Tech wreck continues though some companies coming right

By Peter V O'Brien

Friday 21st June 2002

Companies associated with technology have continued their patchy performance since December, the last time The National Business Review considered the sector from a sharemarket investment viewpoint (Dec 14, 2001).

The Stock Exchange then had 24 companies associated with general technology (including biotechnology), the internet, e-commerce and provision of services based on computing in December, including Baycorp Advantage and Telecom.

There were 27 last week but several were struggling. The various issues can be summarised with reference to three recent statements from companies.

GDC Communications chairman Stuart Johnstone told his annual meeting in March that the share price had declined from $2.35 to $1.44 since the previous meeting. He said the decline was disappointing but he noted all other New Zealand companies (listed on the exchange) that provided IT and telecommunications services had share-price falls over the period. All were of greater magnitude than GDC's, except Telecom, which was down 14%.

Mr Johnstone said the company's drop was the result of many interrelated factors.

"These include the significant weakness in the profit and share-price performances of IT and telecommunications stocks [worldwide and locally], an apparent reluctance of institutional investors to increase portfolio weightings in IT and telecommunications, the profit downgrade announced by one of our contracting competitors and the time it is taking to generate demonstrable iVASP (GDC's application service provider business) relative to the market expectations."

GDC shares closed last week at $1.35.

Pharmaceutical technology group Blis Technologies raised another issue in its preliminary report for the year ended March.

Chairman Murray Doyle said directors changed the accounting policy relating to the recognition of intellectual property as an intangible asset.

The company wrote off all intellectual property, including patents, trademarks and acquired scientific research previously recognised. All costs related to creating and acquiring intellectual property were expensed as incurred. Both matters produced an unusual writeoff of $12.46 million.

Mr Doyle said the new policy presented the balance sheet in a conservative manner, but did not reflect any change in directors' view of the company's prospects and opportunities.

Blis shares sold at 43c last week, compared with a high of $1.10 since listing in July 2001. Last week's close was the lowest since listing.

The company's writeoffs had no effect on cash resources, Mr Doyle saying the financial position was more than $1 million better than forecast in the listing profile, despite some spending being brought forward.

Blis' financial treatment was conservative and probably sensible, although the accounts could be somewhat distorted in future, assuming the company eventually gains profit benefits from its intellectual property.

The treatment resulted in Blis having a $14.33 million deficit for the year. That would not endear it to investors, even when account is taken of the much smaller $1.87 million operating loss.

Finzsoft Solutions, which specialises in finance and banking software for the non-bank finance industry, reported a deficit of $275,079 after tax and unusual items, compared with a pre-tax operating loss of $11,254.

The company referred to the accounting standard requirement that intangibles be amortised, saying it was applicable to a subsidiary's software package. The directors believed the requirement did not fairly reflect the value of finance and banking software and contracts but decided to amortise the items over 10 years.

Debates over intangibles occur regularly, often in the context of balances sheet valuations or brand names.

The value of intellectual property and similar items is important in companies based on technology, because it is a key element in the businesses.

Amortising the items, or writing them off completely in a given year, was part of the reason for the losses recorded in many such companies. Some also operated in a cluttered field and had insufficient financial resources to achieve profitable niches.

Share prices in the sector were heavily discounted. The companies mentioned earlier had total market capitalisation of $477.65 million, after excluding Baycorp Advantage and Telecom, or just over 1% of the total for all listed companies, again excluding the latter two companies.

Given six companies accounted for $314.46 million of the $477.65 million, it can be seen that the total capitalisations of the rest reflect a low rating from investors.

Some of the technology-based groups are coming right or will do so. Others will continue to have difficulties in terms of profitability, which will maintain their share prices at depressed levels.

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