4Projects and profitability

“We’re not always given credit for the consistent profitability we’ve achieved for a business that received no early start-up funding.”

I recently met Steve Nelson, finance director of UK construction collaboration technology vendor 4Projects, to learn more about the history of the company, its funding and the 2007 management buy-out (MBO) – the meeting took place at the London Covent Garden offices of August Equity, who helped fund the MBO. Having regularly commented on 4Projects’ financial performance since 2005 (most recently in September 2009), I wanted to get a better picture of how the company grew during the early 2000s and what had helped it achieve a remarkably consistent and growing level of profitability seen in recent years.

4Projects: the start-up years

After working in private practice (Arthur Andersen, Price Waterhouse) and then for north-east England based accounting software providers Sage and QSP, Steve joined 4Projects’ then parent, the Leighton Group, as finance director in 2001, when 4Projects was still a relatively small business.

4Projects first came to Leighton’s attention the previous year when a Leighton web design subsidiary did a small project for Taylor Woodrow. This led to a conversation between Taywood’s Richard Vertigan, who had been nurturing the idea for a Software-as-a-Service (SaaS) business targeting the construction sector, and Leighton chairman Paul Callaghan, who was looking to invest the proceeds of the disposal of Leighton’s Domainnames.com business. As a result, Leighton offered to fund 4Projects’ start-up costs through to the point when it would be generating sufficient income to stand on its own two feet. “It took about two years to reach profitability – in March 2002,” said Steve, “by which time it had incurred around £400,000 in start-up losses.

“However, we’re not always given credit for the consistent profitability we’ve achieved for a business that received no early start-up funding. Leighton group covered the start-up costs, but the company didn’t want or need outside investors influencing the running of the business. Unlike competitors like BIW Technologies who raised about £8m in external funding, BuildOnline who raised even more [£34m, disregarding sums raised for other ventures that were acquired or merged with BO] and Asite [heavily backed by Robert Tchenguiz], 4Projects was able to manage its backers’ expectations without spending money on different products, on expensive infrastructure and wasteful marketing campaigns. Richard deserves a lot of credit for keeping costs down. When I arrived in 2001, the costs were £50,000 a month at a time when the business was generating just £30,000 in monthly revenues. It was a big gap but nothing like the gap the competition had.

“Nevertheless, we often suffered by comparison with firms like BIW, BuildOnline and Asite – ‘look at how much money they’ve raised’ or ‘look at how many people they’ve got’, we’d be told – but, believing turnover is vanity and profitability is sanity, we told customers to look at our bottom line.”

Steve says part of 4Projects’ success was down to Richard Vertigan’s strategic decision to focus purely on a single SaaS product, managed using a single infrastructure. This was hosted cost-effectively by another Leighton group subsidiary, The Data Corp, at a data centre situated north of Detroit, in Ontario, Canada, until 2004. “Even today, we still keep our hosting expenditure costs down. BT may not be the most glamorous name in hosting – but they provide a reliable base for our infrastructure which is managed from three data-centres including one near Glasgow.” Rather than rely upon hardware provided by BT, 4Projects invests in its own servers and other equipment and pays BT for rack-space to host it.

The plateau of profitability

While rival SaaS collaboration vendors were struggling to reach break-even, 4Projects was generating modest profits throughout the mid-2000s. Turnover at BIW [my former employer] was higher but its higher fixed costs meant it took much longer to report its first profit (2007). In the year to 31 March 2005, for example, 4Projects reported a turnover of £2.1m, and six months later BIW reported revenues of just over £4m, but 4Projects generated a pre-tax profit of £266,000 against BIW’s loss of £192,000. Indeed, of the major vendors reporting figures to Companies House, the only other vendor reporting a profit that year was Styles & Woods’ modest Storedata operation, while losses at Asite, BuildOnline UK and Aconex UK were £1.3m, £0.55m and £0.3m respectively.

For the five financial years from 2003 through to 2007 inclusive, 4Projects reported total profits of almost £1.4m. However, it needs to be pointed out that 4Projects Ltd’s reported profits understate the true performance of the business. Substantial management charges were paid to a loss-making sister company (4Projects Management Ltd). If these fees had not been paid, the profits figures would have been considerably higher. For example, in 2007, the last full year before the 4Projects MBO, the business turned over £3.2m and generated a profit of £0.7m, but the management charge of £720,000 masked a real profit figure of about £1.4m.

