$2bn Software Company Entering a Model Transition

The problem the client identified

The client (under NDA) had heard about us from another CFO and wanted some help with their IR messaging as they entered into a complicated business transition.

Handling the Street during business model transitions - particularly when such transitions put downward pressure on the short-term reported financial results - is always a challenge. The Company knew that investors might overreact to any numbers cuts and wanted some help choosing the right KPIs through the transition and in telling the proper long-term story so that the pressure on the stock would be mitigated during the most challenging part of the transition.

The problem we have identified

Management doesn’t always provide concise, direct answers to questions which can leave investors feeling unsatisfied. Further, the current set of KPIs were insufficient to “hold investors hands” through the impending transition as they weren’t forward-looking enough.

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Our advice was that they needed to explain to investors: 

1) why they’re going through this transition, 

2) what the benefits of the transition will be to the Company and their customers, 

3) what the financials will look like exiting the transition, and 

4) how investors should evaluate the company during the transition by providing new KPIs.

The work we have done

We worked with them for ~1.5 years. We first helped them distill the benefits of their value proposition into a concise story that investors would easily understand and recognize as being similar to others that have worked many times in the past for other companies. We then helped them script their earnings calls, Q&A, and investor presentations (including an investor day) to tell the story while also releasing a series of new KPIs that investors used to gauge the company’s progress through the transition.

The solution

Transitions are always challenging - particularly when it results in downward pressure on the income statement’s reported results.  Investors demand transparency during times like these and need to have a set of forward-looking metrics that they can use to evaluate the company’s progress in making the transition.  Further, investors need to understand why they should “hang on for the ride” during the transition - or said differently, “what the prize will be at the end of the rainbow” when the company exits the transition.  We worked with management to tell the story of why they were undergoing this transition, why investors should care, and what the earnings power of the company could be exiting the transition.  We devised a set of KPIs the company could periodically release to help investors gauge their progress in achieving their stated milestone goals.