Stars align for NZ IT companies

NZ's fastest growing technology companies share a common link, reveals the latest TIN100 report. Anthony Doesburg looks at its findings, while Holly Ryan profiles some tech success stories

Rod Drury, founder of Xero, part of an ICT 'swarm'. Photo / David White
Rod Drury, founder of Xero, part of an ICT 'swarm'. Photo / David White

Information and communications technology companies are the star performers in the latest TIN100 survey of the New Zealand technology sector.

While the 100 biggest technology companies grew 3.7 per cent overall during the past 12 months, firms in the information and communications technology (ICT) sector lifted sales by more than four times as much.

"There's massive growth in ICT - something like 16 per cent," says Greg Shanahan, who has been compiling the TIN100 for nine years.

Nor is the surge just down to sharemarket darling Xero.

"Xero is just one of many - it is part of an ICT swarm."

Although only one ICT company, Datacom, makes it into the TIN100's top 10, computer firms account for seven of 10 "companies to watch" - those that had the biggest revenue growth in dollar terms.

They include Orion Health, Fronde, Certus and Intergen.

The 2013 TIN100 companies had total sales of $7.2 billion - $5.3 billion from exports.

Top-ranked Fisher & Paykel Appliances, which has headed the list since it was first compiled in 2005, accounted for $1.02 billion, down 1.7 per cent on last year. Runner-up Datacom's sales were $870 million, up 7.1 per cent.

Despite ICT's boom, the top 10 is a familiar list. After Fisher & Paykel Appliances and Datacom come F&P Healthcare, Tait Communications, Gallagher Group, Rakon, Temperzone, NDA Group, Moffat and Weta Digital.

To qualify for the list, companies must be involved in ICT, high-tech manufacturing or biotechnology, have originated in New Zealand and retain a significant presence here, and get at least 10 per cent of their revenue from exports. As well as the top 100, there is a Tin100+ list for the next tier of companies.

Last year, Australia was the saviour of exporters fighting a high New Zealand exchange rate against the US dollar.

This year, the reverse is the case. Overall export growth in North America was 9 per cent, domestic market sales were up 5 per cent, but exports to Australia were up by only 3 per cent.

Positive economic sentiments are beginning to seep into the media, Shanahan says, as "green shoots" of business activity appear in the US.

"Certainly that's starting to show in terms of the TIN100 companies, which is juxtaposed with the slowdown in the Australian economy." And no harm will have been done by NZ's America's Cup performance.

"Without wanting to sound contrived, the timing of the America's Cup is probably good for New Zealand."

SHANAHAN describes New Zealand's export performance as behaving less like a giant catamaran than a ball. The air inside represents exports pushing outwards, held back by external pressures such as exchange rates.

As the New Zealand dollar strengthens against the Australian currency, for example, sales across the Tasman tend to slow, leading exporters to focus on other markets.

Over the past year, Shanahan says, the US has been the low-pressure point, with an exchange rate trend that has favoured New Zealand exporters, coinciding with a revival of the US economy.

The movement of the kiwi-aussie exchange rate has been much more dramatic in the 12 months to August, however, than the change in the kiwi-greenback. The New Zealand dollar appreciated by about 13 per cent against the Australian dollar, while weakening by about 2.5 per cent against the US currency during the period. At the same time, the oomph has gone out of the Australian mining boom.

"We're getting a lot of companies - medium-size engineering firms such as Temperzone and Methven - that are tied into Australian building activity. They're affected by Australian economic activity but the currency is the single largest influence. "Companies can structure their offerings but currency is something that takes time to adjust to. Probably the single biggest issue of the past 10 years has been the appreciation of the New Zealand dollar against the US dollar.

"It's a story of companies being smarter and more sophisticated to survive in that environment."

Shanahan says the question of what, if anything, the Government could be doing to lower the exchange rate should be the subject of a non-partisan discussion. "People would argue that we're doomed by our success; we're a stable Western country, therefore currency flows into New Zealand because it's a safe haven."

BUT some companies are making a virtue of necessity by trading on the frugality that has become part of the national mindset. According to Shanahan, it's a characteristic that American billionaire and one-time America's Cup-holder Bill Koch noted when New Zealand first won the sailing trophy in 1995.

"Koch said he lost and we won in 1995 because we didn't have enough money. New Zealand companies, because of their small scale, are good at taking out cost.

"They're not only efficient themselves, but they have technology to create efficiencies, and I think that's one of the reasons for growth in IT services seen in the latest survey."

Health software company Orion, which is capitalising on America's Obamacare overhaul of health funding, is an example.

"Obamacare's key goal is to cut inefficiency and deliver better value and apparently a lot of existing US healthcare systems are failing at that," says TIN100 researcher Jo-Anne Hazel.

"One of the things Orion offers - and this is a real theme of the survey - is helping customers save."

Other ICT high-flyers include Fronde, which bought Australian cloud computing company OnlineOne in May, Certus, Intergen, Vista Entertainment Solutions and Xero.

Shanahan says an important element of their success is that they're overcoming the "lumpy" revenue problem that results from one-off sales, by adopting a more sophisticated software-as-a-service business model.

"This means they have recurring revenue, giving them a Stars align for IT cash ramp so they can continue to grow."

The issue foremost in the minds of TIN100 leaders is sales growth, and their next priority is keeping staff. Profitability and research and development are their third and fourth biggest concerns, and the currency ranks fifth. Access to venture capital rates as last of seven concerns.

"Once companies get into international markets they see that to sustain their margins they must be a price-maker rather than a price-taker," Shanahan says. "So they have to achieve scale and they have to provide value in the solutions they're providing. To do that they must attract and retain quality staff. "You can't just find replacements on the street."

• The TIN100 report is published in association with Callaghan Innovation, and sponsored by NZ Trade and Enterprise, EY, Vodafone, AON and Lumley Insurance.

- NZ Herald

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