What's the solution?
Solution 6 Holdings (SOH $1.15)
Solution 6 Holdings epitomises the tech boom and subsequent crash with a share price that hit $17.70 in December 1999 and then bounced off a recent low of $0.92. But unlike other Internet start-ups, Solution 6 has a substantial business with global reach. Internal revenue forecasts predict $320-$330 million for the current financial year, up from $179 million last year.
New CEO Neil Gamble (ex-Star City) has initiated an extensive restructuring of the company, focusing on management and business performance, and he promises to make changes or divestments where appropriate. The company will continue to seek acquisitions which are complementary to existing businesses, but less aggressively -- it acquired 11 companies in the previous financial year. This year only two acquisitions have been made.
In spite of no debt and $67 million in cash, Solution 6 Holdings is forecasting a loss of $16 million this year. However, the company remains positive due to its strong suite of products and services, global reach and new quality management.
Melbourne IT (MLB $1.95)
Like Solution 6 Holdings, Melbourne IT's share price has also collapsed. The company's share price reached $17.00 in March, only to begin a recent rise from a 12-month low of $1.41. The downward spiral is attributed to increased competition, excessive costs, unfulfilled market expectations, and diminished volumes of global top-level domain names.
Melbourne IT's core business is the supply of domain names and Internet addresses. The company reports its (generic top-level domain) market share at about 4 per cent, compared with 8 per cent last quarter; market leader Network Solutions has approximately 35 to 40 percent. Melbourne IT is trying to reduce its dependence on gTLDs through diversification.
Melbourne IT's alliance with US giant, NeuStar, bodes well for its new TLD tenders, which include .biz (restricted business), .per (restricted personal) and .web (open). NeuStar is the Local Number Portability Administrator in the US and provides access to all telecommunications carriers in that country.
With staff reduced by 28 per cent and new CEO Adrian Kloeden at the helm, internal forecasts predict a full-year result somewhere between a $0.5 million loss to $1.0 million profit.
ERG Ltd (ERG $3.33)
ERG wants to become a leader in multi-application smart card solutions anchored by transportation, which is seen as its killer application. The company earns revenue from supply and design of automated fare collection equipment and software systems, as well as management of the public transport smart card systems (e.g. Rome).
In Hong Kong, ERG's contactless smart card Octopus system has become the international benchmark for fully integrated, multimodal smart card fare collection. More than 6.1 million smart cards have been issued to a population of 6.5 million since it began operations in 1996.
ERG also implemented the world's first totally outsourced transit fare collection system in Melbourne. Successful bids to update the magnetic stripe system to smart cards in Sydney and Brisbane would in effect complete a centralised smart card transport platform for the entire Australian eastern seaboard. This, in turn, would provide enormous potential for an extension into e-commerce. ERG sees its new Multi-Application Smartcard Solution (MASS) as a future earnings driver providing the spine to which smart card applications such as e-commerce can be added.
ERG expects to make 15 to 25 bids for public transport contracts around the world during the next three years and expects to win at least 60 to 70 per cent.
Recurring revenue is expected to increase while ERG continues to establish relationships with telcos, banks and transportation groups. ERG forecasts recurring revenue to account for 40 to 50 per cent of group revenue in 2001, and 60 per cent of total revenue the year after. Consensus estimates are for an average 30 per cent rise in net profit for the next two years.
Powerlan earnings over 3 years
Powerlan (PWR $1.28)
Since its inception eight years age, IT services company Powerlan Ltd has been operating profitably in a market currently estimated to be worth $26 billion. While its strong management and pattern of superior future earnings growth continue to strengthen the company's appeal, Powerlan is also expanding aggressively into both Asia and the Application Service Provider space.
Powerlan's business currently comprises enterprise business solutions (40 per cent of total revenue), systems integration (35 per cent), IT training (10 per cent) and IT recruitment (10 per cent). It derives revenue on a fee-for-service basis, or on a monthly basis in terms of consulting. Australia accounts for 65 per cent of total revenue, with 35 per cent from the Asia-Pacific. Powerlan intends to change the balance to 50/50, with Asia -- a high-growth market compared with the more mature Australian market -- contributing even more over the long term.
Among Powerlan's 6000 corporate and government clients, Telstra is the largest, representing 3 per cent of group revenue -- highlighting the depth of Powerlan's customer base.
Average annual compound earnings growth before interest and tax over its history is 117%. For the year to June 2000, Powerlan recorded revenue of $178.2 million, 107 per cent ahead of prospectus forecasts. Operating profit after tax came in at $9.9 million.
