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12/8/1999
Reporting Results …The Quiet Period, the Close and the Conference Call
Larry Carter, Senior Vice President, Finance and Administration and Chief Financial Officer of Cisco Systems, discussed Cisco's "Virtual Close" and the beneficial impact on IR for managing expectations and reporting results. In addition to the IR professionals typically present at the monthly meeting, there were many CFOs and other Finance professionals who attended this presentation.
The Secret of Success
To provide context, Larry gave a short history of Cisco which included the company's birth in 1984 to its meteoric rise to become the most broadbased Internet company in the world with a $15.5 billion annual run rate and a market cap of $325 billion (second only to GE and Microsoft). The company's rapid growth included 34 acquisitions, and both its growth and tremendous success were powered by consistent execution. Larry explained in a matter-of-fact way that Cisco has had 39 quarters of quarterly growth, and never missed a quarter. While sighs (and even groans) of envy were heard from the audience, Larry went on to share the secret of Cisco's success: it's not just about managing expectations, it's about managing the business.
Stretch Goals
Larry Carter joined Cisco Systems in January 1995, when Cisco was a $2 billion company. Growth was rapid, acquisitions were frequent, and the plan was for more of the same. As the CFO, Larry asked himself, how do we scale? how can we keep control?
Initially, he began with the goal of improving the company's financial reporting capability so they could have reliable information. This would support their ability to meet expectations and avoid surprises. Larry set "stretch" goals of reducing the 14-day close to 1 day and cutting Finance costs in half. The result of pursuing a stretch goal versus continuous improvement, he said, was that you have to change the rules. Changing the rules allowed Cisco to build a new financial information infrastructure, one that provided them with a "Virtual Close."
The Virtual Close
Larry defined the Virtual Close as the continuous monitoring and analysis of critical information necessary to run the business through empowerment. In other words, having the right information to the right people when they need it. Cisco's virtual close provides key financial metrics on a continual and regular basis, empowering salespeople, product managers, division heads, the executive staff, etc. to make decisions and manage or correct the business effectively. Some things are provided to many people once a week or monthly; others are available to a few key people every day.
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Daily |
Weekly |
Monthly |
Quarterly |
| Market Share |
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X |
| Order / Revenue Status |
X |
X |
X |
X |
| Discounts |
X |
X |
X |
X |
| Product Margins |
X |
X |
X |
X |
| Expenses |
X |
X |
X |
X |
| Headcount |
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X |
X |
X |
| Revenue per Employee |
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X |
X |
| After Tax Profit |
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X |
X |
| BU Contribution Margin |
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X |
X |
| Balance Sheet |
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X |
X |
| Cash- DSO- Inventory Turns |
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X |
X |
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Key information provided to management on a daily basis online via a real time, web based system includes bookings, revenue, product discounts, margins, order status and expenses. They don't track ROI, ROLC, EVA or other such metrics, on the assumption that if they manage the business using the information available, these larger items will take care of themselves.
How They Got There
To create the Virtual Close, Cisco had to reengineer the Finance process. Cisco Finance worked closely with the company's IT organization to create the infrastructure and applications necessary to collect and provide the real-time information they needed. They wanted the system to be Web-based, so that employees around the world could easily access it. When applications to collect and analyze data were not available in the marketplace, they developed them.
Key to the success of these efforts was 1) the commitment of management, and 2) the use of a common network/systems architecture. For example, all companies acquired by Cisco are required to convert their information systems to Oracle, Cisco's chosen system. Larry acknowledged that there might be better systems available for different markets or different applications, but that it was more important to have a common infrastructure on which everything could communicate and be managed.
Benefits of the Internet
Cisco's use of the Web for internal data collection, analysis and presentation is pervasive. The company uses the Web for almost everything, from travel requests and performance reviews to expense tracking, sales commissions and stock administration.
Use of Internet-based reporting has allowed Cisco to achieve Larry Carter's stretch goals. Today, Cisco's Finance organization consists of 600 people (to support a company of 24,000), with costs that are 1.2% of total revenues, nearly half the 2% they comprised in 1995. And the company now has a one-day close. (Larry says they thought about holding their conference call on the day following the close of the quarter but that people need time to finalize their notes, rehearse their scripts, etc. so they generally report a few days later.) Additionally, Cisco has identified significant corporate benefits from the company's use of online technology, including $825 million in cost savings and productivity improvements. As a premier provider of equipment that builds the Internet, Cisco's internal use of technology truly allows them to "talk the talk and walk the walk" of what they espouse.
