GROWTH VS. VALUE INVESTORS; DOs AND DON’Ts IN MANAGING EXPECTATIONS By Aviv Boim, CFO

1. GROWTH VS. VALUE INVESTORS; DOs AND DON’Ts IN MANAGING EXPECTATIONS By Aviv Boim, CFO CFO BEST PRACTICE 2006 CFO Forum, Eilat, September, 2006

2. Who is Wall Street for an IL Company? • Financial Investors • U.S. fund managers, with a range of strategies and industry / geographic focus. Typically meet management on a regular basis • London – mostly emerging markets or European dedicated funds. Typically involves hands-on DD • Israeli funds - rely on meetings with management and local research analysts • Retail investors across the World Wide Web, literally! • Research analysts • Financial buy side and sell side, mainly U.S.-based but also local analysts • Marketing research agencies in the field • Financial as well as marketing press agencies

3. Who is Wall Street (cont’) • Press interviews and conferences of all sorts, addressing directly or indirectly your company and field, e.g. a negative Wall Street Journal column on your peers could cause your share price to crash

4. Channel Checks • “Channel checks” – what does it mean? • Communications that research analysts are making with your suppliers and contract service providers, in an effort to gather information on recent events and dynamics that did not become public • Although such communications are likely to breach confidentiality undertakings, they are hard to prevent • In most cases, the results of such checks are released in a note by the analysts days prior to the Company releasing its results; your ability to respond is limited if at all

5. A Closer Look into Types of Funds/Investors • The focus of the fund/investor can be divided into the following main categories: • Growth vs. Value analysis • Long vs. Short positions • Fundamental vs. Technical trade • Momentum driven • Event driven (M&A, spin off, hedge convertible issuance etc) • Each of these investor types is looking for a different edge to satisfy its investment criteria, and these criteria could conflict

6. Market and Technical Thresholds • A number of market and technical thresholds are key in the evaluation for almost all types of investors: • Market capitalization • Trading volume • Share price volatility • Simplicity level of the business model • Key parameters of the financial results (profit/loss, EBITA etc) • For each fund, your market data and parameters could work either way and influence on building or dropping a position • Although it seems like a “chicken and egg” situation – there are always funds with investment policies that will suit your company, almost by definition

7. The Investment Message to the Street • First of all – it should be ready and up-to-date at all times, irrespectively of the business cycle and environment • The message should be: • Clear and coherent • Consistent, subject to market dynamics • Easy to understand by a generalist; most of the funds don’t have the time/ability to dive into the details • Unified message – Regulation FD (Fair Disclosure) addresses it; • be strict on “material releases policy” • avoid preferential treatment to “smart” investors • Second, it should address: • The company’s business model • Risks and the potential upside • Short vs. long term milestones and triggers

8. The Investment Message (cont’) • Funds do compare their notes of most recent comments made by company’s officers; message that varies and is not unified will hurt credibility • Short term and long term company business targets – their fulfillment or push-backs could have a material and immediate impact on buy/sell decisions • Funds monitor the share price and technical trading parameters on a daily basis; could trigger changes of investment position • Portfolio managers are being evaluated based on daily performance, another driver for market dynamics

9. Mutual Funds – the Ultimate Shareholder? • Mutual funds focus on long only positions, with a longer ownership horizon • Market capitalization threshold is key to its investment criteria, with less emphasis on trading volume • Tend to accumulate a sizable position (over 5%) over ~ 6 month period, with room to increase over time • Focus on longer-term milestones and expansion prospects • Typically tied to “sell side” analysts, and require quality research coverage; tend to support decisions on internally developed models

10. Hedge Funds – Driving Trading Volume! • Hedge funds dynamically build both long and short positions; there are many dozens of U.S. hedge funds with over $1 billion in assets addressing equity (shares) • Common strategy is to be market neutral (beta 0), and reduce net long positions to only ~20-40% of total assets • As a result, hedge funds make aggressive daily modifications to holdings; the market technical thresholds of each company become key in such “adjustments” • Ability to accumulate a sizable position (over 5%) over several weeks can be a key criteria for an investment decision • Compared with mutual funds, positions of hedge funds are subject to a shorter holding period, typically 2 to 3 quarters • Higher focus on short term milestones

11. Hedge Funds – Short Positions • Long/short strategy has become a common acceptable investment strategy • Short positions are used to allow low correlation to the market, typically by shorting large cap’s stock, with higher trading volume • Adjustments to short positions are made on a daily basis • Technically, it is harder to identify size and holders of the short positions; • The benefits of shorts – all positions will be covered with the opposite long trade, and typically over a limited period

12. Retail Investors – The Broker • Retail Brokers have varying investment horizons and strategies, but generally go less in depth than mutual or hedge fund investors • Brokers generally get information from research analysts, their peers and from the company; both IR and management. IR office plays an important role here • Most brokers require a complete, but simplified message and “story”

13. Retail Investors – The Individual • Individual investors generally hold small positions, but are regarded as “high maintenance” holder • Rely heavily on Internet-based sources for news, publicly available research and information on companies • Individual investors are more prone to misconception given their tendency to gather information from online message / chat boards • Be sensitive and allow such communications to flow through IR office

14. Summary • There are hundreds of funds/investors/analysts one can meet, mainly in the U.S. and London; a proper mapping and setting the priorities of the targeted investor base is required • Understanding the investment criteria of prospective funds is important in order to have a productive investor interaction • There is no “right” or “wrong” company message; Need to have a full story, with clear and achievable short and long term business targets