Cadmus Technology MD, Ian Bailey

Wednesday 8th May 2002

Following is a ShareChat Investor Interview with Ian Bailey, MD of Cadmus Technology (NZX: CTL ). This interview was conducted during April 2002 and published on ShareChat on May 8, 2002.

SC Investor: The private placement at $0.08 has bought down the market price to this level, disadvantaging existing shareholders (not advised or able to participate) and costing them money, hopefully unrealised. What comment would you have for a loyal shareholder about this?
Ian Bailey: A requirement of the Securities Act (1978) is that a private placement can only be made to "Habitual and professional investors". The alternative is to produce a Prospectus which is both expensive and time consuming.
The funds are being used to procure parts and undertake production to meet our sales revenues which has a positive impact on the company and its balance sheet, with the objective of increasing the long term value of the company.
The company already has over $2M in export sales orders on its books now with more pending. Additionally the domestic market share continues to grow as well which has required us to undertake the placement to meet the production and delivery schedules of our customers.
SC Investor: The capital raising with option to convert a percentage to shares at a future date I see as another potential dilution of existing shareholders holding value. What comment would you make here?
Ian Bailey: Overall, our recent capital raising efforts were undertaken with the objective of meeting our growing international market base. In doing so we were aware that we also wanted to minimise the dilutionary effect and took appropriate steps to ensure this would not be the case. That is why we limited the conversion up to only 20% of the total holding of the secured notes. Please note that the conversion strike price is not at today's price, rather based on the prevailing prices (less 10% discount) at the 3rd anniversary and expiry date of the notes (4th anniversary). We are confident that if our sales projections over the next 3 years are substantially met, the share price should see a lift in value for all shareholders.
The alternative to the notes issue was to undertake a significant equity raising which would have resulted in a significant dilution of the company as a whole. Therefore a First Secured Notes issue was seen as a better way of providing the funding to allow for the growth of the company. The ability to an investor to convert, at a future time, was seen as an incentive to allow an investor to share in the upside of our growth. The Notes also allow for existing shareholders to add to their involvement with the company, whilst obtaining a return in the medium term.
SC Investor: What are your profit and EPS projections for this financial year, and what key assumptions are you relying on for these projections proving valid?
Ian Bailey: Cadmus provided projections for the 2002/2003 financial years in our listing profile.
SC Investor: For company who claims to specialise in quality IT products, explain why your company website is so flaky - many of its hyperlinks simply don't work. It begs the question "Do these guys really know much about IT, or is the company really just another lot of hype (shades of IT Capital, CommSoft, etc)?
Ian Bailey: We have identified and fixed this problem, which resulted from a change in Microsoft Windows Explorer. Whilst we do support our web site in house we are not web developers. The products we develop and market are payments products that are now being marketed in New Zealand, Australia, Malaysia, Singapore and other Asia Pacific region customers. The fact we have sales would indicate that our products are acceptable and meet the price/feature needs of the markets we are approaching.
SC Investor: I note in an analyst report on your web-site that you make your own EFTPOS terminals and that your company "expects the Cadmus brand to make up 90% of CTL's new hardware sales within 12 months". Have you achieved this level? What kind of margins do you make on your own terminals versus distributing other manufacturer's products?
Ian Bailey: Cadmus has been manufacturing and exporting our own products for the New Zealand and international markets for six months now. Taking into account the current orders we have from both the domestic and international markets, the Cadmus products represent the majority of our sales.
As a producer of payment solution products, we have the added benefit of retaining both the manufacturers and retailer margins which allows us to be more competitive.
SC Investor: The analyst report (from August 2001) rates your company as speculative. Do you consider your company to be a speculative investment?
Ian Bailey: No. The analyst's report was completed almost a year ago, when Cadmus was still in the developmental phase of its own product range. Since this time we have introduced new products to the market and announced a number of significant international deals. In fact we are one of the relatively few technology companies in New Zealand that develops and manufactures real payments products for international markets, Additionally we have received certifications from ETSL (the largest NZ EFTPOS processor) for all our products.
On the international front we have been selected as the exclusive supplier to Bartercard in Australia and currently have a number of other international agreements pending. All of which moves us into a quite different category: the manufacture and distribution of proven payments products into rapidly expanding international markets.
SC Investor: How much money does your company make by owning and maintaining New Zealand's largest vehicle identification database? Is there any room there for growth?
Ian Bailey: This database represents less that 5% of the total asset base on the balance sheet and typically is only used for the vehicle industry.
SC Investor: How does the company actually make money from its EFTPOS terminals - from sales, leasing or both? If both, what is the percentage split? Are you keen to see you reliance on EFTPOS revenue reduced as a percentage of revenue or do you expect it to stay the same or increase?
Ian Bailey: We operate our own direct sales channels in the domestic market and use distributors and resellers in the international markets. In the domestic side we typically rent, lease or sell depending on the customer's needs. For the international market we also have opportunity to provide rental facilities, however to date the sales have been based on direct sales. It is important to note that the New Zealand market is static at approximately 15,000 - 20,000 units per annum (estimate), whilst the international market (Asia Pacific only) is almost 1M units per annum and growing at the rate of approximately 20% per annum. There are also major technical enhancements being driven by banks in terms of security and smart card programs which will mean that many of the existing terminals installed world wide (approx. 29M units) will need replacing over the next 10 years.
