Web Strategy
Who is making a profit?
Adrian Weckler
Dublin, Ireland, 3 June, 2001
Last month, in an editorial, Computers in Business placed the following appeal: "Wanted: an Irish dotcom or tech related company making money. Here are the results.
Not `cash-positive', not `revenue-accelerating', not `on target to enter profitability in Q1 of next year', but a profit."
Ninety-five per cent of the replies we received missed the significance of one small word: "Profit."
Were there, we were beginning to wonder, any genuine, honest-to-God, profitable Irish dotcom or e-business companies out there?
Deloitte & Touche's David Flanagan (partner) and Michael Flynn (director of corporate finance) would know better than most.
They presided over this year's Deloitte & Touche's Technology Fast 50 competition, working closely with entrants.
Judging criteria for entrants included, among other things, revenue growth.
Asked by Computers In Business whether they could think of any which were actually profitable, cumulatively they could name less than five they were sure of.
Other pillars of the technology world, including venture capitalists, financiers, industry associations, public relations companies and research analysts seemed to have similar difficulties finding anyone making good money.
We did consider that, perhaps, these companies are just publicity shy.
This possibility was given weight by the actions of one company, Parallel Internet, whose managing director, Tom Skinner, dramatically stormed out of a photoshoot arranged by Computers In Business after deciding at the last minute that this type of publicity would leave him looking part of a "millionaire boys club".
Parallel, he had previously claimed in an arranged interview, was a profitable company.
Left standing in the studio, we wondered whether Skinner, like managing directors of so many other internet companies, may have had second thoughts about seeing that in print.
However, after we had travelled down quite a a few blind alleys, we managed to find a few companies which had bucked the current tech trend.
These companies have the right business model in difficult circumstances, have by and large avoided the tech hype of the last two years and offer e-business products and services the market wants.
They all have a few things in common: most are privately owned with no debt and have never received funding. Most have directors and executives with a down-to-earth, no-nonsense approach to their business.
One or two (like Entropy) have tried to extend quickly, have been rebuffed by the market but have got on with their core business and have come back stronger.
The two we were most impressed with were Sean Carty's Connect Electronics, a tech hardware broker, and Aidan Higgins's Xnet, a storage company. They are models of how it should be done.
Carty's company is the unsung star of the Irish technology sector: a private company owned and run by a few people with revenues of $200 million.
Higgins's gutsy Xnet, which has taken on global storage giants EMC and Compaq in Ireland and come out in the black, rings in at a far more modest £3.5 million in annual revenues, but is young and causing a stir in the previously settled data storage market.
And they're both making money. In that, they share an all-too-rare trait with the other companies featured.
Completely Connected
BUSINESS FILE
Name: Sean Carty
Company: Connect Electronics
Specialty: distribution of electronic components into multinational OEMs; about to launch `trailing edge' computer supply business in Ireland through subsidiary Notebook Express
Based: Finglas, Dublin
For a company so prolific in the provision of electronic and tech parts, Sean Carty's Connect Electronics has one surprising dislike: e-mail.
"If you're a buyer and you have to have something replaced immediately, you're not going to get onto a website, send an e-mail and wait until the next morning," Carty says. "People want to know answers. With us, if someone rings up panicking and saying they need something quickly, they know they'll have an answer the next morning -- because we know they're going to get into trouble with their production manager if they don't have an answer quickly."
Carty says he dislikes the use of voicemail for the same reason. "At Connect Electronics, you always get to talk to someone -- people don't want to talk into a machine."
Connect Electronics is a model of how to build a technology company. Founded by Carty in 1993 as a manufacturer of board-level electronic components, the company quickly began to specialise in sourcing and distributing hard-to-find electronic parts for multinationals based in Ireland.
"Our speciality lies in knowing where to buy products and how to get them to customers," Carty says.
The company has no debts at all, he says. This is partly down to the fact that when the company started up, there was little point looking for investors because "nobody really got what we were doing".
However, this had an upside. The company got into the habit of not dealing with big investors so that by the time it made its biggest acquisition, Notebook Express last year, it could fund it entirely from cashflow.
The company's core business is based around obsolete parts. It sources and stocks components for older systems when other suppliers have moved on.
