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Commsoft - a view from another perspective

By Frank Fernandez

Friday 11th August 2000

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In business, timing is everything and the worst possible nightmare for Commsoft would be for Chris Jones of Telemedia to be named New Zealand "Entrepreneur of the Year" when the award is announced on September 6 - a week before Commsoft is due to list on the ASX.

Since the Strathmore Group bought into Commsoft late last year, SMR connections have always compared their new acquisition to Telemedia. At the SMR annual general meeting last December, Eric Watson asked SMR chairman Phil Norman whether there was any similarity between Commsoft and the high-flying Telemedia. Phil Norman answered, with a broad smile, that Commsoft was "at least equals" to the Australian company.

Last October, Chris Jones went to the public with an offer of 16 million shares at A$1 each in Telemedia. The float was described as "spectacularly successful" with TMN listing on the ASX towards the end of October. By the end of the first day of trading, TMN had closed at A$1.46 (a 46% premium). Over the last 10 months, it has risen to a high of A$10 before being caught up in the April tech meltdown which saw the price drop sharply to the A$4 mark. It has since steadily climbed back and was at A$5.95 at last close.

Now, some 10 months later, Commsoft is following in almost the identical footsteps of its successful predecessor. In a public offer which will close on 1 September, Commsoft is offering some 15.4 million shares at A$1.10 each to the public which amounts to 25% of total shares on issue. The public offer will raise A$17 million - with market capitalisation of the company (at the offer price) being at A$67.8 million.

Of the 15.4 million shares that will be offered to the public, about 4.3 million shares have been set aside as a priority allocation for Strathmore shareholders who will be entitled to buy a minimum of 500 shares plus one additional share for every 75 SMR shares held. All investors must buy a minimum of 1900 shares but there has been no indication of the maximum number of Commsoft shares that intending SMR (or non-SMR) investors may be able to purchase. However, as in all public offers, this will be up to the discretion of the company concerned.

In its prospectus, Commsoft describes itself as "a company that develops, markets and supports communications management solutions (CMS) and customer relationship management solutions (CRM)".

In plain terms, Commsoft develops, markets and supports the CMS and CRM software. The CMS software provides the information necessary to understand and control the costs associated with telecommunications. The telephony-enabled CRM software assists companies to increase profitability by gaining a greater understanding of their customers.

The products are distributed through bundling agreements with hardware manufacturers and telecom service providers, and direct sales to end-users. The end-users of the company's software are primarily small to medium enterprises with between 20 to 200 employees. The company also provides its products to national and multi-national companies, and government departments.

Since the commencement of its business in 1997, Commsoft has established nine offices in four countries and has installed its products in over 20 countries. The company has secured distribution agreements with Telstra in Australia, and Panasonic and British Telecom in the UK. Commsoft has also sold and installed its products to prestige customers such as Rolls Royce, Stanley Tools, Motorola, Scottish Police and the NZ Department of Defence. [Intending investors can read, in greater detail, a description of the Commsoft business on www.commsoft.co.nz]

For the 12 months to 31 March 2000, Commsoft returned operating revenue of A$5.3 million and net profit after tax of A$889,000. Unaudited figures for the three months to 30 June 2000 indicate operating revenue of $2.9 million with net profit after tax of A$173,000. At 30 June 2000, the company had $1.8 million of assets. For the financial year to June 2001, Commsoft is forecasting operating revenue of A$20.8 million with net profit after tax of A$3.9. The company predicts that revenue will grow by 291% for this period but no figures for the corresponding period last year (i.e. June 1999 to June 2000) are provided in the prospectus for comparison.

The company however stresses that there are a few risks which may impact on its forecasts - one of which is the volatile trading prices of many technology companies in Australia and globally at present. Another risk cited is "the actions of competitors which may adversely affect the company's performance".....which leads me to the company that Commsoft have always been likened to - Telemedia.

While the connections of both TMN and Commsoft have (in recent times) attempted to point out to the marketplace the differences in their respective businesses, investors generally tend to classify companies in industry groupings. Companies such as Telemedia, Commsoft, GDC Communications and many others therefore invariably find themselves placed (often simplistically) in the telecommunications basket.

And because of the continual comparison in the past, it would only be logical to expect that intending investors would continue to compare the merits of Telemedia and Commsoft (rightly so, some may say) when assessing whether they would subscribe to the Commsoft float.

By way of recapping, Telemedia floated on the ASX last October. Its products include prepaid calling card and mobile phone systems, voice messaging systems, interactive voice response systems, call centre solutions, intelligent network systems, mass calling platforms and internet telephony solutions.

In the last three months alone, Telemedia has
- Secured key contracts with Deutsche Telekom (Europe's largest telco and third largest carrier in the world) to continue providing support services for the next two years
- Extended the supply of its products to Dallas-based NationNet Communications and AccuTel, and Chicago-based OnePoint Communications
- Won the Virgin mobile business in Australia against a star-studded Nasdaq line-up
- Became a major supplier to Jabatan Telekom Brunei (JTB), KDD Australia (Australian wing of Japan's second largest telco), Teleglobe Japan (another one of Japan's leading global telecommunications provider), and Commverge Singapore
- Bought two U.S.-based companies, Phoenix Global Networks and Oregon-based Donia Telecom Inc.

.....all mighty impressive stuff which makes many companies (in the same line of business) pale by way of comparison. And making life just that bit more difficult for Commsoft are more than 20 new companies who are now waiting in the wings to float on the ASX. Most, just like Commsoft, are hoping to make it to the market before the start of the Olympics.

Included in this lot are
- Amcon Solutions, an IT outsourcing company
- Data carrier FlowCom
- Enterprise solutions provider eServ
- IT training and consultancy firm CPT Global
- Online sharetrading outfit eStar
- Online sharetrader E-Shares
- Internet media firm Digital media.

In the last few weeks, six companies have listed on the ASX and investors have been pretty discerning in their support or lack of it where those companies have been concerned. While the fundamentals of companies intending to list will undoubtedly be studied in greater depth, comparisons will be also made to industry competitors (or perceived competitors). Not only will Commsoft will be listing during a period of great ASX activity, but the company will also need to promote itself to a more discerning Australian marketplace who, at face value, appear to know very little about the principals behind the venture.

We know of the strong Watson connection with SMR but we have also seen the failure of RMG to excite the Australian marketplace (down 10% from its opening price at last close), and we have seen Canbet's share price slump 72% since the Watson camp bought in. There may be other reasons why investors have shunned those stocks but with regard to the Commsoft listing, it does appear that the company will need to win over investors solely on its business capabilities.

The continuing success of Telemedia will not make Commsoft's task to gain pre-listing recognition any easier - and rightly or wrongly, the two companies will be continue to be compared. I suspect that Commsoft's SMR connections may now be ruing the day they started the comparison ball rolling.

I, personally, have been impressed with the Telemedia story and only last week noted that the stock received positive recommendations from the likes of Merrill Lynch, Ord Minnett and Macquarie Equities - with most picking a December price of A$6.32 (15% rise). I do not hold TMN shares but the recommendation from across the ditch is currently for a "Buy".

I started this article talking about the 'New Zealand Entrepreneur of the Year' award. From all accounts, it appears that Chris Jones is one of the top contenders for the title and if he wins, expect a rash of publicity about Telemedia (and a surge of investor interest in the TMN stock) in the ensuing week - the week that Commsoft lists. I intend sitting this one out.

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