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Going public extracts dividends for SOE

By Shoeshine

Friday 18th July 2003

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For budding Bill Gates types, Software of Excellence provides an outstanding case study of the benefits and pitfalls of going to the public markets for growth capital.

The company listed in December 2000, just five months before the "tech wreck" turned dotcoms into dotbombs, but SOE survived the fallout in good shape. From the listing price of $1 the shares climbed to about $3.30 by the end of 2001, fuelled by a string of contract announcements around the world and better-than-forecast results.

They stayed there until late March 2002 when it became obvious it would not make its $2.4 million profit forecast. The result came in as a $191,000 loss.

That began a steep and steady fall in the share price to 75c in early April this year when an announcement it was making inroads into the US market triggered a sharp recovery to $1.50, around where it has traded since. That's despite a March 2003-year loss of $2.3 million.

A 50% rise in two-and-a-half years isn't bad going as local listed companies go but shareholders who bought into the float and held on ­ including founders Paul and Brian Weatherly and Errol and Clare Kent ­ won't have enjoyed the rollercoaster ride.

What's more, SOE's revenue has climbed every year and is now nearly double the $8.8 million in 2000.

Whether SOE would have been better advised to raise equity capital in the private arena is a moot point but the exercise has by no means been a disaster.

The company was formed in 1988 as a software developer. It took its present track when two dentists asked the founders to look at a couple of dentistry practice management products, one based on the MS-Dos operating system and one Unix-based.

The founders reckoned they could come up with a better product using Windows. Their version gained traction and they raised money through a public offer in 1992.

By 2000 they had built up good sales to owner-operator dentistry practices and already had US distribution and a British subsidiary. But they could see the potential in developing products for the enterprise (public hospitals, university dental schools, group practices, etc) market.

To tackle that sector they needed more capital.

The 2000 issue and listing raised $5 million but it brought other important benefits.

One, managing director Paul Weatherly says, is that a public company has to have a strategy that is well thought-out and articulated.

The demands of the Stock Exchange and market scrutiny also impose the corporate governance disciplines of much larger companies.

That involves, for instance, not only setting objectives but measuring the extent to which they were achieved and analysing any shortfalls.

For earlier-stage companies with modest revenues and negligible if any profits, those disciplines might represent a heavy burden on board and management time and resources but Weatherly reckons in SOE's case they have paid dividends.

Being listed, he says, with its visible responsibility to shareholders, has helped when dealing with state-owned bodies and state governments such as in Malaysia and the UK.

It also allowed SOE to raise a further $4.3 million last year in a rights issue. Although that fell short of the $6.2 million sought it avoided ­ for shareholders who took up their rights ­ the dilution that a share placement would have entailed.

In any case, Weatherly says, the company is now too late-stage to attract venture capital.

The cash raised from the listing and rights issues has been ploughed into acquisitions, such as competitor Henry Schein's UK business and Advance Healthcare Computing, which have allowed SOE to build up a strategic position in the UK. SOE's professional (individual dentists) practice brings in an annual $8 million of revenue and is highly profitable, and the company is pushing ahead with its enterprise business, which now contributes more than half of group revenue.

The backbone of SOE's business is electronic patient records, which record histories of diagnosis and treatment in a form in which they can be collated, analysed and used for a variety of purposes.

Weatherly says their deployment in "evidence-based medicine" can have a massive effect on public health services' ability to control costs and provide better "outcomes" by allowing them to collect data and analyse what works and what doesn't.

That might sound like a self-evident way to go about things but, he says, most health services continue doing things the way they did them for decades before the technology became available.

The big frontier for the company now is the US, where it has had to adopt a very different strategy from its other markets.

The US public health sector is small compared with other developed countries and public health providers generally have to apply for grants to invest in technology. Those grants are easier to justify if they can show the technology will bring cost savings.

In the professional market SOE can't hope to compete with the giants such as Henry Schein and PracticeWorks with their "shrink-wrapped" products, so it's targeting the enterprise market, which wants its software customised.

"We don't want a small piece of a big market," Weatherly says. "We're picking opportunities that play to our strengths, not our competitors'."

With the British market near saturation point, the success of the US strategy will dictate SOE's fortunes for the next few years. The company also sees opportunities to adapt its core technology to suit other, similar professions such as optometry.

In the meantime the failure to meet forecasts has, unfairly perhaps, put a dent in its management's credibility. But that's all part of being a listed company.

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