Tech Company IT synergy has been listed on the stock market last December. The company is now seeking to have an initial public offering (IPO) for 20% of its capital. During the past four years, the company’s CAGR revenue grew by 17%, and in 2014 net profit reached EGP 2.82m.
The company has signed an MOU with Ajman Free Zone for an IT project that is expected to generate over EGP 50m during the period from 2016 to 2019. It has also won a tender with three operating companies and is expected to generate revenue of some EGP 132m during the next five years.
Daily News Egypt sat down with Vincenzo Puliatti the chairman of IT Synergy to discuss the company’s future projects, projects revenues, the role of capital market in supporting tech-based companies and the development of the IT sector.
How do you evaluate the presence of the IT sector in the capital market?
Our experience is interesting and it shows the relation between the IT sector and the capital market. Actually, five years ago we went on a mission with the Minister of Communication to the World bank and we had a meeting with the International Financial Cooperation (IFC), and one of the issues that we raised was the fact that there are so few technology or IT companies in the stock market even though it is a sector that is in need of financing and resources to grow.
We [the IT sector] don’t have big assets or factories or infrastructure and as a consequence we don’t have collateral so if we go to the bank for a loan, if you have a factory that makes juices this is an asset that you can get a loan against, but if you have and IT company that maybe produces more in terms of income and so on and you have a bright future but no guarantees it will be difficult to get finances. Technology companies find access to the capital market a fantastic way to guarantee the access to financial resources that will be needed to help them grow.
An IT company doesn’t need too much [finances] to start but at some point you stop at a certain level and if you want to move forward you need an investor or get to a sources of finance. On the other side, if you look at the impact of investments in different sectors for the generation of job opportunities and the quality of jobs offered, [you’ll find that] the IT is by far the sector with the lowest investment and the highest return in terms of well-paying jobs. If you work in construction you hire a lot of people with very low wages, but in IT people are well paid and the investment is not too high. You don’t need to invest in infrastructure but in bright minds. There is a lack of awareness, on the other hand, from both sides of the potential.
IT companies don’t know the privilege the market offers while the capital market lacks the awareness of the IT sector’s potential. If you think about it, in New York, you have NICE and NASDAQ, where NASDAQ is a stock market focusing on technology companies. If you look at EGX, there is not even an index of technology anymore. Maybe the most relevant is still Raya but only 15% of income is coming from technology. There contribution to technology is still important but marginal in terms of numbers at least. If you look at the United States, the biggest five companies are technology companies. There is a shift and trend worldwide, namely the shift of value from hardware to software.
Courtesy of IT
(Photo Synergy)
How can you describe your experience with the listing in Nilex?
We went through this exercise a couple of years ago. We thought it was an interesting opportunity to get [finances]. Nilex is for small and medium enterprises so we thought it would have a simpler path [when listing or having an IPO], but in practice it took two years to complete the process and still we have the very last step this period. If I knew it would take two years, I don’t know if I would have done it. We thought the process was going to be much faster. Probably, much of the problem is the lack of understanding. For instance, when you define the value of the company, you define it based on your past and future performance, based on contracts you have today for the next five years. In the IT sector, five years from now, we’ll be doing something different. The type if evaluation should be based on different factors like the creativity of the company, the talents you have inside while they still look at the numbers. This is the worth that needs to be measured.
Still it helps to move from a family business or a friends’ business to a structure business.
Could you tell us about IT synergy?
We started as an open-source and software development company in 2005. The real good thing about open source is not just that it is cheap but that it empowers people. Instead of buying a license and using it and paying someone abroad, you have people working on solutions and acquiring the knowhow. The awareness of open-source has been growing during the last decade. At the very beginning open source was something that was for students, academia and so on but no it is used by big companies and are willing to invest in it. It is nothing but doing a development and a business that can be shared with other people, in some other parts of the world even. So the value [of the business or development] increases. They are very well suited for emerging countries.
