Growing up the hard way
Softline`s early 1997 reverse listing onto the JSE, through the Benoni cash shell, signalled the start of a local IT listings boom that lasted from 1997 until 1999. Unlike many of the companies that followed it onto the exchange, the payroll and accounting group is emerging from the present downturn with newfound focus and determination.Despite what must have been a stressful two years, Softline CEO Ivan Epstein exudes confidence. He has guided the group through a five-year roller-coaster ride that peaked with its market cap touching R4.1 billion and bottomed with its difficulties with US subsidiary SVI.“What a learning curve! When you first list, you try to be all things to all people, and as you mature into a big company, you start to delve into the real core of your business. We`re still repairing the mistakes of the hype days, when we had deeper pockets. What we`ve experienced is something like running uphill against the wind,” says Epstein, recalling Softline`s early years as a listed company.Softline initially followed a strategy that was de rigeur in the heady days of 1997 – using paper to make acquisitions to drive up its share price, turnover and earnings, which in turn allowed the group to make even more acquisitions.Softline grew from its accounting software roots into a broad-based IT player with interests as diverse as accounting software development, hardware distribution, and (for six weeks) virtual private networks. It even flirted with the exhibitions industry, with unfulfilled plans to bring Comdex to SA.The group decided four years ago to focus on its payroll and accounting interests, and managed to gracefully exit other businesses such as hardware distribution. Ironically enough, the group grew to maturity by going back to its beginnings.Its later attempts to dispose of its interest in ill-fated SVI Holdings – the US-based retail software specialist founded by the controversial former Punchline executive, Barry Schechter – didn`t play out nearly as well. Softline still has the scars on its back to prove it.Nearly two years after financial woes at SVI started to emerge, Softline has finally managed to restructure its investment in the troubled company and reduce its exposure to SVI`s debt and losses.With its interests in SVI ring-fenced, Softline has been able to turn its attention to its core businesses, most of which are performing well. The grown-up Softline may not be the most glamorous IT company on the South African bourse, but its large user-base (around 5.5 million seats at 340 000 businesses) and solid stream of annuity revenues make it a safe bet in an uncertain market.So how did Softline rise above the mistakes that destroyed many of its peers and once threatened to scupper its own boat too? The answer lies in the group`s ability to adapt to changing conditions, its stable management team, and in the fact that it started out with a solid core accounting software business to build on.Softline`s founders – Epstein, Steven Cohen and Alan Osrin – have stayed with the group since its inception in 1988. They`ve grown into the roles and responsibilities of corporate management at a listed concern while retaining an entrepreneurial flair.Colleague investor relations director, Lara Jawitz, says Epstein has an eye for detail that verges on the pedantic as well as a sense of urgency in all that he does. For his part, Epstein admits he likes the idea of running a large group with a small company mindset – he has “an open management style but I draw a clear line in the sand defining what I want.” Going globalSoftline`s decision to abandon the hardware distribution market for higher-margin businesses built around its own intellectual property proved to be a wise one in the long-term. Although business is relatively tight in Softline`s chosen playing field – accounting and payroll software for small and medium-sized businesses – the group has managed to retain its margins and steadily grow its user-base as well as its stream of annuity incomes.Softline`s Pastel, VIP and Brilliant products enjoy a strong position in the South African accounting and payroll software market, and form the bedrock of the group. Pastel is particularly popular with South African tax consultants who, like accounting practices, often refer their customers to the software.Says Terry Kier, MD of the Pastel Group: “Pastel now has more than 150 000 users, of which the bulk are South African. We`ve built a business that has shown itself to be almost recession-proof. While many other software suppliers are feeling a decline, we`re still enjoying strong sales, and only 50 to 55 percent of revenues are derived from existing customers.”Softline also owns a number of complementary South African payroll, retail and point-of-sale software, consulting and training businesses, including VST, Lorge Consulting, VIP Personnel and Payroll Systems, Pilot Software, Edge-1 and Masterskill. All of these businesses are generating cash.Not satisfied with its strong position in South Africa, Softline has been equally aggressive in the global market. After a four-year long acquisition spree in Canada, the US, and Australia, the group derives half of its profits offshore, and this proportion is growing.With a turnover of R412 million in financial 2001 (excluding SVI), Softline is small compared to international rivals such as Accpac (which forms part of the $6 billion a year Computer Associates empire), Microsoft subsidiary Great Plains, and London Stock Exchange-listed Sage International. But that has not stopped the group establishing itself as one of the dominant players in the Canadian and Australian markets. Large-scale success still eludes Softline in the potentially lucrative US (see Looking to the west again).Like many South African companies, Softline initially struggled with its global business model. It first tried to push into developed markets by setting up Pastel operations in the UK and US before settling on a distribution network as the best way of taking Pastel`s products abroad.Kier says that Pastel`s products are now available in more than 40 countries in