Jenny Ruth: Finzsoft up and running fast

COMMENT

When Finzsoft Solutions listed on the now defunct New Capital Market and was completing its "key transaction" in April 2001, the omens didn't look good.

Barrie Shannon, the software company's founder and managing director, says he still has a copy of a Herald at that time which contained a story about Finzsoft and every other story told of doom and gloom.

Because it was just about then that the big tech-wreck began and many high-tech companies and their share prices were vapourising.

Inevitably, Finzsoft was caught up in the panic and its shares, issued at 50c each, had subsided to 38c by early 2002. But they quickly recovered.

Then early last year the shares suddenly shot up and have traded mostly around the $1 mark ever since.

Shannon describes what happened then as "a re-rating. A few people realised what we do and they could see we hadn't crashed".

He notes his company's shares were the third best performer on the stock exchange last year and "our shareholders should be quite happy".

Finzsoft provides software packages for non-bank financial institutions, including finance companies, building societies and credit unions under the Sovereign brand.

Among the larger financial institutions - it doesn't sell to very small operations - and excluding the bank-owned finance companies UDC (owned by ANZ Bank) and AGC (sold by Westpac to GE Capital in 2002) whose systems are sourced overseas, Shannon says Finzsoft can claim about two-thirds of the New Zealand market.

Its clients include South Canterbury Finance, Hanover Group, Marac, Motor Trade Finance, Gough Finance and Fisher & Paykel Finance.

Finzsoft director Brent King's Dorchester Pacific also uses Finzsoft software in its several finance companies. Dorchester subsidiary Direct Broking also sponsored Finzsoft's float.

Southern Cross Building Society, Nelson Building Society, Wine Country Credit Union and the Police & Families Credit Union are also customers.

Shannon says the alternative for such companies is to develop their own software, as organisations like Southland Building Society have done. But Finzsoft clients get the benefit of constant upgrades and shared development costs, which make it a more efficient, cheaper option.

Finzsoft clips the ticket two ways, first on the installation costs and then with its annual licence fees.

And it's no newcomer. The company began in 1986, then known as Systems Support Group.

Its purpose in becoming a listed company was to raise funds for its international expansion.

Shannon says the company has just secured its first two overseas clients. One, an Australia-based nationwide motor vehicle finance company, has been foreshadowed by the company for months.

Shannon had hoped that client, who doesn't want to be named, would sign up last September, but signed only last week.

He explains that it's a big decision for a financial institution to adopt the Sovereign software and that all sales usually take between six months and a year before a final decision is made.

The other sale was made by the company's Detroit-based agent to a merchant bank in, of all places, Barbados.

Shannon says that was a case of the client finding his company through a web search.

One of Finzsoft's advantages is that the New Zealand market is too small for it to specialise in different types of financial institutions such as motor vehicle finance, mortgage finance or leasing finance.

Instead, its software has been developed to cover the whole gamut of any institution's needs.

Overseas, such specialisation is the norm. Shannon thinks that lack of specialisation and the fact that Barbados is English-speaking won Finzsoft the contract.

Some of its staff will visit the client shortly to ensure the company is aware of its technical requirements and "I almost think it's a management job to go", he jokes.

Behind all this activity, the company has announced bottom-line annual losses since listing but that is simply because it is required to amortise its software over 10 years.

The directors say in the last annual report that this doesn't fairly reflect the value of its Sovereign software.

"It should be appreciated that the cash flow of the company is not affected and the value attributed to the Sovereign finance and banking software has not been impaired, despite the amortisation," they say.

Indeed, net cash flow from operations in the year to last March was $247,878, up from $34,253 the previous year. The bottom line looked very different: a net $237,103 loss, from a $275,079 loss the previous year.

But the picture is quite different in the latest six months. Although the company reported a $16,000 net profit for the six months ended September, net cash flow from operations was negative $114,000.

This, says Shannon, reflects the fact that the company has been hiring staff as part of its effort in gearing up to service international clients. It usually takes about six months before a new staff member starts to fully contribute but they still have to be paid in the meantime.

Last April, with the New Capital Market's demise foreshadowed and the replacement AX market still to be established, the company graduated to the stock exchange's main board, even though it still fails to meet several requirements. These include a market capitalisation of $10 million or more - it isn't far off at $8.4 million - a minimum of five directors (it has three) and at least 500 shareholders - on April 28 last year, it had only 223 shareholders.

Shannon says he hopes the market will take care of the first requirement - the shares would need to rise another 20c from the current $1.05 - but the other two requirements are more difficult.

He wants any new directors to be able to contribute meaningfully to running the company.

And the solution to increasing the number of shareholders is already available. Since listing the company's shareholders have voted at every annual meeting to allow the directors to raise $2 million through a share issue.

In fact, one criticism you could level at the company is that it hasn't raised this money and hasn't grown faster. It is still sitting on the $800,000 it raised from its NCM listing.

Shannon says he's always run the business trying to balance costs against sales and the NCM money gave him the luxury of a buffer.

The company's outgoings now are about $350,000 a month.

"You can easily go two months without project work and, with staff costs, you need a buffer."

And before he raises further cash, Shannon wants to be sure that it's earmarked for specific projects.

"The potential is really excellent, but we're not an overnight company. Our business is step by step. I don't want to change that until it's appropriate."

But he hints that the capital raising may not be too far off now. The company has certainly said it is looking for another two directors.

Shannon thinks another re-rating of Finzsoft's shares is likely to come when it starts announcing more overseas sales.

"People can be reassured that it's not a boom-and-bust."

Once its existing Australian clients' systems are up and running in about 12 months, he has high hopes other Australian clients will soon follow.