly “old fashioned,” forces them to prioritize time and pay attention (rather than skimming). They also commented that posting prepared remarks might seem impersonal and could detract from the analyst-management partnership and relationship that they work to develop. All in, we found that meaningfully more analysts would rather stick with the status quo than switch to a model where companies post their comments online and only entertain questions (despite their acknowledgment that this could be more efficient). Across the board, they voiced positive receptivity to receiving the scripted comments at the conclusion of the call.

5 | How important is tone? This is one of the more frustrating (and seemingly inane) topics for many of our management teams – the fact that they are being judged on how energetic or dour they sound on a call. What if the CEO was up all night with a sick child, received bad (or good) personal news moments before the call or is sick herself!? That said, as we talk to investors and analysts – they routinely comment on management’s tone: how they sounded during prepared remarks, Q&A and in the after-calls. They also talk to each other about tone, “…the CEO sounded generally more upbeat about the market than he did last quarter…” Really? We are pretty sure most management teams have a long-term view on their market opportunities, but OK. We have a lot of opinions on this topic, but one thing is certain – analysts will comment on tone. So, is it important? Yes. Practice the prepared remarks and Q&A – especially the thorny questions – with your IR team so you can get feedback on how you sound.

In conclusion, there are interesting trends shaping up in how management teams communicate with shareholders and analysts. We try hard not to default to the most comfortable approach, or the “it’s always been done that way” plan, rather to be innovative and forward thinking – often drawing from the tech sector for our healthcare companies. We think for some companies, posting prepared remarks online (and disseminating them) then hosting a thorough Q&A session may be a good, efficient approach to reporting earnings. But, it’s not yet mainstream and this approach does have some drawbacks, so tread carefully!

We have worked with hundreds of healthcare companies as they handle quarterly earnings and what will be most effective and impactful. With our Street backgrounds, coupled with our immersion in the sector, we are uniquely positioned to share our experiences with similar situations as well as to look ahead to be more forward thinking. We roll up our sleeves to help both strategically and logistically to ensure the message is clean and delivered in the best way possible with the ultimate goal of maintaining and building credibility to create shareholder value. Give us a call or check out our website at www.gilmartinIR.com for more information on how we partner with our clients.

Lynn Lewis
Founder & CEO

Quarterly Earnings Calls: To Prerecord or Not Prerecord

The United States Securities and Exchange Commission (SEC) requires that public companies, whose securities trade on an exchange in the U.S., file quarterly and annual financial reports. According to the National Investor Relations Institute (NIRI), a U.S.-based association of corporate officers and investor relations consultants, 92% of companies represented by their members conduct quarterly earnings calls and webcasts as part of their earnings release process.

Traditionally, these conference calls and webcasts begin with management reading scripted comments about the financial results of their most recent fiscal period, followed by a question and answer (Q&A) period. This dynamic presents a scheduling nightmare for many organizations—arranging for management teams to be in the same location at the same time, or arranging the technology to make this appear to be the case, is often easier said than done. Over the years, though, technological advances have allowed conference call providers to offer a prerecording service to their clients. This enables management to prerecord their scripted comments of the conference call.

Before taking advantage of this technology, it’s important to first consider the pros and cons. Here are some factors to consider when thinking about prerecording an earnings call:

Smoother Speech

Based on the current trend, the length of a typical medtech quarterly earnings script is between 2,500-3,000 words and takes approximately 22 minutes to read. Prerecording this section of the call allows management the opportunity to eliminate any misread words or verbal stumbles, potentially making the call sound more professional.

Location Illusion

A potential issue that can be resolved via the prerecording process is the difference in speaker volumes. With the potential of “C-Suite” employees working in different office locations around the globe, having an edited prerecorded earnings script can make it sound like every speaker is in the same room.

Increased Cost

Quarterly conference calls and webcasting services can be expensive. Adding a prerecording service can increase overall costs by 20-50%.

Inflexible Schedule

Prerecording services typically require recordings to occur 48 hours prior to the actual earnings call, allowing time for editing. This requirement forces companies to have a completed and internally-approved script two days before their earnings call. Prerecording services might make exceptions to their timing requirements, but at an additional charge.

