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Open wide

By Rod Oram

Tuesday 1st July 2003

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It's a gloomy, wet, windy Friday morning in May. Only a really good reason would lure you to this God-forsaken tarmac jungle entwined in a thicket of motorways, canals and railways on the eastern outskirts of Birmingham, England.

The vast parking lots of the National Exhibition Centre are deserted, save for a cluster of classy cars around the entrance. Inside, hundreds of people are abuzz, while a parade of speakers strut their stuff: root canals, fillings, online storage of digital X-rays. On stage, grabbing the attention of the eager assembly of dentists, is a bloke in a black corporate-logo polo shirt with a red plaster cast on his left arm, an "oh-shucks" demeanour and a Kiwi accent.

Fresh from Auckland, it's Brian Weatherly, head of development at Software of Excellence International (SOEI), the dental software company he, his brother Paul and friends founded in the late 1980s. Weatherly and his colleagues from New Zealand and the UK have come to tell of the hot products they've got on offer. Computer charting of root canal work; detailed analysis of "chair" time, revenues and other financials; customer-driven online booking. With each new feature there's a ripple of approval through the audience.

Not so surprising: Weatherly and his team have already proved their mettle with many in this audience with SOEI's user-friendly dental software. From a chair-side screen, dentists can record the health and treatment histories of each tooth, plan courses of treatment in 3D images, pull up past X-rays, run demonstration videos to help patients understand treatment plans, and send automatic text messages to patients' mobile phones reminding them of imminent appointments.

Since Unlimited last checked in with the company ("Gift of gob", June 2001), it has powered ahead in the UK - the British market accounted for around 85% of its total sales of $16.7 million in the year ended March. To complement its strong base in private and corporate dental practices in the UK, SOEI has now turned its sights on dentists working in the National Health Service. Thanks to Prime Minister Tony Blair's decision to commit tens of billions of pounds in new spending to health, the NHS is poised for its biggest shakeup in a decade. As part of its strategy to build on its share of this expanding market, SOEI bought UK dental software company Advanced Healthcare Computing last October for £783,450 ($2.3 million).

A cluster of Kiwi IT companies with offerings in the health sector, such as Orion, Jade, Plato and i-health, have technology and market toe-holds that could pay off handsomely in this huge market, too, but so far SOEI has a much larger presence than its compatriots. It has a 34% share of the UK's dental software market, and, along with US-based PracticeWorks with 53% market share, is one of two dominant players in the UK. SOEI counts 2600 sites as its clients (including 670 that were in Advanced Healthcare's camp), while PracticeWorks has 3100.

And there's plenty of room for growth yet in the market. Some 40% of the UK's 10,000 dentists still don't use computers, and a good chunk of those with computers are ripe for upgrades. One fiercely contested current deal is to supply a software system for the dental operations of the entire British armed forces. SOEI is on the shortlist. By contrast, the New Zealand dental software market is well developed. Some 70% of our dentists are online and SOEI has a 95% share of the market here.

Errol and Clare Kent, a Kiwi husband-and-wife team with decades of IBM experience before they joined SOEI, arrived in the UK in 1994. Back then there were some 25 software suppliers scrambling to survive, many of them DOS-driven and focused on back-office functions such as billing. By comparison, SOEI's Windows-based software was already well respected in New Zealand for its dentist- and patient-centric features.

Over half of SOEI's UK growth has been organic, with the balance coming from two strategic takeovers: Advanced Healthcare, and the 2001 purchase of the UK dental software assets of a US distributor. By mostly growing its own market, SOEI has been able to build a coherent customer base. In contrast, PracticeWorks has been a relentless buyer of other businesses, leaving it with a long tail of legacy systems to integrate into its own.

SOEI says it now has scale and momentum in the UK. It has increased its customer base by more than 150% over the past two years without substantially increasing support costs. This helped push its operating profit margin up to 42% in the first half of the last financial year from 23% a year earlier.

But there are plenty of challenges ahead. Having knocked off the also-rans among the competition, the two survivors have to avoid the duopolists' trap of becoming excessively focused on each other rather than the customers. Brian Weatherly's development team has to maintain SOEI's distinctive dentist-centric philosophy and keep coming up with ever more sophisticated products.

SOEI has also recognised that with such a large client base in the UK, it needs to develop an even more sophisticated customer sales and support infrastructure on the ground. To that end, it acquired a new UK managing director last year, Robert Powell, who returned to SOEI after a stint in Microsoft's European healthcare operations.

So far, though, SOEI hasn't managed to convince a sceptical share market of the merits of its strategy. Its shares are bumping along at around $1.45 - above the December 2000 float price of $1 but well below the $3.40 peak in January 2002. Its reported loss of $2.3 million loss for the year to March was expected by the market and was caused in part by a change to a more conservative US accounting standard, which dictates that a sale can't be recorded as revenue until the software is installed. This caused a one-off delay in booking revenues of $3.7 million.

The current share price doesn't reflect a five-year forecast prepared for the company by analysts Investor Insight, which sees annual increases in revenue and operating profit of 15-20% and 30-40% respectively. These forecasts represent a slight slowing in revenue growth from the 25% annual rate recorded in the past five years, but augur well for a sharp rise in profitability as the company builds critical mass.

Share market caution towards SOEI reflects New Zealand investors' inexperience in rating NZSE-listed international software companies. Simply put, SOEI is breaking new ground, and there's no denying the enormity of the challenges facing the company in a tough international market.

The next big target is the US. Building on nine years of experience in the UK, Errol and Clare Kent moved in 2001 from Britain to southern California. From their new base they will, in their respective roles as SOEI's chief operating officer and head of international sales, be keeping an overview of the UK while leading the company's foray into the enormous US market.

The company's strategy for building the US market is different from its approach in the UK in several respects. For example, it has targeted university dental schools in a bid to build SOEI's credibility, a tactic it used in markets such as Australia and Singapore. Two universities have so far signed up for the company's software - UCLA and Temple University, Philadelphia. The US team is also making headway among practising dentists, signing up more than 1250 users. Some have opted for a base fee plus subscription deal rather than outright purchase, making for an attractive ongoing revenue stream for the company.

With a large, complex and wealthy market like the US at their doorstep, who can blame the Kents for moving to California? And, heck, the weather's certainly better than in Birmingham.

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