CommSoft Group MD, Mark Lunt

Thursday 21st March 2002

Following is a ShareChat Investor Interview with Mark Lunt, MD of CommSoft Group (NZSE: CSG). This interview was conducted during February and March 2002 and posted on ShareChat on March 21, 2002.

SC Investor: What is the outlook for CommSoft in the next 12 months?
Mark Lunt: We expect to be profitable in our next financial year.
We have made a lot of progress in getting our cost base down and the priority for the last few months has been on getting revenues up. We are making good progress in the UK where our new partnership with Techtel has got off to a good start, but things are tougher in New Zealand and Australia where rebuilding old channels and getting new ones established takes time. With new resellers and distributors there is always a lead-in period where a lot of time and effort is expended before the results come - that is where we are in both those territories.
We believe we have the fundamentals right - good company structure, good products, promising distribution deals - we just have to drive sales.
SC Investor: What are your feelings about the telecoms sector at the moment - in both the Australasian market and from an international perspective?
Mark Lunt: The sector is under great pressure from the slowdown in customer spend on new equipment and services and the very high levels of debt the carriers have taken on in building big, high bandwidth networks.
The reduction in sales of capital equipment (such as switchboards) has not helped us as typically our CallMaster product is sold alongside a new PBX. We are working with our partners to help them promote the product to their existing customers as an attractive upgrade that offers a very rapid payback. This approach is starting to pay off.
We believe our products offer significant "value add" opportunities for telcos and resellers at a time when they need to offer more services and products that have quantifiable benefits. We are working hard on this.
SC Investor: Can you give me three reasons why I should invest in CommSoft?
Mark Lunt: We have some very good products in sectors where there are real growth opportunities. Some products save customers money such as CallMaster and CellMaster. NetMaster helps control costs and reduce risks. Brains is a very strong CRM product that helps our customers to grow revenues through more effective, targeted, sales and marketing.
We have established distribution channels in the UK, the US and Australia which we believe can generate higher sales of CommSoft products. We need these sales to get us to profitability.
We have committed, resilient, talented people who have endured hard times at CommSoft and are determined to make the company successful. Management feels the same - we have all been through some tough times and we want to enjoy the benefits of success.
... and a fourth reason!
Being a public company with the compliance and other costs and obligations that go with a listing puts us under a spotlight and creates a pressure that can be very hard for a smaller company to deal with when times are tough. We believe as we turn the corner we can make use of the positive aspects of being a listed company and in time look at opportunities to acquire other businesses and/or raise money for expansion.
SC Investor: Where is the company earning most of its sales revenue? Which country has the biggest potential for future sales?
Mark Lunt: At present most of our revenues come from the UK and we expect to achieve very strong growth there over the next year as our more efficient distribution arrangements really start to bear fruit. We can grow well in Australia too as we see the benefits from new distribution deals and partnerships on the Brains side.
Looking further ahead the US is a huge opportunity, but as we have said previously we have gone for a "low cost, low risk" entry into that market. If it starts to take off we will apply more resources.
SC Investor: CommSoft was in pretty bad shape when you took over as CEO. Were you fully aware of all the issues when you took the job? If yes, what attracted you to the role?
Mark Lunt: I was aware of just about all the issues but taken a little by surprise by the scale of some of them! Having had experience of poorly-performing companies before I believed I could turn CommSoft around, and I think we are getting there.
I was attracted to the role because I relish a challenge and believed the company had real potential.
We are not alone inasmuch as some big, powerful companies have done very badly and in some cases gone under. Whilst I hate to make excuses it is not easy to turn around a small company like CommSoft in the midst of an economic slowdown. You can reduce costs dramatically - as we have done - but getting sales channels moving takes time.
I know shareholders are very frustrated by the fact we have not got better results quicker - I can assure them that they are not half as frustrated as I am. I expected we would be in good shape by the end of 2001. Working in a struggling, listed, IT company whose troubles are widely-known is pretty stressful and our staff have battled heroically. Some of our problems are self-inflicted, others such as a global slowdown and the aftermath of September 11th are beyond our control.
SC Investor: Hindsight is a fine thing, but is there a feeling within the company that it was publicly listed too soon and that this has put even further pressure on it to perform?