Protel International (PRI $5.55)
Protel International established itself as a leader in the Electronic Design Automation (EDA) industry in 1991 with the release of the worlds first Microsoft Windows-based EDA tool. Protel's software now runs on the Windows NT platform, and its worldwide market is independently estimated at $1.25 billion in 2000, growing to $1.6 billion in 2001 and $2.1 billion in 2002.
EDA software assists in the design of electronic products, from washing machines to complex telecommunications systems. Protel offers design tools for printed circuit boards (PCBs) on which most of these electronic products are based.
A major driver of earnings has been Protels latest product, the Protel99SE, which resulted in a significant number of existing customer upgrades. Its acquisition of ACCEL also adds strong brand name in the US and a significant contribution to the bottom line.
Group revenue is divided between the US (63 per cent), Europe (15 per cent), Japan (12 per cent) and 10 per cent for the rest of the world.
Protel reported $33.9 million in revenue for the year to June 2000, a 57 per cent increase; net profit after tax increased 110 per cent to $8 million. Consensus estimates are forecasting average annual growth in net profit and earnings-per-share of 30 per cent over the next three years.
Adacel Technologies (ADA $2.30)
Adacel Technologies' core competency is software engineering. Its software applications reside in air traffic simulation and traffic systems (25 per cent group revenue share), defence (more than 25 per cent), B2B (25 per cent) and telecommunications. All areas are growing, particularly the B2B division.
Geographically, the revenue split is Australia (85 per cent), North America (10 per cent) and Europe (5 per cent). While Adacel's Montreal office is the air traffic systems global base, back home in Australia it recently established a world-class software engineering centre in Wodonga, Victoria, which will be extended to 10 centres across Australia.
Adacel also has an Internet translation product spin-off, and is negotiating with US parties to participate in a company which would commercialise combined language translation technologies. The estimated market for this product is US$1.4 billion in 2003.
An expected dip in profit in 2000 (35 per cent) was due to R&D expenditure in the B2B division relating to increasing the marketing base. In 2000, revenue was doubled from the previous year to $31.0 million. In 2000/01, the company predicts that year-on-year revenue growth from each existing division will exceed 50 per cent, excluding spin-offs and acquisitions. Adacels stated goal for 2002/03 is $100 million in revenue.
Intellect Holdings (IHG $0.85)
Intellect Holdings is a global supplier of smart card and e-commerce-enabling products, secure data transmission and electronic funds transfer. Intellect was first to manufacture a secure payment terminal with an integrated smart card reader.
Intellect's product range includes stored value card terminals supporting multiple schemes, personal identification number pads, and retail management systems. The company also has self-service and personal payment terminals which enable e-commerce transactions to be transacted from home via a computer or telephone.
Group revenue is split between Europe (60 per cent), the Americas (12 to 15 per cent) and Asia. The Asian contribution is expected to grow in significance due to the region's strong economic rebound.
Intellect's terminals are compatible with all types of smart cards. In Europe, 70 per cent of all petrol stations have an Intellect terminal, and Intellect has 90 per cent of the Austrian EFTPOS market. The company has two distributor agreements in the US where revenue is derived mainly from mobile EFTPOS machines.
For the full year to June 2000, there was a reported net profit of $10.0 million from $50.6 million in revenue.
KAZ Computer Services
KAZ Computer Services (KAZ $1.19)
KAZ Computer Services is one of the largest IT outsourcing companies in the Asia-Pacific region for midrange systems such as IBM, HP, SUN and DEC. It boasts considerable expertise in the development, operation and maintenance of specialist computer software systems for the management of employee superannuation entitlements. In Australia, KAZ has developed and operates the superannuation management systems for more than 5.5 million earners.
More than 80 per cent of KAZ revenues and profits derive from long-term contracts (three to six years) with an extensive customer list of blue chip corporations including AMP, Nestle and Brambles.
KAZ also manages (and owns 50 per cent of) a joint venture with the Vanda Technology Group, the largest IT product supplier in the Asian region and listed on the Hong Kong Exchange. The joint venture is pursuing IT outsourcing opportunities in the Asian region with an initial focus on Singapore, Hong Kong and Malaysia.
KAZ has been operating since 1988 and has achieved a consistent record of growth in revenues and profitability. Its 11-year annual compound rate of growth is 45 per cent in revenue and 38 per cent in earnings. KAZ was included in the S&P300 in July 2000.
KAZ reported $61.1 million in revenue for the year to June 2000, up 49 per cent on last year and 6 per cent ahead of prospectus forecasts. Operating profit after tax came in at $4.6 million, 212 per cent compared with 1999, and 8 per cent up on the pros- pectus. Consensus estimates forecast a 126 per cent increase in net profit in 2001 at $10.4 million.
Channeldex is brought to you courtesy of investment company Burdett Buckeridge Young. Contact them on: (02) 9226 0000.