SHFN INTERVIEW
November 30, 1999
StockHouse News Desk
By Chaya Cooperberg (ccooperberg@stockhouse.com)
Rapidly Growing NewSys Aims For More Acquisitions, TSE listing
Toronto, ONT, November 30 /SHfn/ -- When its second quarter results, ended October 30, are reported
this week, expect to see further growth for NewSys [C.NSS], an information technology (IT) consulting
firm who has delivered 25 consecutive quarters of record revenue, with year over year internal growth
averaging between 35% and 40%. "We will be in the plus more than we were in the plus last year," says
CEO Mark Quigg. "We're going to have more growth again this quarter for sure." Projecting forward,
Quigg expects the growth rate to be even higher than the numbers we've seen so far.
For three years running, NewSys has ranked among Profit Magazine's list of Canada's 100 fastest
growing companies. This past summer, NSS was included in the listing in recognition of its five-year
growth rate-1993 to 1998-of 1,999%.
Groome Capital analyst Andre Mousseau predicts the growth rate will tail
off slightly in the near term, but believes that NewSys' ambitous
expectations of achieving continued 40% annual growth is well-founded. "I
think we might see it slow down over the next couple of quarters, not
significantly. Maybe growth of about 30%," he says. "Going forward, after
the Y2K problem resolves itself, and customers start spending more on
IT, that rate of revenue growth, 40%, is realistic."
The company's stock was beaten down slightly along with all the other IT
companies due to widespread Y2K spending freezes. But Mousseau says that compared with
competitors in the sector, NSS faired positively. "They've actually survived it better than other companies.
Some of the bigger companies are actually seeing negative internal growth. NewSys has certainly done
better than that."
He estimates that NewSys will report revenues of $5 million for the quarter, compared to $4.75 million in
the previous quarter, with $200,000, or EPS in the range of $0.02, going to the bottom line after tax. He
has a buy recommendation on the company, with a 12-month target price of $1.60.
Key to the company's residence in positive earnings territory, is its specialty in the hot sector of
Business Intelligence (BI). NewSys is moving beyond the traditional IT services, which involve Internet
applications, system development and Y2K implementation, and focussing on the burgeoning world of BI,
specifically implementing financial reporting systems and data warehousing.
Mark Quigg says BI amounts to a value-added proposition for clients, creating higher profits. "Being able
to get information out and analyze it to improve your business and grow your business, in the longer
term, has more value fundamentally than building the systems that put it in." In Quigg's estimation, about
40% of revenues are flowing from the BI stream. "I would see that growing substantially over the next
couple of years," he says.
According to Quigg, a lot of IT companies in the market are not preparing for the BI invasion, choosing to
stick to the "meat and potatoes" of the business. But he says that opportunities in the sector are
definitely going to move toward solution-based objectives, predominantly on the information management
side.
Mousseau agrees that NewSys has taken an intelligent course of action. "I think it's important for
companies to specialize where you can earn higher margins, and Business Intelligence is one area
where you can do it," he says. "It's hard to argue against e-commerce right now...BI is among the hottest
[sectors] and growing quickly."
NewSys has formed many partnerships with high-flying companies such as IBM [IBM], Cognos [T.CSN]
and Microsoft [MSFT], selling and supporting their products and solutions. It is one of only two Canadian
companies to act as a reseller and integrator for IBM's Intelligent Miner, a tool which helps extract and
leverage valuable BI information from corporate data. NSS also has an impressive roster of more than 100
clients including Bell Canada [T.BI], Bell Sygma, Northern Telecom and Mitel [T.MLT].
A deal to purchase Crystalline Data Structures (CDS), an Ottawa IT consulting firm with annual revenues
of about $2 million, announced earlier this month will strengthen NewSys' BI practice. CDS provides
solutions for clients using Oracle [ORCL] software, which complements NewSys' existing Oracle
applications division. The two will be combined to create an Oracle business group, which Quigg says
will contribute approximately $5.5 million in annual revenues, and will be fully reporting by the next
quarter. Since CDS is profitable, Quigg expects it to add to earnings right away. One of the exciting
proponents of the deal, he says, is the fact that CDS is working to implement Web-based Oracle
financial applications. Most Oracle financial customers are still using client-server software, and Quigg
hopes NewSys will become a leader in converting users to the Web environment. Another positive
outcome of the buy is that CDS is bringing in about six clients, which NewSys hopes it will be able to
leverage into larger projects.
In fact, one of its prime directives right now is to clinch longer term, bigger
contracts. In May 1999, NSS announced it had captured a $1.98 million
contract to build a large-scale data warehouse for the human resources
department of the Canadian government.
The company is now finalizing its plans to position its BI services for the
Web. "That is essentially where we're going to be expanding our go forth
strategy," says Quigg. Moving into the e-business space is going to be "a
prominent focus." He hopes to direct up to 75% of the business toward
these two areas-BI and Internet-based BI. Right now, Quigg estimates
that half of the company's BI work is Web-based. He sheepishly admits
that NewSys hasn't done a stellar job of promoting its Web offerings. "It's
where our highest growth is happening right now," he says. "We're going
to be looking to establish ourselves more firmly in that marketplace."
Marketing for the Internet service offerings will start in late December, or early January.
The services NewSys provides-basically its consultants--account for 99% of its revenues. The company
has just introduced two proprietary products called BI Roadmap and BI Reportal.
