CHANNELDEX: Divest, downgrade and restructure

CHANNELDEX: Divest, downgrade and restructure

Solution 6 Holdings (SOH $1.02)

Solution 6 Holdings is intent on erasing the questionable practices of the past and has undertaken an extensive divestment and reconstruction program over the last 18 months. The company claims that the initiatives have paid off and expects to be EBITDA (earnings before interest, tax, depreciation and amortisation) positive in the current quarter.

Solution 6 has changed considerably on an operational level since the flamboyant days of ex-CEO Chris Tyler. The company's emphasis now is "accountability, sound corporate governance and transparency". The change in strategy is due largely to the prudent direction of well-respected boss, Neil Gamble, who had previously been with Star City Holdings, Australis Media, Wormald and Ernst & Young.

One of the new management's key priorities was educating the public, overcoming the perception that Solution 6 was simply an accounting software supplier. The company also provides legal services and other productivity tools for an expanding base of non-legal/non-accounting professionals.

Solution 6's three main divisions in order of size are professional software and services, IT services and enterprise software.

The professional software division provides practice management, tax preparation and accounting tools. Solution 6 is targeting $145 million in revenues per annum from the division, a figure assisted by the recent mergers/acquisitions of Howarth Computer Systems (Asia Pacific), Ceedata (Australia) and MICL (UK).

The second major segment, Information Technology services, is targeting $130 million in annual revenue as it focuses on IT applications, integration and services including hosting and disaster recovery.

For the first half, Solution 6 reported revenue of $128.5 million (up 82 per cent) and an EBITDA loss of $24.3 million. The company now takes a more conservative approach to calculating EBITDA, including items previously treated as abnormals such as provision for doubtful debts and certain development costs.

Full year 2001 consensus

forecasts are $280 million for

revenue (up 56 per cent) plus a $51 million net loss. Revenue in 2002 is forecast to rise to $305 million, with a relatively small loss of $300,000.

Keycorp Ltd (KYC $1.75)

At Keycorp's recent AGM, the company indicated earnings for the six months ending June 2000 would be a loss of $10-$15 million, which represented a significant downgrade from indications published in the independent expert's report in December 2000. A surprise to the market, the poor result was caused by ongoing problems in the company's access device business coupled with a slower economic environment. Keycorp has had problems in gaining accreditation for its new K78 and K23 machines.

Keycorp has restructured its business units into smartcards, access devices, transaction network solutions, and e-commerce products and services.

The most significant event of 2000 for Keycorp was forming an alliance with Telstra. This alliance seeks to increase local market leadership, enhancing opportunities to build a payments business globally. Late last year, the transaction was approved by shareholders and Keycorp acquired Telstra's Eftpos payments business in exchange for 38.7 million shares - making Keycorp a subsidiary of Telstra.

The alliance expects to deliver a predictable and growing revenue stream to Keycorp and provides the opportunity for further expansion in international markets.

Another key milestone for the company was the acquisition of Camtech's e-commerce assets, providing the e-commerce business with an established distribution and sales and marketing model for the delivery of Internet payment gateway services.

Late in 2000, a smartcard technology licence was signed with the CPI Card Group, with Keycorp taking a stake in CPI, one of the largest card manufacturers in the world. More recently, the company announced the acquisition of EFTPOS Engineering, an Australian-based service organisation. Keycorp's strategy is to grow revenue through global reach and through alliances and partnerships in each of the business units. Consensus estimates are forecasting a $14.4 million loss for the year to December 2001, off a 122 per cent lift in revenue at $227 million. An $8 million loss is forecast in 2002.

Intellect Holdings (IHG $1.11)

Intellect Holdings has emerged triumphant from an operational and managerial restructure in 1999 and is now reaping the benefits of the booming electronic payment terminal industry around the world.

Intellect's products can be split into four categories: the traditional product divisions of electronic payment terminals (indoor and outdoor) together with the high-growth areas of home banking and wireless payment terminals.

The company derives 80 per cent of group revenue from Europe, 15 per cent from Australasia (indoor payment terminals only), and 5 per cent in the US (mobile payment terminals only). Going forward, the two key earnings drivers are mobile payment terminals and the home banking product, Microbank Home.

Intellect's strong earnings growth and potential is illustrated in the company's forward order book, which stands at $63 million, providing it with a roadmap for earnings over the next 12 months and a degree of earnings certainty.

A 90 per cent increase in profit to $10.1 million is forecast for the current financial year, from $78 million in revenue (up 48 per cent). The company has already reported a 60 per cent increase in first-half revenue at $32 million. Operating profit for the same period came in at $4.2 million compared with $1.1 million for the previous corresponding period. In the same period Intellect also became debt-free and cash flow positive, providing further stability.

Further opportunities exist with the current implementation of the global EMV standard to be adopted by thousands of banks around the world over the next few years, together with expanding markets in the US and Asia where Intellect has minimal presence. Continuing strength in Europe provides a solid foundation.

On March 15, Intellect was included in the ASX 200, providing access to index fund managers. ING Australia recently acquired an 8.58 per cent stake in the company.

Catuity Inc (CAT $7.60)

Catuity is a loyalty software provider for payment systems. The company assists merchants and issuers to evaluate loyalty programs at the point of transaction - the merchant can instantly gauge the "value" of the customer and determine eligibility for loyalty rewards. Catuity's software functions over the Internet as well as in the physical store itself; the goal is to eventually work on mobile phones and personal digital assistants.

Catuity's share price continues to fluctuate, although the company claims there is no business-related reason for this. Perhaps legal proceedings commenced by Welcome Real Time, initiated locally, has cast a shadow on the company. Catuity maintains that the case and the decision will have limited impact on its business plans and the international significance is minimal or nil. The company has stated that the decision relates to "a single judge in an Australian Court under Australian law in relation to an Australian patent". Catuity insists the case does not have any legal jurisdiction or precedent value in the US market.

The company believes that the US will set the international standards for loyalty since loyalty is being integrated with payment and the US dominates the payment system. Last month, Visa indicated that momentum for smartcards in the US is increasing with point-of-sale terminal suppliers and trans-action processors implementing smartcard capability. Catuity is the only loyalty program provider to the smartVisa smartcard program.

There are eight million Catuity shares on issue and the company is dual-listed in the US and Australia. The company has stated it will be making enough revenue by the end of the year to "keep ourselves healthy".

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