5 Jul 2017

Revenue growth fails to keep pace with tech companies' expansion costs

2:23 pm on 5 July 2017

A more cautious investment environment is prompting listed technology companies to cut costs to meet growth targets.

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Photo: 123rf

Several companies have recently axed jobs, cut-back on research and development, and operational budgets, to bolster their cashflow and start turning a profit, including the health software company, Orion Health, transport software company, ERoad and the brand management app developer Plexure.

Over the past four years, 10 technology companies have listed on the NZX, most of which have been losing money as they have been burning cash to develop their products and programmes, while also looking to develop markets and sales.

Milford Asset Management investment director Brooke Bone said smaller tech companies, in particular, were finding that revenue growth has failed to keep pace with the cost of expansion.

"There is also a realisation that it costs a lot more money to do that and I think in this environment investors are demanding more cost effective growth from these companies," he said.

"When you add that all together you are finding companies having to take some cost out of their businesses to get them closer to break even, but still deliver that growth."

As a result, he said a new crop of small, but growing tech companies were waiting longer to list on the market to avoid the pitfalls of others who have failed to meet shareholder expectations.

"There is a real concern about going to the NZX, in particular, to list to raise capital for growth because of the difficulties that a number of these companies have had."

However, he said investors were still keen to back companies that delivered on expectations.

"Companies are lowering their growth ambitions and doing it in a much more cost effective way and looking to get to a much bigger size before they think about tapping the financial markets - the listed markets - for new capital," he said.

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