"Money means muscle"
by Larry MacDonald (in Ottawa Citizen of May 17, 1999)
Technology firms operate in highly competitive markets. To distinguish winners from losers, investors evaluate companies on the basis of product superiority, marketing muscle, management adroitness and other criteria.
Firms with financial wherewithal can throw a lot of resources at a problem and survive a misstep or two. They can outlast opponent and emerge victorious in the struggle for market supremacy, even if their products, marketing, or management are not necessarily the best.
If financial strength is a criterion for success, then there are three companies in the Canadian technology sector with very good prospects over the next few years. They not only have good cash flow and access to capital on their own, but also have the financial backing of a parent corporation.
The only real decision would seem .to be when to buy them -- one might :: purchase at any time without regard to valuation, or one might chose to wait until a correction and buy cheaper.
The wait for the dip, however, might seem like forever. In the meantime, investors could watch from the sidelines while the shares appreciated even more. Perhaps the best strategy is to accumulate in stages, increasing the amount purchased whenever dips occur.
The three companies are Bell Emergis (IFM/TSE), CGI Group (GIB.A/TSE), and Entrust Technologies (ENTU/Nasdaq). BCE Inc (BCE/TSE) has large stakes in the first two, while Nortel Networks (NT/TSE) has a majority stake in the third.
All three have received funds from their parent firm and stand to benefit from future contributions.
That BCE Inc. has deep pockets cannot be denied. Its ability to finance its subsidiaries is quite ample, especially after chief executive Jean Monty arranged in March to sell a 20 percent stake in Bell Canada to Ameritech Corp for $5.1 billion.
BCE Inc. wants to use some of the money to build up Bell Emergis and CGI into growth engines that will offset the loss of business in deregulated phone markets.
BCE Emergis is a provider of e-commerce solutions. It designs, develops and markets products that enable businesses and people to shift from paper-based to electronic transactions. Evidence of BCE Inc's commitment is the $100 million it has invested in BCE Emergis invested since last August.
BCE Emergis has a unique strategy for developing e-commerce business. Their offering is network-centric: They own and manage a central computer and IP network over which they manage applications (such as e-mail, security, payment processing, and order management) for clients.
This is different from competitors who sell mainly software. According to chief executive officer Brian Edwards, "enterprises don't want to buy technology, they want to buy solutions."
Over the last three years, BCE Emergis has developed a lucrative niche in the mortgage-appraisal business by making possible the electronic delivery of mortgage appraisals and reports.
Appraisers, equipped with a digital camera and PC, can visit a property and send a photograph and written assessment via electronic channels a much faster and cheaper way than before.
BCE Emergis is a leading contender for supplying a mammoth e-commerce initiative launched by a consortium of Canadian banks and trust companies. Called "e-route," this initiative will enable companies to send bills electronically instead of through the mail. Under e-route, individuals will be able to go to their bank's Web site to receive, print and pay their bills substantially reducing time and costs.
CGI is the largest independent information technology (IT) consulting firm in Canada and fifth largest in North America. Plenty of long-term business has been lined up.
The company has a $4.5-billion, 10-year IT outsourcing contract with Bell Canada. Its order backlog at the end of March was $7 billion, which should allow CGI to enjoy good earnings regardless of economic conditions in the short to medium term.
In the six months to March 31, 1999, the company said revenues were up 137 per cent to $338 million, net earnings were up 248 per cent to $21 million, and cash flow from operations was up 123 per cent to $65 million.
Serge Godin, CEO of CGI, adds: "In recent months, CGI signed letters of intent for several large systems integration and outsourcing contracts, several of which will be contributing to our revenue base in the third quarter."
A main strategy for achieving management's target of $4 billion in revenues in the year 2002 is to expand into the United States through acquisitions. A division from Deloitte Consulting was recently purchased, doubling CGI's presence, and talks are under way with other acquisition candidates in the U.S.
Entrust is a leading supplier of public-key infrastructure (PKI) software, which identifies and authenticates users of a computer system through their digital certificate signatures. As such, PKI software is a vital advance for conducting secure e-commerce transactions. It facilitates the moving of transactions onto business networks and the Internet.
Entrust has won a landmark contract with the government of Ontario. It consists of an initial one-year agreement to provide secure Internet access for government employees and for social workers who need access to child-abuse records.
Afterwards, the contract could turn into a much more extensive five-year contract to provide secure online registration of businesses, applications for driver licenses, and payment of taxes.
Entrust is now licensing without royalties its patented "certification revocation list distribution" technology to speed market penetration. It earlier had licensed only parts of its patented technology, emerging in the process as the de facto standard in the market. As Entrust solidifies its position in the market, profit margins should improve.
Larry MacDonald can be reached at larrymacdonald@hotmail.com
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