I.C. Angles Communications Post…
Improving investor communications can drive multiple expansion. Oftentimes the impact of better IR is hard to measure, but sometimes the benefit is clear cut. The latter was the case with one of my first consulting clients, for whom I leveraged my investment buy-side experience on behalf. When I came to KLA-Tencor, one of the leaders in the semiconductor industry, the company was suffering from a lower valuation than peers, due largely to a lack of communications in general and a compelling investment story in particular. But obvious and not-so-obvious elements were present to turn things around, and move them from a laggard to a leader — not just in their investor relations program, but also with respect to their relative stock valuation. And that was exactly what we did.
To drive a higher relative multiple, the single most important ingredient isn’t communications. It’s execution. If a company can financially outperform its peers, it will be rewarded. Conversely, all the communications in the world cannot permanently levitate a brick, despite how hard you throw it up with hyperbole and some of the sky high valuations a few companies with great stories and little execution have managed to generate, such as during the dotcom bubble of the late 90s. My preference is to build sustainable value, and in the case of KLA-Tencor after the tech bubble burst in 2000, the company was gearing itself up to outperform its peers. But if a company’s execution is predicated on a complicated business model and technologies, which investors don’t fully understand, valuation is penalized. Investors are oftentimes cynical and if they don’t understand something, they frequently assume the worst. Unless coupled with strong IR communication efforts, execution will be belatedly and only partially rewarded.
Fortunately, KLA-Tencor had hired a new chief financial officer, John Kispert, who was actively seeking consultation on how to improve investor relation efforts. He was interested in doing things differently, and was also a strong leader, who worked well with others and was constantly seeking advice on how to improve himself and his program. In terms of how he interacted with financial analysts, John had some of the fewest weaknesses to work on, but perhaps the greatest interest in working on his weaknesses, among the clients I have advised. Giving counsel isn’t useful if it’s not put into practice, and John wanted new ideas to leverage. The truth is having a “good” client, like John, is more important than having great ideas. But there were also some great ideas to put into practice for the company at the time.
KLA-Tencor was the manufacturing leader of process control and yield management solutions for the global semiconductor industry. Their products didn’t manufacture semiconductors. Instead, they monitored and controlled the products doing the manufacturing. Up until this point they had been seen as a sort of insurance to keep things from going bad and viewed as a cost center. It was a negative message for customers and not particularly compelling for investors. So, I worked with the company to develop entirely new messaging and positioning that IR would spearhead, but that would also be integrated with our PR efforts. The fact was that new manufacturing technologies were making the production process more complicated and difficult. There was going to be a greater need for the company’s process control and yield management solutions. However, our positioning transcended this to communicate an even more powerful value proposition.
Our solutions weren’t a cost center, focused on avoiding losses. Instead, our solutions were a profit center that accelerated the realization of high manufacturing yields on the newest and most profitable semiconductors. We showed that the more of our solutions a manufacturer employed, the faster they ramped production on new chips, accelerated their time to market and realized greater profitability via more sales on their highest margin products. We couldn’t name customers. But we could and did show real data from different unnamed production facilities to prove our point. In other words, we backed up what we were saying with proof points. And that proof helped drive more customer sales. As manufacturers realized, based on data they could confirm, that greater investments in such high ROI solutions improved their profits, they purchased more KLA-Tencor equipment.
In this way our communications, directly contributed to our financial execution. On top of that, we messaged to how we could not only outgrow our peers in good markets, when production was being ramped up, but outperform them in bad markets, when semiconductor manufacturing companies cut capex by pushing off capacity, volume manufacturing purchases, but still invested in technology development. The fact was our solutions were especially critical for those R&D pilot lines and made up a disproportionate share of technology purchases. We were positioned to outperform throughout the industry cycle, and we began telling an understandable, positive and credible story on how we would outperform our peers.
We forthrightly addressed issues that came up, including a major competitor in Applied Materials trying to take market share from us. We spoke to our differentiated value and barriers to entry. But we also showed respect to them as a competitor by not arrogantly dismissing their efforts and set realistic expectations for preserving leadership in our markets that we then went on to meet. We consistently told our story, month after month, until we heard our own investors able to repeat it back to us and saw our valuation grow against our peers. To communicate that message we leveraged and integrated it into every vehicle we had from scripted earning calls and product announcement outreach, to prepared executive interviews and conference roadshows.
These efforts usually take about eighteen to twenty four months to really gain traction and by the two-year mark our perceptual tracking audits of the analyst community were showing we had become in their minds one of the top companies to emulate. A market analyst, Dan Hutcheson of VLSI Research perhaps stated it best when he wrote in January 2003 about our efforts with the financial analyst community, “Since analysts are paid to be skeptical, they will take a more cautious view with less information, which ultimately bears negatively on your stock. One believed that KLA-Tencor has gone from a discount to the market leader to a premium, mostly because they communicate better, more openly, and with less spin….”