Dear Fellow Shareholders -
We have received an increased number of telephone calls and emails to our investor relations desk this week. When share price performance is lower than we would all like, it is not unusual to receive an increased number of calls and emails. The calls and emails consist of questions regarding possible explanations as to the share price performance. Statistically, the calls and emails that we receive only represent a small percentage of the total shareholder population. The purpose of this letter is to share the key questions and answers openly with other shareholders. This letter is going out to all shareholders who have asked to receive company updates.
Share Price Performance - Near Term and Long Term
Before addressing the specific questions, let me first comment here on the share price in general. The share price today, in my opinion, does not begin to represent the fundamental financial value of the Company, let alone the potential future value of the Company. Even if the share price were to double, I would still not consider the share price a fair representation of the fundamental financial value of the Company.
I am frustrated and disappointed by the share price, but I am not concerned. I am not concerned because I am confident in the fundamental financial value, the stability and the future of the Company. Just because the share price today does not reflect that value does not mean that the value does not exist. The issue is the alignment of share price and fundamental financial value.
You must evaluate your own confidence in me and the rest ofNewMarket management to ultimately deliver on an alignment. I earn a living as the CEO of NewMarket. My personal goal at NewMarket is to earn a life changing financial reward as a shareholder by doing an effective job as the CEO. I am more confident than ever that the fundamental financial value and the potential future value of NewMarket will be aligned with the share price.
Benefiting today from the fundamental value of NewMarket is challenging at the current share price. Between now and June, based on the seasonal history of NewMarket's share price performance, many shareholders may likely have an opportunity to enjoy a reasonable return on investment as we release our 2007 and First Quarter 2008 financials reflecting our initiatives in China and Latin America, amongst others. Between now and June, shareholders should also have an opportunity to see measurable steps being taken by the Company to realize a better alignment of share price and fundamental financial value beyond June. Each shareholder will have to independently evaluate their timing, tolerance and confidence in management and ultimately make their own investment decisions.
Questions Arising From Share Price Concern
The Company is reporting strong revenue growth, which it has done consistently over the past few years, and sound bottom line performance, yet the share price does not respond with a sustained increase following a contract announcement or a quarterly financial report. The disconnect between share price performance and good fundamental financial news causes speculation as to what might be going on behind the scenes that could account for this continued under-evaluation. Shareholders may wonder if "somebody knows something I don't." We have received a number of questions that amount to shareholders trying to find out what that "something is that somebody knows" that could be accounting for the share price performance.
Below are the primary questions we have received and the answers we have provided. We share them here because we believe more of you may have the same questions. There may be other questions as well, and we encourage you to email or call the Company with your questions at firstname.lastname@example.org or 214-722-3065.
In short, we are not aware of any internal corporate issue that could account for the current share price performance. We want to be open with shareholders and candidly answer any questions they might have.
Share price is not just a reflection of fundamental financial performance. As I have alluded to previously in this letter, share price is also a reflection of future potential value as well. Share price can be impacted by many factors. Some of those factors may include: a company's posture in regard to competitors; the currency of the economy in which they are operating; the economic conditions in general of the geographic region of operation; the percentage of shares that trade in a public float; the number and quality of institutional investors; the overall liquidity of a stock and the market dynamics that may be specific to a given exchange.
Sometimes one share price impact or another may have more influence on share price than other events. It is my belief that NewMarket's current share price is affected by the size of the current operation and the lack of institutional investment. The lack of institutional investment is in part due to market dynamics specific to our current listing exchange, the OTCBB. In general, institutional investors due not participate in OTCBB listed companies. The lack of institutional investment in conjunction with the growth of the number of issued and outstanding shares has had, in my opinion, an effect on the market's perception of NewMarket's progress. NewMarket has very few shareholders that hold positions of the size that would typically be held by an institutional investor. Instead, the Company's shares are held by a large number of shareholders holding smaller positions. A larger number of smaller positions can generate a high volume of trading and liquidity, but it is also likely to cause share price volatility.
To effect an alignment of fundamental financial value and share price, NewMarket faces the chicken and the egg issue. What comes first, an upgraded listing, institutional investment, or a reduction in the number of issued and outstanding shares?
You may have noticed how few shares were issued between the second and the third quarter. We are working to stabilize the issued and outstanding as a first step toward a reduction. However, this reduction does not mean the Company is planning on doing a reverse split. We are also meeting with institutional investors in an effort to attract shareholders that increase the size of the average shareholder position. As I mentioned earlier, shareholders will see between now and June more steps taken by the Company to move toward an upgraded listing with increased institutional investment and a reduced number of issued and outstanding shares. We believe this course of action will be noticed by the market and a revaluation will begin to take place.
Questions and Answers
1. The CFO, Phil Rauch, was not on the recent earnings call. Is he still with the Company?
Yes, Mr. Rauch is still with the Company. We announced on the call the Mr. Rauch was not able to participate due to a family emergency. In fact, Mr. Rauch was attending a funeral for a close family friend during the call. Mr. Rauch's absence during the call was for no other reason. Thank you to all the shareholders that sent in their condolences and concerns. He and his family are doing well.
