KTAF NEWS

Skyrocketing digital transformation expectations challenge companies across every industry. Consequently, CIOs face increasing demands to craft business cases that show how technology will enhance long-term competitive position.

Faced with this daunting task, tech leaders can find imaginative and compelling ideas in an often-overlooked source—top companies’ quarterly earnings calls.

These publicly-available executive presentations provide understandable examples, noteworthy successes and aspirational benchmarks. Most importantly, they can help motivate and frame every tech funding request with a single, strategic question—if our digital transformation is meaningful, measurable and lasting, what success story would our CEO and CFO tell in five years?

Reverse engineering

Digital transformation accomplishments often follow a common path—they first identify desired strategic outcomes and then reverse engineer to technology needs.

When companies follow this approach, their quarterly earnings calls typically include two distinctive hallmarks. First, senior leaders articulate unambiguous long-term digital revenue targets. Second, they clearly discuss how strategic tech investments specifically improve performance on key revenue driver metrics.

For instance, Nike forecasts that by 2025, over 50% of its sales will be direct-to-consumer. That’s a staggering shift for a company historically so reliant on retail distribution. It also reflects the emergence of digital content revenue streams, such as the popular Nike Run Club and SNKRS footwear style apps.

During the pandemic, Nike accelerated its digital transformation, heightened consumer engagement and posted soaring sales, margins and cash flows. On Nike’s FY 2021 Q2 earnings call, CEO John Donahue reported that “Since the pandemic began, we’ve added more than 70 million new members globally, and we’re deeply focused on the member funnel outcomes, including new member buying, reactivation and retention.”

With direct sales and digital revenue now accounting for more than one-third of its $45 billion in annual sales, Nike’s technology investments are clearly delivering.

Revenue drivers

Nike’s future hinges on what it calls Digital Advantage—technology-fueled growth that drives “greater competitive separation.” That’s an aspirational standard which can be reasonably adapted by CIOs who are truly serious about digital transformation.

On Nike’s FY 2021 Q4 earnings call, Donahue highlighted, “At the center of our digital ecosystem is our suite of apps, which in Q4 reflected over 40% of our owned digital business. This is the result of deeper consumer connections, fueled by compelling product and content.”

Importantly, Nike’s CEO explains how technology investments spur sales. “A key differentiator for us is membership—it has proven to be a compelling driver of repeat engagement and buying across digital and physical retail,” Donohue emphasized. “This member demand growth was underscored by strong results across the consumer funnel, including member engagement, average order value and buying frequency. Buying member growth is outpacing new member growth, signaling progress on a deeper member-led commerce funnel,” he explained.

As expected, Nike aims to further its Digital Advantage. Donohue told investors and analysts, “Knowing and serving our members drives greater competitive separation. Today, we’re the clear leaders in our industry, and we continue to see digital as our leading channel for growth in FY 2022. The combination of owned and partner digital revenue is now nearly 35 percent of our total business, more than three years ahead of our prior plan. We see no sign of this shift slowing.”

That’s a lofty strategy proposition which would capture any board’s attention.

Financial returns

Beyond strategic differentiation and marketing success, CFOs still hold firm that compelling IT business cases must justify investments with worthy returns.

For instance, on Nike’s FY 2021 Q2 earnings call, Nike’s CFO Matthew Friend highlighted Nike’s margin improvements and signaled future IT funding. “We earn [a] roughly ten points higher gross margin rate on our digital revenue versus wholesale,” he disclosed. “We will need to continue investments to expand digital fulfillment capacity and improve operational efficiency through predictive modeling tools, data-driven member personalization and inventory staging.”

Friend added, on Nike’s subsequent Q4 earnings call, that “a more direct, digitally-enabled Nike is transforming our financial model. For several quarters now, I’ve highlighted that the strategic and financial benefit of shifting to a higher mix of business through Nike Direct, led by digital and leveraging enhanced data and analytics capabilities to optimize inventory, drive higher full price realization and lower digital fulfillment costs.” Nike is swiftly realizing those profit expectations.

“We now see [our] gross margin rate reaching the high forties by FY 2025. We will continue to re-allocate resources and invest to enable our digital transformation and fuel long-term growth and profitability opportunities,” he said. “As a result of all of this, we see our EBIT margin reaching high teens by FY 2025, with earnings per share growth of mid-to-high teens, on average, over this period (FY 2021).”

That’s exactly the long-term, credible financial narrative that CFOs seek and desire when evaluating and funding strategic technology initiatives.

Formula for success

Nike’s digital transformation playbook works—their successful tech investments elevate customer experience, distance competitors and reward investors.

Quarterly earnings calls like theirs exemplify how to reverse engineer strategic aims, monetize innovation and deliver lasting results. Readily adaptable to any industry, that business case formula will impress, intrigue and inspire boards, CEOs and CFOs.