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Dec 12 2007

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Aconex results hit by legal row

Some three months ago, I had a look at the 2006 financial results for Australia-based construction collaboration vendor Aconex, noting that its 2007 results would be available in November (as per Aconex marketing chief Frank Carron’s comment). After a slight delay (auditors requested an extension of time as some areas required additional testing), the latest figures covering the year ending on 30 June 2007 were received at the Australian Securities and Investments Commission on 26 November 2007. My key points:

  • Aconex revenues and order book have doubled
  • a healthy profit became a loss due to costs incurred in terminating a finance deal and defending a resulting legal action
  • less information about the performance of different parts of Aconex’s operations, including the UK.

Headline figures

Aconex achieved a turnover of AU$25.2m (£10.9m), up an impressive 115% from 2006’s AU$11.7m (£5.1m) thanks to what Aconex describe as “increased market penetration and investment in foreign markets” – the latter funded by a combination of cash flow, a $12.5 (£5.0m) million debt facility and capital injections (Aconex’s sustained revenue growth has also seen it named in the top 20 of the Deloitte Technology Fast 50 Awards in Australia – see Aconex news release).

The consolidated group made a pre-tax loss (EBITDA) of AU$3.1m (£1.34m) in the year to June 2007. By comparison, in 2006 it declared a pre-tax profit of AU$1.32m (£0.57m). However, this apparent reverse is directly attributed to costs associated with the legal dispute it has been engaged in with Hawthorn Glen since May of this year:

“The Hawthorn Glen finance facility termination costs and the legal costs up to year end associated with the subsquent dispute amounted to $4,116,940. Excluding these costs, the consolidated operating profit after tax would have been $574,221.”

The Aconex order book at 30 June 2007 stood at AU$41.6m (£18m), to be billed over the next 2-5 years, roughly double the level reported in 2006.

Legal impact

Despite Aconex’s view (see 24 September statement) that “The litigation does not impact on the company’s operations in any way“, it is clear that Aconex has had to make some allowances. As noted, there has been an impact on the company’s profitability, Aconex has also prudently invested in insurance to protect people against some legal liabilities, and the auditors have noted some contingent liabilities and assets:

“A premium of $9,559 has been paid to insure each of the directors and officers in the company in  respect of legal liability arising from any claim made against them by reason of any wrongful act, other than conduct involving fraud or a wilful breach of duty or claims which are specifically excluded.”

In the notes to the financial statements, the cost of terminating the Hawthorn Gen finance facility is given as AU$3,836,795. Aconex also gives an account of its dispute with Hawthorn Glen under Note 20: Contingent assets and contingent liabilities:

Contingent liability

The company previously had a financing facility with [Hawthorn Glen]. During the financial year, the company organised a replacement facility with the Commonwealth Bank of Australia and moved to terminate the facility with Hawthorn Glen. Disputes arose, amongst other things, regarding the release of the security for the loan and Hawthorn Glen’s non-participation in the 2005 capital raising. These disputes were eventually settled in March 2007 with Aconex issuing 300,000 Convertible Preference shares to Hawthorn Glen in April 2007.

Subsequently, Hawthorn Glen applied for $12 million worth of Convertible Preference shares in the 2007 Capital Raising, which was rejected. As a result, Hawthorn Glen commenced proceedings in the Federal Court and is seeking an order to require the company to allocate 461,538 Convertible Preference shares at the price of $26 per share to Hawthorn Glen for consideration of $12 million. The trial was held in October and early November 2007 and it is anticipated that judgment will not be delivered for a number of months. If Hawthorn Glen is successful then Aconex may be ordered to issue the shares sought and/or to pay damages and to pay costs. It is not possible to reliably estimate what these damages and costs may be as the outcome of the dispute is inherently uncertain pending judgment.

Contingent asset

If the company is successful, it may be able to recover some of its legal costs incurred in the dispute. The estimate of the Company’s costs for these legal proceedings amounts to approximately $1.65 million.

(AU$1.65m is about £0.72m.) Following some court activity during mid-November, Hawthorn Glen Pty Ltd v. Aconex Pty Ltd has been “Adjourned – judgement reserved”.

Regional operations

Last year’s report helpfully gave a breakdown of Aconex’s primary geographical segments: Australia – which accounted for a whopping 87.4% of total revenues in 2005 and an even greater 93.4% in 2006 – and the UK. But there is sadly no similar breakdown this year due to a change in accounting policies. Almost the only information given relates to the amount of loans from the parent company to its various regional operations; the UK division appears to still require substantial support funded by Aconex’s thriving Australia-based business.

The 2006 figures showed UK revenues in 2005-2006 of £0.323m, and a loss of £0.340m. At the time, Aconex was providing unsecured interest-free loans (in 2006 these amounted to AU$2.8m (£1.2m), the year before AU$1.9m (£0.8m)) on an arm’s length basis to its UK arm with repayment “due when the related party reaches profitability which is expected in 12-24 months”.

In the year to June 2007, further loans to the UK operation totalling AU$3.3m (£1.4m) were made (bringing the three-year total to £3.4m), along with AU$5.5m (£2.4m) worth of loans to operations in Hong Kong, Singapore, Malaysia, New Zealand, United Arab Emirates, South Africa, China, Japan, India, North America and Thailand. Profitability for this expanded group of controlled entities “is expected within 36 months”.

Update (14 December): I invited Aconex to answer some questions relating to the above issues and today received the following response from Frank Carron:

As a general note, we are happy to answer many of these types of questions when they come up. There will be some that, for commercial reasons, we will pass on.

Your questions on the court case have largely been dealt with in your blog post. We don’t expect a judgement before Christmas, and have no indication as to when one may be given, although January would seem likely.

In regards to Australia revenue as a proportion of global sales, we passed the point in mid-2
006 when monthly export revenue first exceeded ANZ revenue (we manage Australia and NZ as a single region). (The previous year’s financials overstated the importance of Australia in 05/06: significant sales to projects that were entirely overseas were invoiced through the Australian entity in that year. As we have created more overseas companies, this distortion has lessened considerably).

UK revenue in 06/07 was almost double the previous year’s, broadly in line with the group a s a whole. 06/07 also saw the UK business become profitable (although profitability of any one subsidiary is not in itself a strategic goal and as you can imagine is subject to decisions about the degree of cost that that subsidiary carries).

To elaborate on the final paragraph, doubling UK revenue would put Aconex (UK)’s turnover somewhere around £0.7m, making it a comparative minnow in the UK market. Frank’s statement doesn’t indicate how profitable the UK operation was (so when I come to redraw my graphs, I will have to post their profit just above the break-even line).

Permanent link to this article: http://extranetevolution.com/2007/12/aconex-results/

1 comment

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