Mark Lunt: As a listed company, everything you do is subject to a high degree of public scrutiny. The costs of complying with ASX rules governing disclosure, financial accounts, raising money etc etc are high and also take a lot of management time. That said, greater accountability means that you run a more disciplined business and your business is stronger for that.
CommSoft - like many others - had dreams of very rapid growth and high profits. We weren't able to deliver and our poor performance and the public scrutiny we have received put us under pressure. It is our job to put those things right. Hindsight is as you say a wonderful thing - and of course, in hindsight we should have done a number of things differently.
SC Investor: Strathmore used to be one of the company's biggest supporters but now that it has announced that it is getting out of nearly all of its investments what does this mean for CommSoft?
Mark Lunt: Strathmore has now divested all its shares in CommSoft, for its own reasons. This means there's no overhang - a very positive thing. SMR, like all VCs, really suffered last year and even though they wanted to remain shareholders their own circumstances made this impossible. We appreciate their support, but new shareholders often bring a new perspective and new ideas and we welcome them.
SC Investor: Why are you based in Auckland rather than at head office in Australia? Wouldn't it make sense - and lower corporate costs - to either choose one place or the other?
Mark Lunt: We need to have offices in Australia and New Zealand and given that the costs of employing people, of offices and of other overheads (including CEO salaries!) tend to be higher in Australia it makes sense for us to do a lot of work from here. New Zealand is where the company started and developed, so there is nothing to be gained in shipping everyone across the Tasman.
We have a head office in Australia because the ASX is our primary listing. I can assure you that the overheads at every point in the company are minimal and that includes the head office.
SC Investor: You obviously need capital. How much do you realistically need before you will begin breaking even? What is the current burn rate?
Mark Lunt: We have cancelled a proposed rights issue and have said we are considering the possibility of another one. I have stated that we need additional funding to capitalise on the opportunities we have and I am working very hard on the options available to us to provide new capital to help us achieve the profitability we now have in our sights.
SC Investor: I have been following Software of Excellence and am impressed that it has moved slowly in expanding its market, concentrating on the UK first before the US. Why have you decided to expand to the US without first ensuring you have your markets sorted out in New Zealand, Australia and the UK?
Mark Lunt: I have met the management of SOE. I think it is a great company and they have done a fantastic job, getting many things right where we have perhaps not done quite so well.
We've announced that we have signed a distributor in the US but certainly have not dropped our focus on our primary markets to do so. The opportunity came up and it was prudent to take it - as I have said before it is a low risk opportunity with a great potential payback, and we'll put in more resource when it starts to take off.
SC Investor: What is the general feeling like at the company amongst your staff, programmers etc? Is there any indication from them that they feel that their work has been mismanaged at marketing and sales level?
Mark Lunt: Many of the staff have been with CommSoft for several years and have ridden the company's fortunes with a real Dunkirk spirit. Some of the factors that went wrong at CommSoft, such as the overly ambitious targets it set itself, do come back to the company. Other issues we have had to deal with, including the IT industry downturn and the loss of confidence following September 11, are unpredictable external factors that have affected most IT companies.
SC Investor: What research is the company doing into new products, if any?
Mark Lunt: We have recently released new versions of NetMaster and CallMaster. We're readying another release of NetMaster and a new release of our CRM product Brains this year - we have people working on developing our products all the time.
We are not looking at any developments of new products - what we have has plenty of potential and we need to focus on selling what we have got.
SC Investor: Does CommSoft earn income from servicing/updating software? How much is this worth on an annual basis?
Mark Lunt: Yes we do, but we are working on offering new services to customers and in better promoting the support and maintenance services we currently offer. We don't get as much as we should from these services and need to track our costs and revenues better to ensure we are offering good value to customers but showing a return on our efforts.
SC Investor: Have any investors - including original investors - been in contact with you about the company's progress and if they have been in contact what are their feelings about the company?
Mark Lunt: Yes, we still have many of the original investors and two of the original founders still work here, and I hear regularly from a number of other shareholders. Long-standing shareholders are of course disappointed but I think they accept that we are doing everything we can and that results are starting to come. It has been a hard slog and I think most shareholders realise that we have had a real mountain to climb.
