provide a summary of the most important characteristics of MEMDEC's current financial communication status:
"The next three quarters continued to be strong, with growth in revenue and bottom line earnings. All of the growth was driven by the new design business. Internally, Michael frequently pointed out that he had been correct, there was huge pent up demand for this service. At the same time, MEMDEC continued to invest in the outsourced production lines. Those investments were very capital intensive, so MEMDEC had increased its borrowing from a syndicated loan group. They expected to have those lines fully producing items in 2016, when contracts with two new, very large, customers went into effect. That cash flow would pay off the debt within a few years.
Each quarter of good news attracted more attention to the stock. While the stock rose steadily throughout the period, there were large jumps around each earnings announcement. Sofia capitalized on this increased performance by attracting two new analysts to cover the stock, both of who initiated with a buy. Michael was so pleased with the stock performance that he celebrated Sofia’s six-month work anniversary with a gift – he had IT install a “ticker” reader that displayed MEMDEC’s current stock price and volume traded for the day. While the first reader was installed in the conference room that Sofia and her staff of two frequently used, Michael decided that he liked it so much he had one installed in the company cafeteria as well.
Overall, Sofia was pleased with her success during 2015. However, there were a few areas of concern. Despite her attempts to get more details into the press releases and conference calls, Michael and the CFO did not embrace the idea. They often would remove her comments from the press releases just before the final draft went out. And they would simply skip over the details scripted for the conference calls. She tried to convince Michael more details would help develop understanding of the firm. In particular, she wanted Michael to provide more insights on the mix of revenues and the large capital expenditures for the dedicated lines. Michael originally listened, but demurred that it was too complicated for the analysts to understand – adding that really they only cared about how the numbers all summed up. When Sofia pushed her ideas again, Michael snapped at her that he was done with that topic since everything seemed to be working well the way he liked to do it.
The interactions during the east coast roadshow visits also gave her pause. She found that they usually did not get to meet with the portfolio managers, but instead spent time with junior buy side analysts. Michael was good at putting the analysts at ease, but answered almost all of their questions with generalities. In particular, he deferred technical questions, often responding with comments such
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as “you would have to be an engineer to understand that anyway”. When one of the analysts said he had been an engineer, Michael told him he did not want to give away trade secrets, so he preferred to let the results speak. Sofia suggested they bring along some of the technical executives on the next visit, but Michael responded he would prefer that they focus on designing chips since that is what actually drove revenue.
The annual analyst day had been similar. Michael and the CFO insisted on a schedule where they were the only people presenting. Further, beyond planning their two hour presentation, they wanted to have a brief headquarters and plant tour led by the marketing VP and then end the afternoon at Michael’s yacht club. They insisted that this format was always very effective in the past. However, after sending out the agenda Sofia found that only a few analysts said they were coming and even those analysts were junior members of the team. When she reached out to some of the more senior analysts and one big investor, they all said they did not find the day worth the travel to Seattle. One long time analyst did say he would attend if Norman or “one of his guys” were added to the agenda. Michael quickly dismissed that idea, saying people needed to know he was running the company, not Norman.
Perhaps most concerning, on the third quarter call in late October Michael had snapped at the analyst from Conner & Hayes, who was the only analyst that continued to list MEMDEC as a hold. Michael had answered a question about the future from another analyst by saying “The sky is the limit for this company, just more good things to come”. While that analyst did not follow up, the Conner & Hayes analyst asked for more specifics, both in amounts and times. Michael responded “You never have anything good to say about us. I don’t know why I bother even responding to you. In fact, I won’t!” Following the call, Michael told Sofia she needed to pressure Conner & Hayes to assign a new analyst and “get rid of this bum”.
In response, Sofia had asked Michael if they could talk about some changes in IR strategy. She had reiterated her requests for providing more detailed revenue breakdowns and capital expenditure explanations. She also told Michael they could not try to “fire” an analyst and that she was very interested in revamping analysts’ days. She had prepared several other more specific comments, but Michael told her he would have to hear those ideas later as he had just remembered another meeting. The next morning the CFO came into her office and said “your job is not to tell Michael what to do, it is to sell him and the company”.
Despite those few misgivings, Sofia headed into the New Year feeling pretty good about all she had accomplished. She had hired a staff of two (a junior IR analyst and an IR manager), put in place many new policies and she felt like she was developing good relationships with many of the analysts and investors. On top of that, her family loved Seattle, thanks in no small part to the excellent schools Michael had helped to find for her kids and the great job for her husband Frank."