2. The recent $1.2 million contract announcement did not mention any customers' names. Are the contracts real?
Yes, the contracts are real. NewMarket has many contracts with clients of all sizes. Most of them are never announced. As much as we would like to announce every contract or at least the larger contracts, our customers often do not authorize the announcement. Please consider the potential press from our customers' perspective whereby they would be announcing how much capital they committed on a product or service. Such an announcement may not encourage their shareholders' enthusiasm for forward progress and such an announcement can also disclose competitive information as to what technology they are using and how much they paid for it. We have to carefully manage the challenge of demonstrating the nature and value of our services by announcing example contracts in a manner that does not create issue for our clients.
3. With the share price at its current level, why doesn't the company announce a stock buy back?
A stock buy back program is not a trivial initiative. Besides the compliance aspects of implementing a stock buy back, a company must carefully consider its use of cash produced by operations. NewMarket is an aggressive growth company, and we concentrate the use of cash on funding organic growth. A buy back program could impact our ability to fund ongoing organic growth. A buy back program could also reduce our net income. As I have stated previously in this letter, management believes that an alignment of share price and underlying fundamental financial performance is achievable, and this alignment does not necessarily require the implementation of a buy back program. Management believes the first priority should be building fundamental financial value. Accordingly, the first priority of available cash should be to invest in the growth of the Company's operations and, in turn, the growth of the Company's fundamental financial value. However, we will continue to monitor the share price situation and look for an opportunity to support and accelerate our ongoing steps to manage the "chicken and the egg" issue of moving to an upgraded exchange, increasing institutional investment and reducing issued and outstanding. In other words, if a share buyback opportunity arises that would facilitate an accelerated avenue to aligning share price and fundamental value, we would not hesitate to execute. Currently, given the cash that NewMarket could dedicate to a share buyback program and the current share price, we do not believe that a share buy back program would have a substantial impact on aligning share price and fundamental financial value. We otherwise believe that cash generated by operations is best utilized to invest in the continued organic growth of NewMarket's operations.
4. In layman's terms, how does NewMarket make money?
NewMarket is a systems integrator and an emerging technology provider. What does that mean?
NewMarket sells technology products, like computers, servers and telephones, and the software applications that make computers, servers and telephones work. The software and equipment we sell and "integrate" can improve, for example, a corporation's network security, financial forecasting, supply chain or operational performance.
We become an authorized reseller of those technology products and software manufactured by brand name companies such as Microsoft, Oracle and Cisco. Often times those companies do not directly sell or install their products and software and use resellers like NewMarket to provide that service. We then buy products from those brand name companies and sell them at a mark up to our customers. We also sell the service to implement and maintain those brand name products. Sometimes we sell the service to customize the brand name technology to the unique specifications of our customers. Some well-known companies that do this kind of business just like us include IBM and EDS. We do what they do.
In addition to reselling brand name technology products we also sell our own proprietary technology products and provide emerging technology implementations and services. Examples of our own proprietary products include software that enables voice over the internet protocol (VoIP) and software that manages the messages sent via a radio signal from the radio signal tag on a retail store product (RFID).
A good example of a VoIP solution is "internet" phones in an office – they are plugged into a network line, not a traditional phone line. The cost of calls is reduced over the internet, and the phone becomes a computer and can have enhanced functionality for calls and messages. We provide primarily commercial solutions, but a primarily residential provider you may know that does this is Vonage. Every time you call our office, you are talking to someone on a VoIP phone.
Combining Systems Integration and Emerging Technolgy:
We often times sell brand name products, our own proprietary technology products and emerging technology solutions to the same customers, leveraging already established customer relationships. Additionally, the combination of selling brand name technology and innovative emerging technology makes us more operationally efficient than most innovative emerging technology companies.
The efficiency improves our shareholder opportunity to realize the equity appreciation that can result from the market adoption of an innovative technology. We are less likely to run out of investment capital in our effort to introduce a new technology to market than your typical innovative emerging technology company that has a focus just on their emerging technology product. We also give shareholders that opportunity to benefit from multiple emerging technologies instead of just one new technology like most innovative emerging technology companies.
Where do we operate and why?
As the market becomes more global we concentrate our sales efforts in geographic regions where the economy is growing fastest so that we can benefit from that rapid economic growth. Our largest sales growth today comes from China and Brazil, two of the fastest growing economies in the world. Because we have established, growing operations in China and Latin America, we have consolidated our Chinese operations into NewMarket China and are in the process of consolidating our Latin American operations into NewMarket Latin America. Both subsidiaries are majority owned by the parent company NewMarket Technology.
We continue to diversify into other geographic regions and additional innovative emerging technologies.
Shareholder Town Hall
I remain committed to building a world class, emerging technology company. I believe the underlying fundamental financial value and future potential value of NewMarket will be ultimately reflected in the share price. I appreciate the concern created for shareholders by the misalignment, and I am committed to continually addressing any specific concerns shareholders may have. Please send your questions and suggestions into email@example.com or 214-722-3065. Our IR team is dedicated to answering questions and concerns and passing them onto upper management including myself when necessary. Even more so, I encourage you all to come to our shareholder town hall January 17th in Dallas. I cannot think of a better way for you to evaluate your confidence in management's ability to succeed, than to come and meet management first hand.