Differences between the Prerecorded Segment and Live Q&A

Sometimes technology can do too good of a job. Crystal-clear audio quality of a prerecorded portion of the call might differ drastically from that of the live Q&A. This may throw off some investors, and make them question the content.

Management Warm-up

Many of the management teams we have spoken with about prerecording believe that reading the script live during the conference call is a nice warm-up for the Q&A. Reading the script live sets the tone and gets management in the right state of mind for the second half of the earnings conference call, which is an advantage that prerecording doesn’t offer.

After considering these factors, we’d like to present a third option that’s being utilized by Amazon.com, Inc. and Tesla, Inc., which is to eliminate the scripted section of their conference calls altogether. Both companies release comprehensive earnings reports and only hold a Q&A session during their conference calls. This change in conference call practice has not yet been adopted by any medtech company, but we would not be surprised if several large cap companies implement this change in the next few years.

While the SEC requires public companies to file quarterly and annual financial reports, it’s up to the companies to decide whether to host a corresponding conference call, how it should be conducted, and what information should be included. In our opinion, it’s still the best practice to include management commentary and a Q&A session. As to whether or not to prerecord the management segment, contact us to further review your options and decide what is right for your company.

Greg Chodoczek, Managing Director

IPO Marketing, Pricing & Allocation Tips

You’ve spent the last 12 months preparing for your IPO and life as a public company, selected bankers, and have finally flipped your S-1 from confidential to public. But what’s next? As you prepare for your first salesforce in-house presentation, the roadshow, and ultimately the deal pricing, here are a few tips to keep in mind.

In-House Presentation

The in-house presentation provides a great opportunity to tell your company’s story to the bookrunners and co-managers’ salesforce, who will in turn help tell your story to potential investors. These in-house presentations will likely be your final presentation before meeting with investors. By this point in the process, you should be well-versed in your slide deck and fully prepared for a tough Q&A session following the presentation. Many of the salespeople have deep sector knowledge and can anticipate, or may already know, the questions their clients will be asking. This time can be instrumental in preparing you for anticipated questions.

Roadshow 1-1 Meetings

The roadshow will entail several types of one-on-one meetings with key audiences. These can range from meeting with a single analyst to a sit-down with multiple PMs and analysts. For the roadshow, we encourage you to remember two things: you’ll encounter varying levels of engagement, and this is just the beginning of life as a public company.

Audience engagement

Roadshow meetings run the gamut in regards to audience engagement. Some accounts will not be fully prepared, need to see the full roadshow presentation, and will finish up with few questions. On the flip side, other meetings may involve a PM who has completely marked up the prospectus and wants to dive in with granular questions. Keep in mind, though, that regardless of initial engagement, either of these accounts could end up being your largest buyer. We have seen clients come out of a meeting thinking there is no way the account was interested, only to have the account be a large participant in the IPO and aftermarket. Regardless of perceived interest, give each account your full attention and treat them like they’re already your largest shareholder.

This is just the beginning

It’s also important to remember that this is just the beginning of your life as a public company. You’ll be coming across the same investors in the future through conferences, non-deal roadshows, and possibly follow-on offerings. And while an account may choose not to participate on the IPO, they may turn around and become your largest shareholder buying in the open market or participating in a follow-on offering.

Pricing

IPO pricing is more of an art than a science, as it requires blending both quantitative and qualitative feedback from the roadshow. On the quantitative side, some of the metrics considered include:

  • Subscription Levels: On one end, a deal that is subscribed one to three times is likely to be priced at the low end of the filing range or below while a deal that is more than 10 times subscribed has a chance to price at the high end or above. There is no exact subscription level to pricing formula, but this is a good metric to predict demand for the deal.
  • 1-1 Conversion Rate: 1-1 meetings typically consist of the biggest accounts that are most relevant in the space. The higher the 1-1 conversion (where an account does put in an indication of interest as opposed to saying no), typically the stronger the deal.