It also redistributes obsolete and excess material through a network of contacts within the electronics industry.
The company's customer base includes manufacturers of computers and telecommunications equipment and companies in the aviation and automotive sector, as well as the military in several countries.
Around 85 per cent of Connect's business is done overseas and Carty has his eyes set on becoming one of the top ten distributors of electronic components in the world.
One interesting sideline to this is the military business in which Connect claims an extensive customer base in the Unite States.
"We deal with a lot of subcontractors," Carty says. "There are a number of bases around the Philadelphia area. We provide a full range of electronic components for military parts."
At present, the company is doing work on missile guidance systems. Its main business up to now in this field has been on the army side in artillery support units.
Connect recently opened a new office in Pennsylvania to strengthen its US arm, which manages warehouses and distribution hubs in both Europe and the US for components ranging from central processing units to hard disk drives.
From its headquarters in Finglas, Connect manages sales from France, Germany, Belgium, Holland, Spain and Austria.
In the past, the company preferred to concentrate its European sales and customer service operations in Dublin. Continued expansion means that new offices are planned for Hungary and the Czech Republic. There are also plans to break into the Scandinavian market.
Last year, using only its cashflow, Connect bought British company Notebook Express which makes handheld computer devices. The operation's revenue increased by 50 per cent to £5 million in the first six months since the takeover. A second office was recently opened to deal with the British market.
Later this month, Notebook Express will launch an Irish office, supplying `trailing edge' laptops -- machines with a slightly lower spec than the current high end models -- to businesses which don't need huge computing power.
In 2000, the company had a $200 million turnover. This year it's projecting a turnover of $224 million, down on the $250 million it had initially thought it could earn.
The principal shareholders in the company are Carty, sales director Tom Connolly and financial director Tim McDougald. Carty owns the largest stake.
One of the reasons the company is so successful is that Connect has achieved individual ISO registrations for the different parts it supplies. Companies rely on this quite a lot, Carty says.
"We never say it can't be done," he says. "We figure out how you can do it."
BUSINESS FILE
Name: Aidan Higgins
Company: Xnet Information Systems
Specialty: supplying data storage products and services
Based: Dun Laoghaire, Co Dublin
Ask any venture capitalist about where the hot areas are in technology at the moment and they'll give you two answers: wireless internet and data storage. Whether or not they're right about the prospects for the former (and we have our doubts), there's little obfuscation when it comes to data storage.
The key to the market is this: storage capacity has to increase by 60 per cent per annum just to keep up with increasing capacity in data (source - IDC). Between 50 and 60 per cent of IT budgets in Ireland are spent on storage (half of this is on personnel engaged in doing things like changing tapes) and, with a growth rate of 80 per cent a year, the Irish market will be worth an estimated £1.6 billion by 2003 (IDC figures).
The only problem is that two companies utterly dominate the market -- EMC and Compaq. How to break in?
Enter Xnet. Started by Aidan Higgins and Kevin Moore in 1995, this small company has been steadily winning business based on its best-of-breed data storage solutions. Xnet sells anything related to data storage from data backup, storage area networks and storage management to site auditing and solution support.
The way it has done this is by establishing close partnerships with data hardware companies considered the best in the world. It has an exclusive arrangement at high enterprise level with companies like Hitachi (which signed a contract order for storage worth a Petabyte (1,000,000 gigabytes) in California recently).
Its other selling point, says Higgins, is service. He points out that Hitachi is the only company in the world to guarantee data availability -- it pays money to customers if data becomes unavailable on their disk system. This level of guarantee, says Higgins, is something Xnet's rivals can't offer. Other big partnerships include Veritas and Storagetec.
For all its attractions, the storage market was not the original target for Higgins who had worked as an IT business consultant for Philips and IT manager for Crown Equipment in Galway.
`Originally we had a look at the ISP market and came close to setting up, but found it difficult to find anyone who'd back us financially. The costs of entry into that business were very high. So we went into storage."
Higgins doesn't think that the sector is necessarily inherently profitable, despite the huge growth rates. "We have to watch our costs carefully. One of the things we avoided was a burn rate -- we tried to grow organically, even if that meant slower than some other companies."
It is still reluctant to rush into expansion. "Some of our clients would like us to move more into European expansion, but we're still cautious about it," he says.