We have also new investors who feel positively about CommSoft's future.
SC Investor: Can you explain for me in simple terms how the company got itself into such a mess with debtors and put a figure on how much money has been recovered and how much is still owing?
Mark Lunt: The company entered into a number of contracts that had extended payment terms, especially in the UK - this was disclosed in the listing prospectus. A number of resellers and distributors did not achieve the level of sales they (and we) had anticipated and were unable to pay their bills as a result. In cases where we felt the customers were not acting in good faith we took legal action where we believed recovery of moneys was likely. In other cases we took the view that either the customer simply would not be able to pay, rendering action pointless, or if there were genuine issues we decided to try to preserve the relationship in the hope of future sales.
In simple terms? This was indeed a real mess arising from over-optimistic sales projections and it has hit the company's bottom line and credibility very hard. Rebuilding both is what we are working on.
SC Investor: Where do CommSoft's software products lie in relation to your competitors and can you please outline the competitive advantages that you believe your products have over other companies?
Mark Lunt: Our products are designed to be really useful to managers, from mid-management up to CFOs and CEOs: for anyone who has an interest in understanding , monitoring and reducing communications costs. Small, owner-operated businesses of less than 10 people can use our products to better understand their costs and how resources are being used. And our products are fully scalable so they can be used by larger businesses and organisations.
Our NetMaster product is further different from other web management and monitoring products because it doesn't block. The internet is an open system and many products block access. We think this causes further problems. If people can't get access in one place they will just go elsewhere - it becomes a challenge. However, we think NetMaster encourages responsibility. If people know they are being monitored they pay more attention to their own behaviour and self-regulate, which is surely a healthier environment. A leading commentator recently said that there are millions of sites you wouldn't want people to be using or to be exposed to at work, with hundreds more being added every day - he went on to say this makes blocking often a futile task.
For these products I would say ease of use and flexibility are key differentiators. For Brains it is the strengths the product has in helping customers boost revenues through better marketing and better understanding of their customers' needs and buying patterns. It is also a great product for call centres to improve handling of in- and outbound telemarketing.
SC Investor: What are the benchmarks that you will use to measure whether you, and the company, have been successful for the coming year?
Our objectives are to boost sales and be profitable next year - very simple. If we achieve these things I believe our shares will get a re-rating.
SC Investor: Has the publicity that you got in a US magazine for one of your products (I can't remember which one) resulted in concrete sales? What feedback is your US distributor getting from customers or potential customers?
Mark Lunt: Secure Computing gave NetMaster a 5/5 review - I believe this is what you are referring to. They said that "NetMaster Professional is a flexible and imaginative solution for any size network where cost of Internet usage is causing concern. NetMaster provides a full and comprehensive range of services giving all the information needed with regard to Internet usage".
The distributor reports very high interest in the product. The way these deals work is that you find a potential distributor, convince him you have a product he should be offering to his resellers and their customers, and negotiate an agreement. You then work with him to convince resellers to promote the product. You then help the resellers to promote the product, training their staff and often doing plenty of sales calls with them to prove that customers really do like your product and will buy it. They then become confident about the product and start to push it themselves.
It's that easy!
All this takes up to six months - we have been working with Sension for two months. Based on feedback and a recent meeting with their CEO I believe results will come.
SC Investor: Do you notice that negative publicity about workers using the internet for their own purposes, like the recent case in New Zealand, increases interest in products like NetMaster? Do you actively use such examples to promote the products?
Mark Lunt: Yes and yes. The product is good, and people who see it usually buy it. Our challenge is to get the product in front of potential customers - to "expose it to the risk of being bought" as a former boss of mine used to say. The process of getting the product in front of customers is often a lengthy one as I described above. You need to have channels that will show the product to customers - it is a great product, it looks good and is very easy to use. If you want to see it please call us on 0800 800 005 !

ShareChat thanks Mark Lunt for taking part in this Investor Interview.

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