The (Comm) Soft sell

The (Comm) Soft sell

A few months ago ASX-listed CommSoft Group was contemplating a worst-case scenario. On June 18 the company announced that it had remaining cash reserves of only $1 million, and was spending above revenue at a rate of over $300,000 a month. Its decision to expand through resellers in the UK market hadn't paid off, and the company was staffed up for much higher revenues than it was currently seeing.

The story of CommSoft carries many of the hallmarks of other companies that took advantage of the euphoria surrounding technology stocks through 1999-2000 to raise money in the public market, only to find themselves struggling when the predicted markets failed to materialise.

CommSoft began life in New Zealand in September 1997. It develops software for small and medium business in the areas of call centre management, customer relationship management, and the tracking of Internet usage within companies. A profitable private company, it listed on the Australian Stock Exchange at $1.10 in September 2000, raising $17 million primarily for expansion and business development. CommSoft also boasts one of the original OzEmail investors, Trevor Kennedy, on its board as company secretary.

Today CommSoft's share price is

languishing at around 8 cents, its revenues are far below prospectus forecast and it's rapidly burning through cash; the victim of over-ambitious forecasts and a growth strategy that it couldn't support in a slowing market.

"There's no point in denying that those numbers do not look pretty," says CommSoft's recently appointed chief executive, Mark Lunt. "But we're seeing sufficient improvement in terms of sales activity, orders and collection, and a sufficient degree of discipline being applied on the cost side, to give us confidence that we can make it through."

Only time will tell. For now, Lunt can breathe a little easier, having secured funding of $2.15 million to underpin CommSoft's growth plan.

Tough times

The first sign that things were seriously awry for the company came in March, when it announced a half-year loss to December 2000 of $6.26 million on revenues of only $3.86 million. At the time, $4.2 million was attributed to conservative provisioning around debtors, primarily British resellers that were expected to conduct most of CommSoft's sales and marketing in that country.

Further evidence of the company's plight emerged in June, when Commsoft issued a statement saying its prospectus forecast of a net profit to June 30 of $4 million had been revised to a loss of $17 million.

"In common with a lot of high-technology companies, the revenue forecasts at the prospectus time were very ambitious," Lunt says. "We basically staffed up and built up an overhead structure to support that level of revenue, and for a number of reasons we just couldn't deliver the revenue. The fact that from the end of last year the whole market slowed down didn't help, but we also had some issues in the execution side of our plan.

"I don't think we did a good enough job of supporting our channels and creating the pull that a distribution channel ultimately needs. If you don't have a demand from end-users then products are going to sit on distributors' shelves."

English-born Lunt only joined CommSoft at the end of April this year, following the resignation of the previous CEO, Geoff Wilding. Lunt, a 23-year industry veteran with a reputation for turning around companies in both New Zealand and the UK, was first approached to work at CommSoft in January, but says he declined the proposed role as it wouldn't have given him full operational control of the company. When he was approached again in March with an offer to become chief executive, he began a month-long period of due diligence before concluding that the company could be salvaged.

"Clearly I was aware that there were some significant issues," Lunt says, "but I've had experience with doing turnarounds of companies with problems before, and I really do enjoy a challenge. I also thought that the fundamentals needed for a good business were in place and I really felt like I was prepared to back myself to deal with the issues and turn it around.

"If you look at the markets we're in, these are big, rapidly growing markets. There is certainly no lack of growth opportunity to constrain us."

Lunt has great confidence that the steps he has taken to reign in CommSoft's costs will stem the flow of red ink and take the company to at least a break-even position within a few months.

"There are some very basic things you have to do with a company that's struggling," he says. "You have to make a very realistic assessment of the dependable, recurring revenue base, and you essentially have to move very quickly to resize the company so that your costs don't exceed your revenues. Unfortunately, that often means pretty dramatic reductions."

At CommSoft that meant dropping staff numbers from 140 to 80 in the last six months. As yet, that hasn't been enough to arrest the cash burn entirely, but it has led to a reduction of monthly cash burn to only $300,000, compared to $1.2 million earlier in the year.

"While it's going to be tight, the modest improvements in revenue, combined with the cost cuts that are still coming through, are going to take us through."

Crossing the sea

Having only a small domestic market to operate in, CommSoft relies heavily on revenue from sales through partners overseas, with 55 per cent of sales coming from the UK and 30 per cent from Australia. Lunt says penetrating the Australian market is considerably easier than other markets for New Zealand companies, with business having a similar mindset.

"People and decision-makers tend to be approachable and the business environment is similarly relaxed (in Australia)," he says. "Sydney and Melbourne are only three or four hours away, which means access is much easier. Also, the market is much bigger, so it's a logical first overseas market."

Similarly, Lunt says the UK market is much better for NZ companies than the US, due to historical and cultural ties.

"Just about everyone in the UK has a relative or friend who lives in NZ and everyone wants to go there," he says. "There is a keen interest in the country and this is a great help. While people in the UK are often viewed as isolationist or detached, this is not generally the case - the US is far more that way inclined. The US is also the undisputed centre of the IT world and it's very hard and very expensive to get above the noise level. A lot of companies have spent huge amounts of money there to little effect."

Lunt nevertheless attributes a large chunk of CommSoft's woes to problems with its reseller base in the UK. "Maybe we thought a little naively that launching ourselves in the market with some strong products would be enough for success, but business in the UK is quite hard," he says. "The logistics of getting around, the traffic, the expense - it's gruelling, it takes time, and the business culture is very different. Over here (Australia and New Zealand), getting access to decision-makers can be quite straightforward. In the UK, those things are much, much harder. And of course, like the US, it's a very crowded market.

"We did a good job in opening up some high-quality channels, but we were a bit optimistic as to how quickly those channels would achieve sell-through. The main issue is not that the channels aren't selling the product, it's that the partners themselves may have thought that they could move 50,000 (UK pounds) worth of stock in six months, but they weren't able to. That was a combination of their irrational exuberance and . . . things that we could have done better in terms of providing demand and basic promotional support."

Lunt says he and the team have been working hard over the last two months to correct channel productivity issues and ensuring that CommSoft is providing the right level of support to channel partners. "We know an awful lot more now than we did six months ago. That experience has been pretty hard-earned, and that's what makes me confident that the thing is going to pick up," he says.

"The new focus of pitching the products and understanding what the resellers need is starting to bear fruit. We have an office, some great people and some sales channels that are starting to perform well - but it has taken quite a while."

In June, CommSoft signed up five new UK resellers, but whether these initiatives, a badly needed funds injection, and CommSoft's cost-cutting will be enough to save the company remains to be seen. Lunt's confidence is not reflected by the share market, which continues to punish its stock, and he'll have to work hard in educating industry analysts, with neither IDC nor Gartner having strong knowledge of the company's activities.

Should Lunt and CommSoft prevail, it will be one of the great turnarounds in the local software industry.

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