Managing Communications with Research Analysts February 13, 2017 Michael Coke Corporate Julia Reigel Corporate The materials in this presentation, and the opinions expressed in this webinar, are those of the authors and speakers, respectively, and do not necessarily reflect the opinions of the companies or institutions with which such authors or speakers are affiliated. In addition, neither these materials nor the views expressed in this webinar are intended to constitute legal advice as to any particular situation. 1
Goals of developing earnings model Rational basis for investors to value the company and measure performance Understand key business drivers (revenue, expenses, etc.) Predictability & minimize (primarily negative) surprises Long-term earnings model Support for underwriters due diligence Enable bankers and investors to value company Fundamentally based on internal financial models used to grow and manage the company 2
CEO expects Multiple Models = Multiple Haircuts Marketing possible Salesforce commits Decreasing Expectations CFO believes Board approves Bankers see Analysts get 3
How is the model prepared CFO, Controller, FP&A lead effort, but: Input from salesforce, operations and other functional departments Competitors & market research When is the model prepared for the bankers & analysts? What factors are considered? Board approved operating plan & long-term model Composition of earnings Recurring revenue & sales forecast roll-up Bookings / subscription metrics (new customers, churn) New product intro timing and product transitions Expenses to support growth & cost of being public Are historic rates of growth sustainable? 4
Other considerations in developing model Sales pipeline is there a robust methodology of tracking and evaluating prospects? Pricing policies, competition and degree of price control What happens if cost of revenue increases? Necessity and timing of cost efficiencies at what revenue levels SEC staff review over critical accounting policies how would any changes impact the model, including ASC 606 transition Impact of stock based compensation and other noncash expenses Capital expenditure and working capital requirements 5
What is the underwriters goal for the model Predictability Adequate systems in place for management to understand the levers needed to move their business Identifying revenue model transitions and understanding rationale Long-term attractiveness of issuer as an investment Long-term growth rates, gross margin, operating margin and profitability consistent with comparable companies Pricing based on comparables analysis Identify who comparable companies should be First in sector Hot growth company in relatively stagnant sector Long term model not consistent with logical peers 6
How do underwriters and sell side analysts evaluate and use the model Global settlement means that management meets separately with two groups Should counsel attend research meetings? How do the objectives of underwriters differ from research analysts Haircuts Consistency with input from customer and supplier diligence calls Depth of management 7
How is the earnings model used in the IPO Pricing the Offering Forward model versus historical financials How many years of forward revenue/earnings are used to price the deal What metrics are used Explaining the business to investors Buy side analysts and investors Positioning versus comparable companies Do investors see the model before the IPO is priced? What if the model changes during the road show? 8
How does the relationship change after the IPO How does the relationship with analysts change once the deal is priced? Reg FD applies Bank policy regarding commencing coverage Timing of initial research publication (impact or lack thereof of JOBS Act) Underwriters Have an obligation to make a market in the shares Credibility concerns if management cannot meet expectations based on model in the short-term 9
What is earnings model used for after pricing Sell side analysts evaluate their own forecasts of company performance Investors use as a basis for making decisions to: Increase or decrease position Set investment strategy for the issuer Evaluating management credibility What if management consistently beats its own guidance or fails to achieve its own guidance? How are the metrics of the business changing and what is management doing to address the impacts to the business? 10
What is earnings model used for after pricing (cont.) Underwriters Would investors be receptive to another offering if the issuer under or over performs? Are the comparable companies still appropriate as their business develops and the issuer s matures? M&A deal pricing Negotiating economics Fairness opinions How do analysts decide whether to initiate or drop coverage At the time of IPO After IPO 11
How does the company manage the model after the IPO Generally provides quarterly and/or annual guidance to the investor community How to decide how much (if any) guidance to give? How does street guidance compare to internal plan and forecasts? What if the street consensus is inconsistent with internal model: Periods when guidance has been provided Longer term How does management decide if a preannouncement is necessary? What happens on follow-up calls after earnings with analysts? Tension between giving more detailed information to improve analyst understanding of business and model and desire to control flow of information Do analysts tell the company what their perspective is prior to publishing? 12
How does the company manage the model after the IPO (cont.) How does management reset long term model expectations? Commentary on earnings call to identify factors affecting trends without giving specific guidance Discussion on conference call versus at investor conferences Focus on long term model at conferences explicitly Under FD, is there a safe harbor based on the earnings call or do the slides need to be filed (publish on IR website)? 13
Thank you! Michael Coke Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304 mcoke@wsgr.com Office: (650) 565-3596 Julia Reigel Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304 jreigel@wsgr.com Office: (650) 320-4509 14