Africa, Asia, and Europe. A sign of the product`s growing international popularity lies in the fact that a community of developers that focus on creating add-ons for the software has started to emerge.Softline has also perfected the process of finding the right companies to buy and then integrating them into its stable with the minimum amount of pain, adding several strong regional brands in First World countries to its portfolio in the past three years. Says Epstein: “If you look at all of our acquisitions, outside of SVI, we have managed to increase their revenue-flows. We have bought owner-run businesses and taken them to the next stage of their growth.”During financial 2001, Softline added Canadian firm, BusinessVision, to its fledgling North American operation. Apart from establishing the group as one of two players that hold more than 60 percent of the Canadian market, BusinessVision will be key to Softline`s plans to expand in the US.The Australian operation, which comprises of HandiSoft, Sybiz Software and the group`s latest acquisition, payroll software developer MicrOpay, is also performing well, says Alan Osrin, MD of Handisoft.Osrin says that Handisoft has a client-base of more than 5 300 accounting practices and handles 40 percent of electronic tax returns filed in Australia. Frequent changes to Australia`s tax structures means that most of these customers need to upgrade once a year, so Handisoft boasts a good stream of recurring revenue. Sybiz battled during financial 2001, but Osrin reports that Softline has made good progress containing costs at that subsidiary and bulking up its recurring stream of revenues from maintenance contracts. Sustainability and synergySteven Cohen, Softline`s COO, is tasked with harmonising the operations, R&D and marketing efforts of Softline`s 15 or so separately branded business units. Cohen says he sees no problem with managing such a multitude of brands since all companies focus on the same business: developing financial software. His key challenge is to maintain and even improve the Softline`s present operating margin (a respectable 28 percent in financial 2001, though low 20s are expected for 2002 due to the inclusion of AccountMate) by pooling R&D resources and driving common processes throughout the group.Cohen – a chartered accountant with a major in computer science – seems well suited to the job. By his own admission, he didn`t enjoy his tenure as the group`s financial director, and jumped at the opportunity to work more closely with the software developers and to take an active role in day-to-day operations.“My real passion is for the developers, perhaps the most important people in our organisation. Right from the early nineties, I wrote software manuals and tested software. I`ve done this stuff – I feel it in my stomach when I talk to our developers. I`m not a great financial director, but I`m a great ops director,” he says.Softline plans to gradually transition all of its businesses onto a common technology platform. It is engaged in a strategic review that may lead to co-branding on the operating companies, but it has no plans to re-brand its products under a monolithic structure. Softline`s companies have built up a great deal of brand equity within their respective markets, and it would be a mistake to tinker with that, says Cohen.Cohen is working towards the development of a common technology framework, based on Microsoft`s .Net platform and a three-tier architecture that all companies in the group can draw from. This platform will also be well suited to an application service provider business model.Says Cohen: “The move towards the new technology gives us the perfect opportunity to exploit synergies between group companies. We are identifying experts in the group and building a team that will develop a platform that can easily scale out into the .Net and XML environments.“Software development is an art. A lot of passion has gone into each of the products in our stable. We can`t take away the development teams [from the companies] that have created these products – it would be like ripping the heart out of the businesses.”The earliest examples of technologies that Softline companies will share are “white-label” bolt-on modules that add customer relationship management, helpdesk and e-commerce functionality to their accounting packages.“Each company can sell these technologies under their own brands while the group benefits from lower R&D costs,” says Cohen. Firm favouriteSoftline was a favourite among analysts and fund managers during the JSE`s tech boom of the late nineties until it became apparent how deep SVI`s financial troubles ran. At the peak of the technology bubble, the group`s share price reached R12.80; at the time of writing Softline was trading at around 90 cents. But Softline management is philosophical about the group`s relatively low rating on the stock exchange (it trades at a P:E of four).“We enjoyed the benefits of a strong rating for two years and used it to grow in South Africa, Australia and the US through acquisition. We made the best of it,” says Epstein, who believes he now pilots a sustainable business with good prospects for the future.He dismisses speculation that Softline may join the likes of Unihold and Rectron by de-listing from the JSE or seeking a buyer for its businesses. “We`ll remain listed and grow the profitability of the business. When the sector is re-looked at, we`re confident that we will be re-rated. You can`t take a short-term view,” Epstein says firmly.Along with FrontRange, Prism and Idion, Softline is one of only a handful of IT groups listed on the local stock exchange that own and develop the technology they sell. But, unlike Idion and FrontRange, Softline has always generated cash and grown earnings in its core business year-on-year.“We have 1 100 employees, more than 340 000 businesses in 40 countries use our software, and half of our profits come from abroad. Softline has shown that it can be done from South Africa,” says Epstein. The group has certainly come a long way since it started out in 1988 as the brainchild of a trio of newly-graduated students.