Higgins's cautious nature seems to have paid off. Xnet had estimated revenues last year of £3.5 million and, with no debt, the company is believed to have a profitability level of about 12 per cent. It has increased its staff from ten to 35. Its clients include AIB, Ericsson, Nortel, Baltimore Technologies, Worldport, Gateway, Eircell, Eircom and Intel.
The company is owned by the two directors, with a further 10 per cent of equity in an employee equity fund.
BUSINESS FILE
Name: Conall Lavery
Company: Entropy
Business speciality: Security products and services
Based: Sandyford, Co Dublin
Baltimore Technologies is going through a stormy time, but security is still considered one of the unfettered success areas of e-business.
The company is owned by its directors -- Conall Lavery, John Ryan, David Bolger.
The rest of the company is owned in a stock option arrangement between other managers and staff.
Lavery started the company with a family loan of £15,000 and an overdraft of £5,000.
He says this was paid off in a year and the company hasn't been in debt since. This is partly because it never took on external investors.
Last year, the company tried to secure funding of over £1 million to finance its expansion plans into Europe, but the market didn't go for it.
Lavery says that the company hasn't given up on the idea.
Entropy is a profitable company. In 2000, it had revenues of £8 million and remained profitable even after the acquisition of MSS, a £1 million acquisition paid for entirely with retained earnings.
BUSINESS FILE
Name: Johnny Parkes
Company: Electric Paper
Speciality: E-learning and developing ECDL CD-Rom discs
Based: Dublin
When it comes to e-learning, Ireland is the centre of the universe. It was here that the now internationally standardised European Computer Driving Licence was created and developed. Fitting, so, that Ireland has produced one of the most successful ECDL e-learning companies in the world.
Electric Paper charges upwards of £250 per ECDL CD-Rom (and licence). The company's core business is based on the premise that there are a sufficient number of people out there who don't know enough about computers and who will pay a few hundred pounds to find out.
"If there weren't millions of people around the world struggling to get online, we wouldn't be in business," said Johnny Parkes, managing director of the company.
It seems to be working -- the company claims to have trained a quarter of a million people and last year had revenues of £3,000,000. According to one senior manager, this will probably double this year, making the company the fastest growing company in the sector.
With production costs on a massively sliding scale, the margins on producing extra CD-Roms, if you get the market share, are potentially enormous.
"The margins are pretty good," said Parkes. "What we earned last year, we're investing this year."
The company was started by Hugh Skinner, the man who had the first Apple Macintosh dealership in the country with Computer Workshop, in 1993. Never having borrowed money, the company grew slowly.
Electric Paper's main markets are now Britain and Australia. The company has just recruited staff from California, some of whom worked for Lucas, the giant media entertainment company.
BUSINESS FILE
Name: John O'Shea
Company: Webfactory
Specialty: Web development
Based: Dublin
There are only two significant players in the business web development market in Ireland -- Webfactory and Labyrinth. Both grew slowly, both were recently bought out by bigger companies, both make healthy profits. For Webfactory, it started with design, but don't say that to John O'Shea, managing director of the company -- it's a long time since that was the firm's core business.
"I'd see Webfactory's core business being much more associated with developing internet functions for businesses," said O'Shea. "Everything from delivery, billing right through to a 360 degree view of the company."
It almost seems an oxymoron to mention profitability and web development in the same sentence, but that's exactly what Webfactory has achieved. Analysts say the company had revenues in excess of £4 million and estimate -- authoritatively, we understand, that the profit margins are in excess of 20 per cent.
This type of success doesn't come easily. The company has built up a reputation for being the industry standard when it comes to web integration and design.
"We were reasonably cautious over the years and built the model around work we had. We didn't hire a whole bunch of people in the expectation that the work would come down the line," said O'Shea."It was a struggle to survive five years ago, but we just set monthly targets and stuck to them."
Clients include Shell, Intel, Cisco, Sherry FitzGerald, Xerox and Eircom -- big firms.
In recent times, the company has gone in to the banking sector in a big way, building software and coding bridges between legacy systems used by big financial institutions to make it all work together.
O'Shea predicts that the next big lucrative area will be e-government, based on the fact that the government are committed to huge expenditure in the area over the next two years.