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CHANNELDEX: Turning profits when chips are down

CHANNELDEX: Turning profits when chips are down

MYOB (MYO $0.69)

The second half of 2001 was encouraging for accounting software developer MYOB. The six months through to December saw the company report a significant improvement on the $2.9 million loss it made in the first half of the year.

The company announced an after-tax profit of $4.9 million for the full year. MYOB's balance sheet improved considerably over the period with the sale of its Canadian operations, which yielded revenue of $10.7 million ($10.4 million after costs).

"The worst is over for these guys," says Macquarie Equities research analyst Alex Milton. After the boom in sales of its tax-compliance software spurred by the introduction of the GST, Milton says the company has had a tough 12 months adjusting its cost structure.

Opportunities for revenue growth could increase for MYOB should there be any change in taxation legislation, or if there's a period of sustained economic growth that brings about the establishment of new small businesses. Otherwise the company's growth prospects are slight.

Commonwealth Research analyst Craig Woolford says: "As yet, we don't see any reason for another spike in sales, [so] we are not all that confident with the outlook for MYOB."

Volante (VGL $1.15)

The Volante Group announced an after-tax profit of $3.1 million on revenues of $183.9 million for the six months to December 31, 2001 - a 12.8 per cent increase on the same period in 2000.

The result was pleasing for group CEO Allan Brackin, but on reporting the earnings he noted that the corresponding 2000 figure included the impact of Volante's acquisition of AAG.

With this in mind, customers of Volante's procurement division, Volante Systems, actuallypurchased less product than in the same period in 2000.

Brackin attributes this downturn to the caution major corporates are showing in IT spending. He believes customers are questioning the need to buy new computers and lengthening the sales cycles on such products. But he expresses optimism that this will not last and spending will pick up this calendar year.

Macquarie Equities research analyst Alex Milton says the rate of decline in hardware sales should have bottomed out, and hardware resellers that have survived the slump can look forward to the stability of flat growth or even growth of 2-3 per cent. "Volante has been one of the better performers in the reseller industry," he says.

Volante distributed an interim dividend of 3.5 cents to its shareholders, following the more generous dividend of 8 cents last financial year. Commonwealth Research's Craig Woolford says this is unique for an IT company. "The company generated strong cash flows in the December half," he says. "Rather than take too many risks, the optimal thing to do is reward shareholders."

Solution 6 (SOH $0.80)

Solution 6 Holdings, a consolidated business consisting of practice management software development and IT services, reported a net loss of $14.6 million for the six months to December 2001. However, the loss is a considerable improvement on the company's $121.6 million loss in the previous corresponding period. For the first time in several years, the company managed to report a positive EBITDA profit.

"The legacy issues under Solution 6's previous management team have been addressed. The new management team is doing well and has taken out a lot of the costs of running the business," says Macquarie Equities analyst Alex Milton.

The majority of the company's 20 per cent revenue increases over the last six months of 2001 were earned by its Professional Services and Software (PSS) division, which sells and services legal and accounting software on a global basis.

The company's domestic IT Services division, however, posted a $3.3 million EBITDA loss on growing revenues ($71 million). Solution 6 chief executive officer Neil Gamble attributes this loss to difficult market conditions in Australia.

Milton speculates that Solution 6 may consider divesting its IT Services business on the back of such results. "There were high expectations for their services business but it is still producing losses," he says. "The software business, on the other hand, is exceeding expectations. It is becoming clear that in the IT services game, you have to get big or get out."

Solution 6 also used the release of its results to announce that it has shelved plans to list internationally until it has further consolidated its business.

Melbourne IT(MLB $0.90)

Melbourne IT was able to report a pleasing EBIT (earnings before interest and tax) profit of $4.2 million for the 2001 calendar year.

Commonwealth Research analyst Craig Woolford says the domain name specialist increased its net profit by around 20 per cent in a very soft market. "It is quite a positive result considering Melbourne IT managed to increase their market share for top-level domain names in a period where the two market leaders, Verisign and register.com, both experienced significant declines in registrations," he says.

Melbourne IT earns almost two-thirds of its revenues from top-level domain names, and is now the fifth largest registrar in the world, with a 5 per cent market share. While selling the .com.au domain in Australia is a more profitable business for the company, most of its revenues and recent growth has been experienced in international markets.

Woolford says the company will rely on reseller arrangements to continue this growth. This year, it provided back-end support and registrar status for US Web hosting firm Verio, Pacific Access, and Yahoo in the US and Australia/New Zealand. "The key for them is to sign further reseller agreements," he says. "But there is a lot of competition for that business, so they will have to show superior support and service to win the deals."

KAZ Computer Services (KAZ $0.74)KAZ Computer Services reported a very encouraging result for the six months to December 31, 2001.

Total company revenue was $106 million, an increase of 139 per cent over the corresponding period in 2000. Most of this revenue was derived from the company's consulting division, with product sales only accounting for 16 per cent. The company reported a net profit of $8.6 million.

KAZ's acquisition of Aspect Computing impressed many analysts with the sheer size of the merged entity, but has also worried the investor community due to the short-term effects of such a deal.

The acquisition's announcement sent KA'Z's share price downwards, and it is yet to recover. Commonwealth Research analyst Craig Woolford says investors are concerned about the dilution of earnings per share caused by the distribution of new shares to the owners of Aspect Computing, and a placement of shares to institutions.

"The real benefits of the acquisition are not likely to come through until the next year," says Woolford. "Investors at the moment are more concerned with short-term issues."


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