IR at Cisco
Larry Carter described the IR group at Cisco as a "small but elite" group of IR professionals who bring strong communications and technology skills to their roles, as well as Street smarts. He highlighted some key elements of the Cisco IR program, which include ongoing competitive analysis, twice daily Wall Street updates and a strong Web site.
Larry's "Rules for IR" include:
- No surprises - for him or the Street
- Be credible
- Be boring (i.e., consistent and predictable) - including no blowouts
- Stay one step ahead of the Street
- Set realistic expectations for performance
- Bring analysts estimates down if you have to
- Give guidance once, after the conference call, and then don't talk about the quarter
Obviously, Cisco's Virtual Close system supports these objectives by providing management with the information critical to running the business and the CFO and IR with visibility to predict and report the business accurately and consistently. (Seems like it would free up some of IR's time to focus on more Best Practice type activities than explaining the last quarter, as well.)
How Can We Do This Too?
Cisco's performance and subsequent credibility with the Street is enviable. Many in the audience asked Larry about how they could apply Cisco's model to their own companies. While Cisco's IR program and tactics can be replicated elsewhere, Larry's responses reinforced the idea that consistent results and the rewards that accompany it have to come from how the business is managed.
For example, when asked how companies with less predictable quarters could build up credibility, Larry replied, "If you're company's not linear, you're almost dead to begin with. I don't know how you manage it." Cisco's own business is very linear, making it easy to monitor the quarter's progress. Larry added that his advice was to do whatever it takes to get linear, even if it meant sacrificing a couple of quarters. Otherwise, he stated, the risk is extremely high that you'll eventually miss expectations and lose whatever credibility you've built up.
IR Best Practices
Some IROs are in a position to help drive how the business is managed, but frequently they are not. However, there is still a critical role for IR to play to increase a company's credibility. Larry Carter acknowledged that what Cisco does may not work for everyone, but he did describe some of Cisco's IR "Best Practices":
Communication with Analysts
- Focus on educating investors and analysts about the company's strategy and products, and make sure there is adequate exposure to management. Cisco IR wants to provide the Street with the insight and expertise of its managers, so meetings are set up frequently. Someone from the IR staff always coaches the Cisco manager and sits in on the meeting.
- Implement and enforce a tight policy that no one can talk to the Street without approval from the CFO or IR. Make this formal policy part of the company's culture, communicating it to all new employees as well periodically reminding existing employees of it.
- As a matter of policy, ignore whisper numbers and don't respond to rumors.
Guidance
- When giving guidance about growth, let the analyst set the range by using market growth statistics (if available) as a comparison. For example, if your company plays in a market growing at 30% per year and you say you think you'll grow as fast or faster than the market, the analyst might estimate the company's growth at 30-35%.
- When giving quarterly numbers, use the first analyst spoken to "set consensus," using his or her numbers to help bring other analysts into line. Give analysts some overall financial objectives, such as margin targets.
- Bring down the high estimates, but recognize that an IRO's best friend might be the low analyst on the Street.
- Always tells analysts everything that could go wrong.
Conference Calls
- Cisco's conference call is open to anyone. Typically, there are 1,000 listeners by phone and 5,000-6,000 via Webcast. The call is always held at the same time of day and is usually 1 ½ hours long, to accommodate questions (from the approximately 30 sellside analysts that follow them only). The call is well scripted and rehearsed. They don't talk about every aspect of the business each quarter, but choose a "wild card" topic to discuss in depth. Typically, they poll a few analysts to determine what this topic will be (e.g., Y2K or Asia).
- Very general guidance is provided on the call: for example, market growth and tone of business. Management never uses the word "comfortable" in response to expectations, and they don't provide business forecasts (but use whatever market forecasts are available instead). For example, Cisco's CEO, John Chambers, might say, "We have 40%-45% market share in data networking and we believe the convergence of voice and data will change the landscape of opportunity for us from $60 billion to $150 billion. We're at the early stage of the market, in a good position; but it's all about execution."
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