The important transition for us was in 2011, we were badly affected like everybody else. Our budget dropped by 60% or something. The IT sector suffered. We took a decision to move fully into becoming a cloud company. It was an investment for the future. We wanted to take this time of recession to build the knowhow on technology that we felt would be important for us. The cloud computing is not new but it started as a big boy games for companies like Google and Amazon that were investing billions in cloud technology. I didn’t feel that a small company will play an important role. Something happened in 2012, you know Linux for operating system for the cloud sector. Companies got together to develop a common platform then it was decided that companies will take the platform and customise it. You have the basic core, it is called open stack.
We joined the consortium in 2012 and since then we were able to develop a product based on this platform. We got some support for Intel, which was happy to build a cloud infrastructure, small but as useful as a big one. In 2013, we won a big tender for building cloud infrastructure for the Ministry of Scientific Research. We built two data centres; one in Burg Al-Arab and one in Dokki. We got some leverage because we won against big companies. We had local expertise with all our team being Egyptian. We got another opportunity when we started providing software as a service for operators. There is an interesting transition we are facing. Telecom operations used to make money from voice call then the prices and number of calls dropped so they had to move to data. Nippon Electric Company (NEC) contacted us and they had this approach to be the middle man between the mobile operator and the ISV, the independent software vendor. We signed a contract with them and the first costumer was Etisalat Egypt, which is now in the soft launch process.
What was the project volume?
We are working with NEC’s projection and they expect that within two years they should have 10,000 customers using this enterprise resource planning (ERP). We customized ERP solutions in small modules so that you can rent modules and eventually expand those modules.
What other projects are you working on?
We have a project with Mobinil, where we are providing school management system. It is like an ERP for school and we have another agreement for Telecom Italia Sparkle, a fully owned company by Telecom Italia. We said we can do the same thing we did with NEC. IT synergy will do the infrastructure and the network and they can out the network and together sell this to customers. We signed a letter of intent (LOI) and hopefully we should sign the final contract by the end of September. They have a data centre that they are not using and our team will use this data centre and build infrastructure and data centre for disaster recovery. The good thing is being part of the fibre optics marine cable, it’s like having a building next to you and there is no difference in speed.
What about your upcoming projects in the region?
On the way to the EEDC, I tried the application that was made to connect all attendees and I uploaded a project idea for the Suez Canal. The next day I got a reply from the government of Ajman in United Arab Emirates that showed their interest. The General Manager of the Ajman Free Zone Authority was there and he asked for a meeting. They liked the concept and they reviewed the project. They asked that we start in Ajman and not wait for the Suez Canal as the evolution of the canal was still unknown. They have a free zone with 7,000 operating companies and a total of 13,000 listed. The idea was to create and sell the services to the companies in the free zones and create a separate free zone that focus on SMEs, IT and an eco-system for them, the cloud digital free zone. We signed a memorandum of understanding (MOU) with the chairman of the free zone and we should sign the contract by the end of September.
There is an idea of forming a joint company owned by Egyptian IT Synergy and the government of Ajman to help operate the cloud digital free zone and also give services from the zone to other areas.
So basically the implementation will be done by an Egyptian company and the follow up will be by a joint company?
Yes.
When will the project start?
It will start in November.
Let’s discuss the company’s IPO. When will it take place?
We got listed on 7 December. Then we needed the value approval and it’s a process that took seven month. The value of the share, decided by Prime Holding, was EGP 43.31 and we’ll issue around 1m shares, around 20% of the company’s value, so the IPOs value will be EGP 8.6m. The money will be used to invest in infrastructure in Italy and Ajman and then will be incorporated in Egypt.
What about the expected profits?
We closed last year with EGP 2.8m and we presented the latest balance for the second quarter at EGP 1.8m. By the end of this year we should end with EGP 4m or EGP 5m of profit.
What about the profits expected to be generated from Ajman and Telecom Italia projects?
We didn’t consider them in 2015 but in 2016. I think next year [our profit] will be around EGP 9m.
