Renaissance's plain report spells out important things

Friday 12th April 2002

In the two years since the dotcom bubble burst, merely surviving is cause for a party for most technology companies.

Computer distributor Renaissance has done that and more, although it could not escape a net loss in the past year.

It was never one of those ethereal "new economy" companies, although its share price rose impressively - and fell - like many dotcoms.

Its computer orientation associated it in many people's minds with the internet age, an image it encouraged when it established e-commerce portal Conduit. A proposed listing on the Singapore sharemarket was canned but the business continues and Renaissance still has high hopes for it.

Its latest annual report reflects a company that has gone back to basics.

In his review, chairman Richard Ebbett cites the knock-on effect of the US technology recession last year, intense competition and "an unfavourable climate for technology venture investment" for the company's poor result.

In the year to December, it reported a loss of $3.5 million on sales that were up 22% to $192 million.

"In response to these challenges, which intensified following the events of September 11, we made substantial changes to the nature and scale of Renaissance Group's operations at the end of 2001. These have proved to be very costly in the short term but leave us with a company more able to focus on improving shareholder returns," he says.

Bravely, it decided late last year to discontinue non-exclusive distribution agreements with major suppliers like Hewlett-Packard, Compaq, Microsoft and Toshiba.

"To illustrate the significance of this, only $100 million of our $191 million turnover was attributable to activities which will continue into 2002," Mr Ebbett points out.

Despite a bottom line loss, Renaissance produced a positive operating cashflow, a turnaround on the previous year's net outflow, but its equity ratio has slipped to a slender 27% from an only slightly better 32% in 2000.

Mr Ebbett delivers a useful description of why the company has taken the actions it has and puts them in context of wider industry trends.

The managing director and the company's major shareholder, Mal Thompson, continues this theme in a refreshingly straight-shooting explanation of the company's strategy and objectives.

"Recent years have seen profits squeezed in a commodity shootout with our competition - especially with high attention, high volume, non-exclusive major brands delivering pitiful margins. The result was poor quality business and a downward spiral of value that was hurting our ability to create wealth and bleeding the culture of Renaissance dry," he thunders.

He goes on to spell out how Renaissance is going to make things better: focus on higher quality business, better serve its reseller clients and sell more value-added services.

He finishes with a strong sense of vision and excitement about the business.

"Relinquishing our interests in mass distribution was the toughest decision Renaissance has ever had to make. The loss of significant revenue and the ensuing loss of jobs have taken their toll. We face the future, however, with renewed passion and energy. We know what we need to do and we know how to do it. The magic is back."

Despite the plainness of the report and the lack of discretionary disclosure, such as a five-year performance table, Renaissance's report does a lot better than many flashier examples in telling readers the important things.

It reveals what kind of company it is, the opportunities and challenges it faces and how it intends to deal with those to deliver an adequate return.

It communicates a persuasive confidence about the future, although many a positive statement in an annual report has subsequently proven incorrect.

If it becomes profitable, however, shareholders can take comfort from notes to the accounts that show it has nearly $6.5 million "available to be carried forward and set off against future assessable income."

David McEwen is an investment adviser and author of weekly sharemarket newsletter McEwen's Investment Report. Web www.mcewen.co.nz, email davidm@mcewen.co.nz

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