CTO be damned, tech sector forges ahead regardless

Published on the 01/10/2018 | Written by Heather Wright

TIN200 2018 report

Kiwi tech profitability up and exports on track to hit $10b in three years…

New Zealand’s top tech companies are forging ahead with record profitability growth of 38 percent in the past month – no national CTO required.

The new figures, which are part of the TIN200 report due to be released later this month, show New Zealand’s tech companies are experiencing the fastest rise in profitability since the report began back in 2005.

“The NZ technology sector is certainly not an ecosystem that is broken and needs to be fixed.”

Greg Shanahan, TIN managing director, says the profitability is a critical element for the sector, which is throwing off old perceptions that technology companies aren’t driven by the fundamentals other businesses live by, including the need to become profitable.

“What we’re seeing this year is that there has been a big drive particularly in the listed companies, but in the private companies as well, to become profitable to be able to sustain that growth,” Shanahan says.

Seven of the top 10 listed companies are EBITDA positive, up from five last year.

“It’s a sign of maturity. If you look at the profile of the top 100 companies in the report approximately a quarter have revenue over $100 million and about half have revenue over $50 million, so the successful companies are achieving economies of scale that are enabling them to become profitable.”

That news has been welcomed by investors, with stock prices for the TIN200’s 10 largest companies by market capitalisation up 57.3 percent in the past year.

“The sector is entering a new chapter in New Zealand’s technology story. The rising profitability reflects the wealth of experience, capital and scale the sector has built up; creating the foundations for widespread and stable growth,” Shanahan says.

And he says the rise in profitability hasn’t been at the expense of revenue growth, with listed companies growing their revenue by 17 percent – something he dubs as ‘massive’ – with growth across the board. Nine of the top 10 companies saw revenue growth.

Instead, he says, the companies are now ‘more self-sustaining’, reducing the risk of a tech bubble where growth is only possible through follow-on investment.

Export growth is also on the up. Shanahan says the sector has ‘passed a tipping point’ with export revenue expected to top $10 billion within three years.

“It is realistic to assume that within the next three to five years – and probably on the three side rather than five – it will be of the same stature as dairy or tourism, depending on what happens to dairy or tourism.

Last year’s TIN200 saw the companies topping more than $7.3 billion in revenue, from overall revenues of NZ$10 billion. The dairy sector, meanwhile has exports of around $14 billion, with tourism from international visitors at nearly $11 billion.

“The advantage with technology as an industry is that, unlike dairy and tourism, it’s not stymied by natural resource and infrastructure constraints, other than access to talent and capital,” Shanahan says.

And on that talent front, he notes the sector is growing a high wage economy. In 2017, Kiwi tech companies employed about 43,000 staff globally in 2017. Dairy in comparison employs 40,000 New Zealanders.

The report also sees 19 new entrants this year.

While Shanahan declined to get too specific ahead of the release of the full report on October 24, he says there are four growth markets: healthcare, AgriTech, FinTech and digital media.

A key contributor to the ‘unprecedented levels growth’ for Kiwi companies over the past three years, has been the strong US market, where, since 2013, GDP figures have been strong, with TIN200 companies benefiting from that.

“The companies are growing to a larger size and there are more companies participating in the US market,” he adds.

“The industry has momentum. No one is waiting around for anyone else to come up with a solution or a CTO role,” Shanahan says in reference to the controversy surrounding the national CTO role. Part of that role was to have included helping to ‘signficantly grow our ICT sector so that it becomes our second largest contributor to GDP by 2025’ according to government documentation on the role, which spectacularly self-destructed last month.

Says’ Shanahan: “I’m not debating merits of the CTO role, but [the New Zealand technology sector] is certainly not an ecosystem that is broken and needs to be fixed.”

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