We also provide value added services such as "transactional processing" (e.g. Bartercard) where we provide a processing/authorization service. In effect this provides us with an ongoing revenue stream to augment our terminals sales stream.
SC Investor: I am unsure how you make money from your involvement with Bartercard. Can you please explain?
Ian Bailey: We provide Bartercard with services and products. On the services side we provide back room transactional processing services that process and authorize Bartercard transactions electronically via our EFTPOS terminals. On the terminal side we provide both Bartercard directly, as well as their merchants, with a specifically designed terminal for their business, including the added benefit of email capability. Bartercard in NZ has approximately 4,500 merchants whilst the Australian Bartercard has over 20,000 merchants. Worldwide Bartercard has over 65,000 merchants.
SC Investor: In my opinion the market has marked down Cadmus because the business is too hard to understand and the way you communicate doesn't make it any easier. For example, from last year's Annual Report, you state that one of your revenue streams is from "Implementation of enhanced payment terminals for domestic and international markets." Don't you think it would be in your company's interests to try to explain your business in plain language? Warren Buffett doesn't invest in companies he doesn't understand and I think Cadmus is in this position.
Ian Bailey: Thank you for your feedback. The business we are in is a fairly simple business. New Zealanders have been using EFTPOS longer than most countries, and as a result we've become good at developing applications and equipment that handle debit and credit payments. Cadmus aims to harness that expertise and build advanced products and solutions that can be sold into international markets. You're right, as an investment it's not Warren Buffet's cup of tea, but then he's not known as someone who chooses to invest in technology companies, even when they are rapidly expanding.
SC Investor: Where is Pos Power at? How many homes is it in and how much money is it making?
Ian Bailey: Pos Power is now in its initial rollout phase. The major domestic customer for this product is, of course, TrustPower who have exclusivity in this sector for the New Zealand market. TrustPower is continuing the initial rollout to selected customers in Nelson and Ashburton on a weekly basis. This product has significant international opportunity, however in light of the potential size of the markets, and the potential to rapidly increase revenues, we have not given any projections in relation to this product's uptake. Revenues come from the sale of the product, ongoing support of the product and the processing of transactions via the product.
SC Investor: You talked in the interim announcement about buying profitable payment technology and data management companies. What countries would you prefer to invest in? Have you done any due diligence on potential acquisitions?
Ian Bailey: We have not identified any potential prospective acquisitions at this time, however we are always on the lookout for profitable and synergistic acquisitions. The most logical is to look towards the Australian market and acquire an existing entity. We will only invest in a company, however, if it matches our capabilities, is profitable and will provide long term value for our company.
SC Investor: Although you are not strictly a technology company as in a dot.com do you think you that being perceived as being in the tech industry has been a problem in terms of your share price?
Ian Bailey: Yes, I think there is some perception in the market that we are a "tech stock". However, in the truest sense, we are probably best described as an "Industrial" company which would more accurately portray our business of manufacturing and exporting advanced payments terminals. We do not see ourselves in the tech sector, as we are in an established business, with real products and cashflows. The share price issue is one that, we believe, has been brought about by the lack of understanding of our company, and the "tech stock" label.
SC Investor: I see that your contracted remuneration was $192,000 and $240,000 this year - am I correct? This is a 25% increase and yet operating profit for the six months ended December was lower than the previous year and revenue only rose 2%. Don't you think that management should ensure they are improving results before receiving such a large increase in remuneration?
Ian Bailey: Remuneration contracts for all Cadmus staff are in line with current industry standards and senior executive salaries are subject to review by the Board.
The overall workload has increased substantially to cope with the growing export market and the responsibilities of a listed NZSE company.
The growth opportunities for the company are significant with major orders on the books and for delivery over the next few months. It is important to note that, once an order is received the actual delivery time could be up to 9 months as the product undergoes the bank certification required for each new market. Once this certification has been completed the ongoing sales are able to be delivered within industry standard 90 - 120 days. The company has already announced a minimum of $2M in forward orders with more in the pipeline.
SC Investor: Which country in Asia offers the most prospects for growth at this stage, and in which products/services?
Ian Bailey: The Asia Pacific market is approximately 1M units per annum across the board and is continuing to grow at a year-on-year growth rate of 20%. Conversely, the New Zealand market has reached maturity and is now recording low rates of growth. We see two distinct opportunities for Cadmus as a result: (i) Asia Pacific countries, such as Australia, Malaysia, Hong Kong, Thailand and the Philippines which are increasingly adopting advanced payment terminal solutions and (ii) The requirement of replacement terminals for the New Zealand and Australian markets over the next 10 years (NB: In Australia alone this is approximately 350,000 units and New Zealand approximately 70,000 units).

ShareChat thanks Ian Bailey for taking part in this Investor Interview.

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