Here are a few qualitative metrics to consider:

  • 1-1 Meeting Schedule: Some of the earliest feedback on the deal’s interest will be in the quality of the accounts taking 1-1 meetings. Ideally, the schedule will be filled with the highest quality accounts that are active in the sector and shown to be long-term investors. 
  • 1-1 Meeting Feedback: During the roadshow, and up to pricing, feedback from the 1-1 meetings gives a sense on whether an account plans to build a long-term position or plans to flip their allocation (if any). The more positive feedback from larger accounts with a proven history of building large positions in the space, the stronger the deal.
  • Market Conditions: While market movement and comps can be tracked quantitatively during the roadshow, this will not always have an impact on pricing. However, a weak market or a sell-off in the comp group can spook investors into not taking new positions, and thus passing on the deal.

Allocations

Allocations can drastically different depending on IPO pricing and how investors received the deal. Here are a few variables to consider:

  • Cold IPO: In a deal that prices at the low-end of the filing range or below, allocations will typically be given to fewer investors and be heavily top-weighted. In this situation, the book-runner will inform accounts that indicated interest that they may receive a large percentage of what they have indicated for. This can lead to various outcomes, including the account canceling its indication and choosing to pass on the deal. On the flip side, an account that had initially indicated for 10% (a common way of expressing interest) may express interest in taking a much larger position.
  • Hot IPO: For a deal that prices at the high-end or above, the allocations will typically be spread among more accounts. One reason for this is that the broader demand will see more accounts interested in building long-term positions. In addition, more stock will also be allocated to accounts that are known to be short-term, or who will flip the stock. The flippers, or those that will sell the stock on the first day or shortly after, help by creating a liquid trading market (a goal of any IPO).
  • Long-Term Holders: When making allocations, it is impossible to predict who the long-term shareholders will be with 100% accuracy. An account that was initially expected to be an anchor shareholder may sell due to market conditions, thesis switch, or a host of other reasons. Ultimately, as a small-cap company ($300MM to $2B market cap), there won’t be enough float for more than 10 to 25 accounts to have meaningful positions. As insiders sell stock over time, the market cap grows and there are further events such as a follow-on, the shareholder base will broaden to include more investors.

The above items are just a few you will encounter during the IPO process. For more detail on any of the above and other things you can expect during the roadshow, pricing, and allocation of your IPO, contact us.

Tom Brennan, CFO

Managing the Press Release Process

Press releases are an important component of any company’s investor relations program. They are a key method for companies to announce news to a variety of stakeholders.

Creating and approving press releases can be an involved process that requires various resources and stages of internal and external approval. Managing this process is not a simple task, particularly when you are working with different internal teams and, at times, third party organizations.

What is the best way for this process to be streamlined to save time and ensure the best final product is communicated to the public? Below is a list of some key components in maintaining the integrity of the press release process and the final written product:

Point Person. Have a designated point person who is responsible for driving the process forward, writing an initial draft and identifying and collecting input from the appropriate stakeholders. This person must liaise with their internal colleagues as well as external partners to ensure everyone is on the same page and that the message you wish to send is clear and easily understood.

Deadlines. Clarify your deadlines and communicate those deadlines to involved stakeholders. Give yourself enough time before the scheduled release time to make sure deadlines can be met. Do not be shy about setting deadlines for senior leaders giving their feedback. Anticipate delays – multiple stakeholders may have multiple opinions on the direction or the content of the release. It is also possible that more people will be inserted into the process at the last minute. If possible, build in ample time for versions to be circulated and edited.

Sourcing Quotes / External Approvals. Press releases are often written in conjunction with outside parties. Approvals and sign-offs for quotes might be required and can take time. Anticipate approval timing in your deadline and reach out to third parties for approval early. Remember that many press releases need to be cleared by a legal team, who might require extra time for review.

Press Release Approval Committee. The “approval process” is a vital part of generating a press release. Know ahead of time how many people need to approve the press release. Consider establishing an internal approval committee for all press releases. This can be a tricky task, as many team members feel that they should have input. This group should be small – remember that in most cases a press release contains material non-public information, so keeping access to this information to a limited group minimizes chances of information leaking out to the public.

There are many components that go into the creation and publication of press releases. Managing the press release process is not a simple task, particularly when you are working with different teams and other companies. While there is no one-size-fits-all approach to managing a project with several stakeholders, these tips should help things run smoothly in order to get the best communication out to the public arena in the most efficient way possible.

Debbie Kaster, Managing Director