Quigg describes the first, BI Roadmap, as a "methodology and a strategy to take your desktop tools and
make them Web-enabled, and to put all your reporting on the Web." Basically, it is a consulting product
compiled by NewSys based on its experience in the field of organizing data, and moving that information
into an online environment. "From a deployment perspective and a cost savings perspective," says
Quigg, "this is the way to go."
The research for BI Reportal was also gleaned from work for several clients. Reportal is a "one-stop shop
on your desktop for reporting." The software will create one desktop icon for all the reports in a
company's system, and regardless of what program each report was created in, offer an easily
accessible listing. "It's like an organizer that gets you into your information almost seamlessly and
painlessly," Quigg explains. NewSys recently released a version of BI Reportal for Lotus Notes, and is
currently working on a beta version of BI Reportal for the Web.
While the company hopes to generate real revenues from the products, it is using them as a lure to
attract larger contracts. Sold primarily through direct sales, and telemarketing avenues, each product has
a price point in the low five-digit figures. But Quigg says they have attracted some high-profile interest
that might lead to consulting contracts. "Quite frankly, if we can get one a month I would be very happy
because that is one new potentially big client down the road." Right now, he reveals, some of the
companies looking at the products "are massive, billion-dollar" entities. NewSys is also in negotiations
with a few companies for large contracts on par with the one signed earlier this year. "One of them is
fairly substantial," Quigg says. He describes it as "almost like a joint product development contract with
a big software vendor." NewSys might remain a hidden provider of the product, and Quigg says he can't
name any names, only saying it would be a seven-digit contract, and that he will be able to confirm it this
week. The company is not facing any competition for the deal. Quigg also hints that there there is
potential for a much bigger upcoming contract. This week, NewSys will be presenting solutions for a
project on the CRM side of the business in Toronto. Large companies are offering competing proposals
for two separate contracts, but Quigg says NewSys is the only company to present a solution for both.
Aside from aggressively pursuing contracts, NewSys is hot on the acquisition trail. The size and
accumulated experience of a company is definitely a factor in facing down the heavy competition. Quigg
says NSS has been "after a few people" in the US, but the companies have been "slow to react," so he
is expanding his search to firms NSS has already been in contact with, "some in Ottawa, some in
Toronto, maybe western Canada." NewSys' business is currently split 80/20 between Canada and the US
markets, and over the next 12 to 18 months, Quigg hopes to tighten that broad distance. Realistically,
though, he "will take growth wherever it comes." His first choice is to land a company geared toward
Web-based services, hopefully with a BI flavour, and failing that, a systems integration or an IT firm with a
focus in a complementary area such as financial services.
In all, Quigg would like to complete two or three acquisitions in the next five months, done through a
balance of cash and stock. Considering the low price of the company's shares, it has no intention of
diluting it by issuing more shares at this point. According to Quigg, a number of companies have
approached him offering to help finance growth initiatives, and NewSys could raise more equity than it
needs at any time. Part of NewSys' strategy going forward involves finding a broker to assess some of
the opportunities, as well as sponsoring NSS for the Toronto Stock Exchange. The company has
completed most of the TSE paperwork, but needs to find an underwriter before filing, as well as nail down
its potential acquisitions and hone and market its new Web strategy.
A weight holding down Quigg's high spirits, and the company's flight
toward growth, is its flatlining stock price, which has ailed around and just
under the dollar mark for many moons. Quigg attributes the dire lack of
investor attention to NewSys small stature. "Everybody else out there is
bigger than us," he complains. "Therefore, 'Who are these little guys?'
tends to be a bit of the mentaility." In researching the company, this is
one critical issue that consistently arises. The company in its present
incarnation is just too small to compete in the big leagues for important
contracts, and has lost bids to established players such as Cognicase
[T.COG] and LGS [M.LGS.A]. But NewSys is growing fast, in its own
right and at its own pace. One analyst feels that as the IT sector
rebounds, the company's stock will get a kickstart. "I think the IT sector
in general will pick up next year, and once the financials for the first quarter, the calendar year, come out
and show how much business is picking up for these companies, the sector in general will pick up,"
asserts Mousseau. "These guys [NewSys] have really small multiples considering how fast they're
growing."
In his opinion, NewSys is currently trading a less than 0.5 times its current revenue run rate, ("A
significant discount to other profitable Canadian IT companies") due to a number of factors which will
soon correct. "They trade on the Alberta Stock Exchange, and they're just not that well known," he says.
"They're kind of just below the radar screen of most investors. I think when they move to the new junior
exchange, that will be positive for them, and if they make another acquisition of any size, get a little more
trading on them, they could move to the senior exchange. If they got that, there would be a lot more
investor interest."
The company's 11.8 million outstanding shares are thinly traded, which in itself, poses significant risk to
the average investor. But, if the company is still below investors' "radar screens", it has already been
picked up by analysts searching for comparitively undervalued plays. According to research by the
Gartner Group, spending on IT services will grow about 14% annually through 2002, for a US$247 billion
industry in the United States. Aside from basic IT, NewSys is also leveraging its BI experience to offer
products and services in the e-business space which is considered to be in the beginning stages of a
massive sector renaissance. NewSys is facing hugely competitive players in that specific space already,
but as Mousseau points out, "A large portion of them aren't even profitable yet."
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