The MBO

I have written several times before about 4Projects’ 2007 MBO. Steve explained that Leighton’s long-term objective had been to create a business that was generating sustainable revenues and could then be profitably sold. The deal saw 4Projects valued at just over £20m (transaction expenses saw the total deal cost reach over £21m). The Leighton group withdrew from the business, but several of 4Projects’ directors reinvested a total of around £3.2m in loan notes to 4Projects (see post) alongside August Equity’s £7.4m. The balance of the sale was funded by £1.0m of equity (from August and the directors) and bank loans from Kaupthing Bank which are serviced by bi-annual repayments. Kaupthing is currently in administration and 4Projects’ strong cashflow has allowed it to make repayments earlier than originally scheduled (“Given interest rates at the moment, there is no point in holding money on deposit,” Steve said). The bank loans were scheduled to be paid off by 2015.

No Middle East exposure

The debt on the 4Projects’ parent company balance sheet may be regarded by some competitors as a potential issue for customers, but Steve isn’t unduly concerned: “Given the business’s continued growth and profitability, the debt is easily manageable,” he said, “we have used surplus cash and we don’t have any of the issues that rivals [eg: Aconex, BIW] have faced through over-exposure to the Middle East market.”

He says Richard Vertigan and colleagues looked at establishing a 4Projects base in Dubai, but were ultimately discouraged by the legal and commercial hurdles involved: “I’d had experience of dealing with customers in the region when I was at QSP, and when I looked at the changing market conditions in Dubai a year ago [late 2008], I certainly felt we were right to be cautious.”

My reaction

Having worked for one of 4Projects’ competitors throughout the 2000s, it was fascinating to get Steve’s perspective on the relative financial fortunes of the different vendors. Plainly, 4Projects started without some of the impressive sums pumped into its rivals during the dot.com boom era (and so didn’t have any of the issues recently encountered by BIW – see “A tough year for BIW” – when it came to repaying loan notes), and focused on keeping a tight ship. As former head of marketing at BIW, I don’t believe we indulged in any expensive marketing campaigns (perhaps Steve was pointing the finger at BuildOnline, which certainly invested heavily in PR and marketing during the early months of its existence).

With the benefit of hindsight, 4Projects made some good early decisions. First, it has mainly been focused on one product aimed at a market sector it knows well (only in the last year or so has it begun to segment its core market, creating offerings for the retail and energy sectors), whereas its major rivals have tended to offer wider portfolios of products and services (BIW, for example, invested time and money on an innovative but ‘problem child’ product, PlanWeaver – now shelved (post) – and BuildOnline set out to create an array of e-commerce as well as collaboration services).

Second, 4Projects also opted to avoid the Middle East market and focus its initial efforts mainly on the UK, only venturing overseas when its UK-based clients wanted to use them in projects in other locations. It has therefore avoided the fall-out from the continuing crisis in Dubai – where BIW’s erstwhile client Nakheel has been much in the news recently, and where Aconex took a hit too.

And third, Steve plainly believes that 4Projects hosting strategy has paid off handsomely. It pays much less for its rack-space hosting by BT than BIW does for its Attenda managed services – though, of course there are distinct differences in what each vendor gets from its hosting provider. Moreover, in a cost-conscious market like construction, being able to pitch your services at a lower rate than your competitors can make a crucial difference, particularly when that market hits a savage downturn (though cost isn’t everything, of course, as Aconex‘s Rob Phillpot recently argued).

As a result, and as previously discussed (post), 4Projects has achieved some healthy pre-tax profit margins in recent years. This year’s 33% was almost double the 18% achieved last year by Sword CTSpace (which today incorporates what’s left of the former BuildOnline operation), and ahead of the performances of BIW and of Business Collaborator (post) who achieved margins of 13% and 7% respectively in 2008 – though both, I believe, are expecting more modest results this year. By contrast, Steve Nelson seems confident that 4Projects will continue to thrive in 2010. Its rivals may seize on the debt issue, but given 4Projects’ steady growth, the healthy profit margins and the stability of its management team, the company would need to suffer a savage reverse in fortunes for the debt to assume major significance.