As befits the company whose equipment and expertise weave the web around the world, Cisco Systems’ IR department is continually expanding its network of analysts and investors – as well as the human servers who keep them primed with the latest information about the Nasdaq Stock Market’s third biggest stock. Indeed, with six staff and four more pending, this investor relations team is growing into one of the world’s best – a target for any company to shoot for.
Cisco’s enhanced IR program has not gone unnoticed by Wall Street. US analysts and investors surveyed for the 1999 Investor Relations Magazine Awards voted the IR portion of Cisco’s web site (www.cisco.com) one of the best , ranking alongside Intel and Microsoft. In 1998 and 1999, Cisco achieved the top ten list for best overall IR by companies with a market capitalization over $30 bn.
Citigroup analyst Lanette Donovan, who visits Cisco’s San Jose, California headquarters four or five times a year, rates Cisco’s IR team ‘excellent’. ‘They make a point of caring about what investors are thinking, and catering to investors’ needs, ‘ she adds. Donovan points to the fact that Cisco takes polls at analyst meetings to see what analysts want, and subsequently changes the format of the meetings based on the responses.
Chris Stix of SG Cowen is a monthly visitor to Cisco HQ. ‘More than any other company I follow, Cisco gives completely consistent guidance to all the players on the Street, which is a difficult thing to do,’ he says. ‘At the same time, the company gives more access to its executives than anyone else. They do a superb job taking you through the technology, the financial model and the market position. Their response is also superb and remarkably fast.’ Stix commends the investor relations team with having undergone product trading so they can answer technical questions as well as financial ones.
‘IR is an important part of a company’s interface with Wall Street and investors, and if that’s not working, it hurts your valuation,’ adds Marianne Donlan, an analyst with Palantir. ‘Cisco has a good valuation because they’re consistent in what they say, and they give good guidance about what to expect. They’re very good at making sure that what they want projected is clear. All that helps people understand the company and its opportunities better and that gets it a higher valuation as a result.’
While Cisco’s whole IR team wins kudos, senior IR director Mary Thurber attracts widespread personal acclaim as an individual. ‘Professionally, Mary Thurber’s just the best,’ Dolan continues. ‘She’s exceptionally knowledgeable and fair, gives everybody equal time and effort, and she’s very quick to respond and very quick to get you answers if she doesn’t have them. Nobody works harder, nobody’s more focused, nobody’s more fair or knowledgeable, and she has access to the entire company. They make sure she has the resources to do her job.’
Fast forward
In an industry where history seems on perpetual fast forward, a major in history from Stanford may help Thurber as much as her MBA from Harvard. She began with Cisco Systems in 1992 working on the treasury and M&A side. In 1995 the new CFO Larry Carter came on board and asked her to start the IR department. ‘I had no experience of IR at all, but if you’re inquisitive and a good communicator, and you have good basics in understanding the company, then I think that’s what makes an IR perspective. It’s communication. The Wall Street game is all relationships, so it’s about building relationships. And, of course producing results.’
To get those results, Thurber’s expanding IR team currently has five people reporting to her, with an increasing precision of focus. In addition to the indispensable administrative assistant, the department’s program manager Lisa Magleby ensures that a whole range of outsourced IR activities go smoothly; and she also handles retail inquiries. This includes looking after vendor relationships, the web site, and the hotline for investor packages. ‘We leverage the web a lot. The site has a networking tutorial on it to explain to people what we do and we have a mass of information on our acquisitions. And of course people can listen to our conference call over the web.’
Selective disclosure is IR anathema to Thurber, who declares that she doesn’t want anybody to be locked out ‘regardless of how small their share position is.’ Faced with SEC strictures about selectivity, some companies have abandoned the traditional conference call. Cisco’s ingenious compromise gives any stockholder access to the call, giving it the Street’s biggest teleconferences – up to 1,300 on one recent occasion. The Cisco method of managing a mass-meeting by telephone is to allow only the analysts to raise questions. ‘In general, buy-side analysts and investors don’t ask them there anyway,’ Thurber explains, and the call is also available on the web afterwards.
Specialized focus
In building Cisco’s IR department, Thurber consciously follows the example of other companies – applying a ‘benchmarking’ process. For example, members of the Silicon Valley chapter of Niri benchmark against each other, she says. And prior to the spate of consolidation in the networking sector, Thurber and a group of fellow IROs from networking companies would throw an annual conference they called Networking Connections – ‘just to get in the same room,’ she describes. ‘We would also visit each others’ offices. I’d go to Bay Networks or 3Com and we’d chat. We don’t see each other as competitors; we see each other as valuable resources.’ These days Thurber uses Intel and Microsoft for benchmarking because they both have large IR departments.
Cisco’s IR department already has a senior manager responsible for looking after the sell-side alone. ‘We have 40 analysts following us, so it’s a full-time job,’ Thurber explains. Plus, she’s adding a buy-side manager to take a special interest in targeting on a geographical basis. She suspects, for example, that institutions in nearby Los Angeles may not be fully aware of what they’re missing, so that city will be an early beneficiary of investor relations outreach along with many other financial centers across the States – and indeed abroad as well.
In the Darwinian world of the web, keeping ahead of the competition is important, and Thurber takes pride in her department’s strong ‘competitive analysis’ function, which has been up and running for several years. Marty Palka listens to all publicly available earnings calls by competitors, and puts together a briefing for 30-40 of Cisco’s managers. ‘In fact, his expertise generates so many requests from our sales force and senior management, that we’ve had to get him a back-up analyst.’
