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CHANNELDEX: Time for a u-turn?

CHANNELDEX: Time for a u-turn?

The Swish Group

Despite its tight financial situation at present, The Swish Group is a digital services company that is not short of ambition. The group has scheduled an extraordinary general meeting, asking its shareholders to vote on several acquisitions, the consolidation of the companies shares and whether it should proceed with attracting new investors through a fresh placement of shares to raise further operating capital.

Swish recently completed the acquisition of satellite broadcasting provider Access1. Now to complement Access1's services, it is looking to acquire both digital content management services firm Planet X and IP broadcasting specialist Malua Broadcasting. The group intends to pay for both in stock deals, with lucrative incentives for the owners of the acquired businesses if their business units perform in 2003.

Last month the Australian Stock Exchange queried the management of the Swish Group after its quarterly report showed a negative net operating cash flow of $309,000, with only $112,000 in cash reserves. The company had earned $832,000 in revenues during the period.

Chief executive officer Chris Stecki told Channel X that the company's last quarter was uncharacteristically down on its usual performance due to spending constraints in the Group's target market. But he said the current quarter was doing a lot better and should the acquisitions be successful, the company's revenue stream will be less volatile in times of cautious spending.

Stecki is aiming to attract between $5 million and $8 million in the new share placement, but said that even without the acquisitions or the fund raising, the company will survive doing business in its current form. "If you're asking whether [a failure to raise capital] will put us under, no, I don't believe so," he said.

Curiously, the Group's share price has risen by about 300 per cent in recent months.Powerlan may have started as a systems integrator in the early 1990s, but the company's current plans are to become something altogether different.

Last decade saw the PC and networking reseller move into new areas such as recruitment and training, project management, software development and e-business. But none of these areas have proved to garner better margins than those generated from its reseller business.

Now selling off the SI arm and divesting several other assets, Powerlan's Theo Baker is announcing another change of direction. He wants the company to own the IP of several best of breed software applications, and is prepared to pay for them.

Thus Powerlan is attempting to buy back Clarity International, a software developer that specialises in the telecommunications vertical. Powerlan had spun most of the company off several years ago but now wants it back and is offering a script deal in acquisition.

Nevertheless, Clarity appears to have cash issues that its former parent will have to address should it be brought back into the fold. Its last quarter produced a negative net operating cash flow of $2.5 million, and there was only $2.1 million in cash on hand. Its last half-year results (to December 31, 2001) saw revenues of $14.5 million, but a net loss of $5.8 million. In the short term, it is likely to be earnings per share negative and analysts suggest addressing costs will be vital for Powerlan should the takeover happen.

Hire Intelligence

Hire Intelligence is a not a new player in the IT channel, but only in recent years has its success caught the attention of the investor community.

Established in July 1996, the company hires out computers and peripheral products on a short-term basis to small businesses.

It has also franchised the business to partners to widen its geographical reach, and built up enough revenues to warrant listing in February this year at the modest price of $0.50 a share. One of the more successful floats of the last 12 months, the company now trades at around $1.30, with positive cash flow reported in its first quarter.

Analysts suggest the business model is generally safe for investors as it remains steady regardless of wider economic conditions, a rarity in the IT industry. In economic downturns, it maintains revenues by attracting customers who are hesitant to buy computer equipment outright and would rather ride out the storm with short-term rentals.

In periods of high economic activity, entrepreneurial confidence leads to the establishment of new small businesses. Many of these new businesses will begin with rented equipment in order to reduce risks while building up revenues.

A possible risk for investors would involve competition - with a successful franchised model, another group could promote a similar model and create a more competitive market. A second worry is whether Hire Intelligence can maintain its current growth rate. The company has to continually attract franchisee owners who are suitable for the operation both in their capability and their capital.

Oakton

Having built a solid reputation in Victoria, the IT services company Oakton is starting to expand throughout the country and overseas. The company consists of Oakton Solutions, which focuses on enterprise software solutions; Charter Wilson, a recently acquired IT strategy and architecture consultancy; Oakton Computing, a traditional IT services business; and an IT recruitment business.

Much of the company's recent success has been based on the sale of an imaging and document management product specifically developed for the NSW Police Department. Solid endorsements have encouraged Oakton to begin marketing the software to law enforcement agencies on an international basis.

Even with solid cash flow, revenues and profit - and a management team that is well respected by the industry and the investor community - Oakton is only valued at $1.01 per share. Analysts suggest the company's value is suffering due to the reluctance of an investor community that has not forgotten how much it was burnt by the IT sector in the past.

Concern about shrinking margins in IT services businesses is not unfounded and IT spending continues under duress. Even services giant KAZ Computer Services, which recently acquired Aspect Computing, has seen its share price halved because of these concerns. Regardless, Oakton is one of the few listed IT services companies that is proving on paper that a sustainable business model is possible.esecThe compulsory submission of quarterly reports to the Australian Stock Exchange has revealed much about which models are working in the Australian IT industry and which are struggling. The publication of this information has helped analysts to estimate how long a company can survive if it continues to perform in its current state.

A point in case is eSec, a company pushing the new managed service provider model (certainly flavour of the month in the IT industry) and providing an impressive array of security services. However, based on its recent quarterly report, analysts are convinced eSec is one of the many companies still suffering from the cash-burn epidemic.

For the three months to 31 March, 2002, eSec reported a negative cash flow of $232,000. This concerns the investment community as the company reported having slightly less than $200,000 cash on hand. Continuing to perform at this level means the company is in danger of not surviving the next few months.

ESec chief executive officer Saxon Hill attributed the poor results to a "seasonal weakness" in December and January, made worse by the events of September 11. March and April were improving, Hill said, and the recent acquisition of Software Vision Consultants had provided some better prospects for revenue and sales. The company is now looking to re-finance to the tune of $500,000 by attracting new investors.


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