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Shaw thing: NetDimensions Holdings Ltd

Friday, August 29, 2008

Last year, AIM-listed software publisher NetDimensions Holdings missed its profit targets and went on to watch its share price tumble by 90%. This year, the company’s amiable American chief executive, Jay Shaw, is taking the fight to the market. And with some new strategies for its core software products, the signs are that the company is set to put things right in 2008.

“Last year we missed our expected numbers by a mile and in some sense that was my fault,” Shaw says. “I don’t know if we deserved it that much, but we certainly missed expectations. The first half of last year was our best ever performance and we went into July thinking we’d do well, but because a lot of our clients are banks and insurance companies things fell of a cliff a little bit.

“But we still managed 23% growth and we eked out a profit and we added to cash so we weren’t ashamed of the performance in any way. But it wasn’t stellar… it wasn’t what we wanted.”

In the six months that followed, Shaw’s team returned to the drawing board and started looking at new ways to sell the software to customers. Take a look at the company’s interim figures to June 2008 and it’s clear that the work they did meant that last year’s wobble didn’t turn into this year’s disaster.

Year-on-year sales were up 37% to US$2.94 million and a pre-tax profit of £94,000 was much improved on the £0.8 million loss the year before. Forty-seven new clients bolstered the books and a new joint venture with a Singapore-listed IT services business looked promising.

NetDimensions was set up in 1999 to sell software it had developed that manages performance, knowledge and learning management programmes inside companies. Its three packages are led by the flagship EKP, the Enterprise Knowledge Platform and include EAP, the Enterprise Assessment Platform and ECP, the Enterprise Content Platform.

“Sometimes people say we’re about e-learning and actually that’s the least of what we do,” Shaw says. “It’s not why people buy our software.

“I’ll give you an example, one company we worked with had more than 700 training providers and they had people from across many different departments buying training. By putting everything together, their expectation was to cut that figure to 75. Now, you might wring your hand and say that 75 is still a lot, but for them to get rid of 600-plus suppliers was fantastic because there had been endless duplication and poor management in the past. There is a return on investment issue immediately from just getting a unified view of what is going on in your company.”

Another of NetDimensions' customers, airline Cathay Pacific, uses EKP and EAC in part to manage the certification of its pilots, who get the chance to re-test four times a year.

“Cathay Pacific is very careful to make sure that the systems have high availability, high security, complete audit trails, fantastic tracking capability at every step of the way,” he says. “It’s very high-end and it’s very compliance optimised.”

New opportunities

But while the company’s software has proven its worth, Shaw describes the change in strategy this year as a move to “pivot” NetDimensions’ approach to the market. Acknowledging the tough times its clients were facing, the company has watched its cash and started exploring new income streams.

“We needed to pivot the company’s focus a little bit away from the good, powerful HR stuff and more towards mission-critical software,” he says. “We’re not mission-critical software in the sense of being transaction-based, we don’t help companies take money from clients or do their back office. But we took a long hard look at what was mission-critical for our clients – and what we could help them with. In other words, what’s really important to them right now?”

Using industry analysis and spending time talking to its existing customers, Shaw’s team identified compliance as a key issue and then worked on how the software could be used to address that issue.

“Compliance is a ‘licence to operate’ issue – you need to be compliant if you’re in a highly-regulated industry,” Shaw says. “For airlines that can mean maintenance, engineering work or recurrent training for pilots. For energy companies it means being certified and having the licence you need to be on a drilling platform, and for banks and insurance companies it means regulatory compliance with, for example, the FSA in the UK.”

One outcome from this move to a compliance-oriented approach saw the company optimise its software to help customers manage the move to achieve the international quality management and environmental standards, ISO9000 and ISO14001. Inspired by one of its own customers that was using the software to manage the accreditation process, NetDimensions began working towards the standards itself – also using its own software.

At the same time it began working on how it could help US-listed companies, particularly those on Nasdaq, handle the complex compliance issues connected with Sarbannes-Oxley regulation. The company is also working on new e-commerce related applications for the software.

“So this year we’ve really tried to pivot the company a bit, and it is ongoing,” Shaw says. “We’re not in any way turning our back on the learning management world, we love our clients and they’re not going away, Shaw says. “But we thought that in an economic downturn we’d look at what people have got to have.

“We think that the trading environment is not likely to get any better this year or next. There is still demand for the inwardly looking HR solutions, but people are being more careful about making decisions and they are also more likely to buy ‘software as a service’ applications because that way they don’t have a lot of capital expenditure upfront. So that continues, but it becomes a harder market.

“But we’ve actually upped our sales and marketing because we think that in a tough market with some of our competitors flailing a little bit it’s an opportunity to take market share.”

NetDimensions’ largest sales areas include North America, Canada and the US Caribbean and then EMEA, where Western Europe is the most significant part. The company’s partnership model regularly sees it link-up with sector-specific companies working locally, which Shaw says must have “a ‘go to market’ strategy”.

“One of our partners in the US, e-HealthcareIT, does just hospitals and our software is one part of their go to market solution,” he says. “That’s a very nice partnership.

“Most of our competitors are much bigger than us but they can struggle to make a profit and most of their revenues come from services. Services are a pretty small part of our revenue mix because we give it to partners. So that has allowed us to be profitable and grow at a much lower base level.”

Bigger deals

With last year’s calamity apparently old news, Shaw is quietly confident about NetDimensions’ prospects. Despite only listing the business on AIM in April 2007 and quickly feeling the wrath of investors, he says he is “over the moon” with the company’s UK listed status.

“I have to put up my hand and as CEO and take responsibility – we missed our numbers last year and we deserved to be punished in a sense. But if I step back from that for a moment, we weren’t looking to join AIM for a short term pop, we were looking to become listed in order to be take more seriously for bigger deals and in order to have shares that we could use to do M&A with over time.

“Obviously that will slow down a bit when the share price goes down because your currency is worth less, but in terms of our long term goals nothing has changed.

“When we announced the IPO we said we’d be looking at two kinds of acquisition – bolt-on acquisitions of partners and people in the same field who have market inroads that we don’t have, and in some cases joint ventures or M&A work around complimentary products. In terms of those two areas, again nothing has changed. And in the case of the JV with the Singapore-listed services firm we announced recently, we expect that to be launching by the end of September.”

Ben Hobson, SmallCapNews.co.uk