Targeting success
Cisco Systems’ comparative IR advantage is that ‘it’s well known, highly visible and held by many people. ‘Unless they’re a value shop or a small-cap shop, almost every institution holds us,’ says Thurber. In addition, we also have a lot of customers in the financial services sector, so there’s an overlap. Our customers are also investors. The question is, do they hold us in the quantity that they could?’ Hence the targeting.
In fact, even without the targeting, the stock is widely held. At 28 percent the retail component is high and rising, despite the fact that there’s been no effort to target these individual investors. Thurber takes it as a testament to the visibility of the stock, but is also considering whether to make a push at National Association of Investors Corporation (NAIC) conferences. Domestic institutions hold some 61 percent and foreign institutions about 9 percent, which, is higher than might be expected given the lack of any proactive IR overseas. Directors and officers hold two percent.
Some companies want the retail proportion for stability but, as Thurber points out, ‘Individuals aren’t the only loyal holders. If institutions believe in the company, then they’ll stay in the stock. I have had big names that have not moved in years.’
Which is how she likes it. ‘I want shareholders who are going to be a partner, who’ll help me learn how we can improve. I’m happy to say that I think our momentum ownership is only about 1-2 percent. Again, you don’t want folks who run in and out of your stock, you want guys who can give you insight.’ She adds, ‘Typically I target growth investors, even a lot of aggressive growth, but that’s different from momentum.’
Thurber’s future plans include emulating what she considers to be Cisco Systems’ IR peer group: Microsoft and Intel. ‘I think that they have really leveraged the technology, quite sensibly. But they also have more staff. Intel for example, has people just for retail and international audiences and someday I’d like to do that.’
Thurber is equally firm about what her IR department is designed to do. ‘Our mission is to communicate really effectively, and educate our shareholders and the rest of the financial community, including the sell-side analysts, about our growth and financial strength, our business strategy and our achievement of corporate objectives. That’s the basic overall mission: education, education and education. To really understand where we’re going.’
‘Our second principle is: we don’t hype our stock. It rises according to the books. In the end this goes back to the education. The stock will go up if we execute. My job is to communicate that.’ It comes down to the IR basics, maintaining credibility with good news as well as bad, and above all, ‘Don’t surprise the Street. As long as you follow that credo they are going to appreciate it, and follow the stock,’ she says, seeing investors’ perception of Cisco being boring as a positive advantage.
It is with this philosophy in mind that the Cisco IR department has been approaching investors about Cisco’s plans to extend into telecoms territory with voice communications along the internet’s digital facilities. The world of pedagogy is missing a prodigious asset in Mary Thurber, as once again she invokes education: ‘I believe that if you can’t understand Cisco Systems, you shouldn’t follow the stock. My job is to educate, to proactively inform, about where we’re going and why we’re going into this huge market opportunity, so we’re going to lots of financial conferences, bringing people to talk to our product managers, and going to industry conferences.’
Internet muscle
Clearly on the plus side is the fact that Cisco is still firmly entrenched in the internet, where traffic, business and investor expectations are still growing. ‘If you are going to play the internet as an investor, who are you going to play? We have profits, real customers, real products, so we are still definitely seen as an internet play, but one that has produced tangible results and has a track record. Still, the world is changing so that voice moves over data networks. That’s our next and additional opportunity. That’s where we have nothing to lose and a lot to gain compared with our competitors in the voice world.’
Analysts often tend to be conservative and judgmental about the industries they cover. This move means that Cisco has a whole new set of competitors, ‘So we have to explain how we differentiate from them as well.’ Internally, this involves picking ‘the people at Cisco Systems who can communicate where we’re going in the telecom world.’ Externally, Thurber watches for sell-side analysts who she thinks can ‘understand what we’re doing, and then I try to get them to write reports and work with them to reflect Cisco Systems’ new vision accurately.’
An equally important aspect of IR is, of course, the reverse: communicating investor concerns within the company. She adds, ‘We pride ourselves on the internal component of IR, providing information to folks inside the company, because you can learn a lot from Wall Street about what our investors are saying about us, whether we are doing the right job, and whether there’s anything we are doing better.’
Management meetings
‘Before many institutions own our stock they have to meet with management, typically the CFO. It’s the same when a sell-side analyst initiates coverage, so we get our senior management to see people. But what we find more and more from analysts and investors is that they really want to see a variety of people inside the organization. They also want to see the products and find out what’s happening in different product areas rather than always wanting to see the CFO or the CEO.’
Thurber reports to the CFO, but also has a direct communications line to the CEO and the other senior VPs. Since one of the best guarantees of good communication is physical proximity, she should be alright: her office is within 20 feet of them all. Crucially, her competitive analyst’s work is available on an internal web site and major announcements on acquisitions or First Call notes are distributed. Almost every morning and evening she passes on market updates for the senior executives, about ‘where we are, why the stock is acting the way it is, what are the rumors on the Street that day.’ In the same spirit, during the frequent analyst and investor visits to Cisco, ‘We encourage our people to ask them questions afterwards, especially, What are our competitors saying about us?’
The spirit of internalized IR begins at the inception of a Cisco career for all employees, when she gives ‘Wall Street perspectives,’ to the incoming draft. The other constant reminder of shareholder value is the stock options that now go to every permanent employee. ‘But to get options on an ongoing basis they have to perform. We have to give them out very carefully. They’re to make employees sensitive to shareholders’ interests.’
In fact Thurber sees a close parallel to relationships with the customers: ‘We always listen to them and we are always paranoid about the competition.’ Since so many investors are also customers it gives a double edge to her IR sword. With the openness of cyber culture, and the leverage of cyber technology, Cisco’s IR seems well-tooled to meet the twin challenges of expanding networks of internet customers and e-traders.
