Dejar Vu?

[Gryffyn]

Software a punt for investors

25.06.2004
By PAUL PANCKHURST
The sizzle in the latest sharemarket float is Dejar, a software product already sold to one bank in New Zealand and another in the Czech Republic.

But the prospectus for the tiny - $2.3 million - share offer by Auckland company Solution Dynamics says international glory for the bill archiving system is far from certain.

Either "sales could boom - or someone else's technology could supersede this software".

The organiser of the second float on to the sharemarket's fledgling AX board is sharebroker Colin Giffney, of Giffney & Jones.

Giffney also organised the initial public offering of Just Water International.

He said the AX was designed for companies like Dynamic Solutions.

"It is a smaller company with a core cash-flow business but an opportunity to grow very strongly off the back of technology.

"It therefore carries a higher risk-reward profile."

Founded in 1996 by Dave Thornber and Craig Pellett, the Albany business has 70 staff and four units: Comit Group, Complete Print Solutions, Complete Data Services and Dejar International.

In the industry jargon, it handles "outsourced customer communications" across data entry, data management, laser printing, and document distribution and archiving.

Solution Dynamics' chairman Mike Smith - better known to the sharemarket as head of Computershare - said the traditional businesses of mail house and "transactional processing" gave the company a solid cash flow.

Chief executive Rob Ford said the money from the float would be used for working capital and to cut debt.

Solution Dynamics is projecting earnings of nearly $2 million on revenue of $12.9 million.

On that basis, the float values the company at four times earnings. The projected dividend yield is 7.5 per cent.

The offer closes on July 16.


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[Gryffyn]

Small IPO with opportunity to be a significant shareholder.

Anyone know any more about this one?

[craic]

No but my son got his big start with a company doing exactly the same from London a few years back. He had a great time tearing around the world setting the software up in major financial institutions in Asia and USA and Europe. Problems arose for different users and the company could not respond effectively and he became piggy-in-the-middle. The software was eventually swamped by improved versions etc. He moved on but it always reminds me of the danger of intellectual property. When the idea has been lost, there is nothing there for the shareholders but a few computers and other office equipment.

[Gryffyn]

Unless you get a good installed base of customers in which case service and license fees can be good.

[Lawso]

I can't help thinking that Spectrum (SPE with its Kinetiq billing software for utilities) and Finzsoft (FIN, Sovereign software for finance companies and small banks) are in a similar plight - sound basic products but difficult to market internationally and possibly overtaken by other better products. As I read it in today's news item about Dejar - "Either sales could boom or someone else's technology could supersede this software." At least he's honest.

[MeNoBatty]

http://www.solutiondynamics.com/investorinfo.html

[craic]

Tech Stocks Not Worth the Risk

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By Richard Gibbons
June 25, 2004

We're Dueling over tech stocks this week on Fool.com. In this article, Fool contributor Richard Gibbons says investors should beware of the tech sector. But Tim Beyers thinks tech stocks should be a part of everyone's portfolio. Read them both and then vote for your favorite.

Warren Buffett, CEO of Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), does not invest in the technology sector, a position for which he took a lot of flak at the height of the tech bubble. Buffett's simple answer has always been that he does not understand technology. But I think this really is just a way to summarize a raft of problems with investing in technology.


Technology is tricky
The straightforward interpretation of Buffett's answer, that technology is hard to understand, deserves mention, even if it seems overly obvious. One important rule of investing is that you should understand how the company makes money -- a rule I violated in my deep, dark, pre-Fool days. Alas, I learned then that buying companies whose business I didn't fully grasp was not exactly a path to wealth.


Thus, anyone who owns Cisco (Nasdaq: CSCO) should spend the time to learn how the Internet works, what the difference is between a router and a switch, and how these technologies are changing. Meanwhile, a potential McDonald's (NYSE: MCD) investor can spend a few hours thinking about the 10-K -- and maybe grab a Quarter Pounder -- and have a pretty good idea of how that company makes money.


So, maybe this just means that tech is a great place to be, because you're not a lazy investor and are willing to spend the time to understand the technology. That brings us to the next problem in the tech sector, neatly summed up by the title of Intel (Nasdaq: INTC) Chairman Andrew Grove's book, Only the Paranoid Survive.


The problem stems from the high rate of change in technology relative to almost any other sector. Tech bulls tend to focus on potential high growth that such change can bring, but investors should be aware of the negative consequences as well. For example, it is difficult to sustain a competitive advantage in technology because of the fast rate of both evolutionary change and disruptive change.


Evolve or die
Evolutionary change happens when technology improves incrementally, such as the speed of computer processors increasing each year. It requires companies to constantly expend resources simply so they don't fall behind.


You see this effect with most hardware manufacturers. For instance, Intel and Advanced Micro Devices (NYSE: AMD) are constantly burning cash trying to improve the performance of their processors just to remain competitive. Compare this with Coca-Cola (NYSE: KO) and PepsiCo (NYSE: PEP), whose core products can remain unchanged for decades, leaving piles of free cash flow to be distributed to shareholders or invested in opportunities that will actually increase revenue.


Disruptive change is even worse than evolutionary change. Disruptive technologies offer a completely different value proposition than existing technology, and may underperform the existing technology in the near term. However, a disruptive technology that initially only seems to address a niche can take over the market. For example, digital photography is a disruptive technology for traditional film photography, resulting in Eastman Kodak's (NYSE: EK) recent dismal performance. Similarly, TiVo (Nasdaq: TIVO), a pick by David Gardner in Motley Fool Stock Advisor, is a disruptive technology for the VCR.


Disruptive change can happen in non-

[Halebop]

Aside from the very small and uncertain Dejar business, SDL is a service company rather than a technology play. They utilise mostly other people's technology (and presumably their expertise) to execute quite mundane although problematic processes like billing and communications.

Given their small size they look a bit pricey. It would be interesting to know the extent of losses outside the core business to better value the "sum of the parts".

ROE is reasonable but they have little to show in the way of scale, market leadership and pricing or cost advantages.

I will not be subscribing. Good luck to the stags! ;)

[MeNoBatty]

Read the prospectus from the website in full. I agree with Halebop, will give this one a wide berth.

Mainly a service company with quite a few competitors in this space. Outsourcing is a growth area but competition will be fierce. Software side sounds dubious.

Nice to see the vendors taking out their cash [V]. $2m capital raising with $550,000 being alloted to repayment of shareholder loans. Looks like they will end up with their free shares, a la FTB. Dissapointing. Obviously they dont believe in the future of the business otherwise they would have left their cash in.

This company should have remained private. Cant see the point of these tiny IPOs. This stock is going to be very illiquid. Who knows where the price will go, no doubt the vendors will release some spin around the software in the hope we will see large variations in price.

Might see a small stag due to interest in IPOs currently. Try selling afterwards....;) Long term this will struggle IMHO.