Tech expert Duncan Stewart.
Every year, Deloitte & Touche's "Technology Fast 50" ranking tracks the progress of the industry by showcasing the 50 fastest-growing tech firms in the country.
Duncan Stewart, Deloitte's head of research in the technology, media and telecom fields, joined us to explain which technologies are on the rise and what the future holds for the industry.
Mr. Stewart, a CFA, has almost two decades of experience in the industry. As an analyst and portfolio manager, he has provided research or made investments in the entire Canadian technology and telecom sector. He has written research on names such as Nortel and Celestica, and been a venture capital investor in Research in Motion.
Duncan is also a founder of Tera Capital, Canada's first high-tech and biotech money manager. In the mid-1990s he managed a $150-million, small-cap high tech/biotech fund at a large Canadian pension fund manager.
Dave Michaels, globeandmail.com: Hi Duncan. Thanks for taking time from your schedule to join us today. The word on everyone's lips these days seems to be "recovery," from what has proven to be a steep economic downturn. How is Canada's tech sector faring?
Duncan Stewart: Before we get to the heart of your question, there are a couple of important points to note:
1. There used to be a belief that technology was immune to economic cycles. In a recession, their growth might slow, but the industry as a whole would still do okay and be positive. But 2008/2009 showed us that ain't true any more! In fact, some tech companies saw their revenues and profits fall further and faster than car companies or U.S. banks!
2. But just because the industry as a whole is down in a recession doesn't mean that every company is affected. As today's release of the Deloitte Technology Fast 50 highlights, there are some great pockets of growth in Canadian technology. Our winning company saw five-year revenue growth of more than 18,000 per cent, and even the "average" growth rate for all 50 companies was almost 2,000 per cent. There is a quote in this recession that "flat is the new up." I guess our Fast 50 winners are setting their sights just a bit higher that that ...
If we move beyond the Fast 50 for a second, the broader Canadian tech industry is participating in the recovery in two ways. Stock prices are hugely up from the March lows (more than 60 per cent on average) and they are also seeing revenues and profitability coming back. Companies are raising guidance on both the top and bottom lines - sometimes materially. Fast 50 winner Dragonwave (No. 17 this year) has had to raise its guidance twice in the last few months, and the stock is at all-time highs, raising more money and listing on the NASDAQ. Sounds like a recovery to me ...
But not everyone is benefiting equally. Obviously companies like Nortel aren't being helped, and some tech companies are in niches where the recovery looks like it will take longer.
Dave Michaels, globeandmail.com: Is there any one company that has done particularly well this past year?
Duncan Stewart: There are two that jump to mind.
Obviously, the company that was the No. 1 grower over the last five years, the Leadership Award winner for Emerging Technologies and a Green 15 winner, did pretty well! I have followed ProSep of Montreal for a few years now. The revenue success they have had confirms the trends that we have been seeing, and that led to our creating the Green 15 award for Canada's top clean-tech companies back in 2007. More and more, clean technology is becoming the "next big thing" in technology. It isn't just about saving the planet - being able to do more with less is both the right thing to do and something that makes a lot of money if done right. ProSep is a company that lies at the intersection of two Canadian industries: it uses technology to help the oil and gas industry. That nexus is a sweet spot for Canada and the planet.
The other company that has to stand out is Research in Motion (RIM). Since the Fast 50 rankings are all about five-year revenue growth, it is obviously mathematically biased against companies that had a lot of revenues five years ago and in favour of companies that were just starting up in 2004. It is amazing that RIM is able to be on the list for 12 straight years - and for them to finish in the top half of the list makes me shake my head. This has been the year of the smart phone, and RIM's ranking reflects their incredible success. They are not just growing - but doing so consistently even as they become a larger company. That's tough - all sorts of companies can get to $10-million in revenues; fewer get to $100-million. Very few get to $1-billion and beyond. We are lucky to have one of those in our backyard.
Dave Michaels, globeandmail.com: Looking at the big picture, how has Canada's tech industry changed since the tech bust of 2001?
Duncan Stewart: That's a great question, and the reason it is important is that the Deloitte Technology Fast 50 is a bit like a mirror, and a bit like a crystal ball. It does reflect some of the things that are going on right now in Canadian technology, but because many of these are earlier-stage companies, it also gives us a glimpse into the future and what are likely to be the "next big things."
Ten years ago the Canadian technology sector (and the Fast 50) were dominated by Ontario and Quebec telecommunications and enterprise software companies. Lots of fibre-optics manufacturers, chip companies whose products went into Nortel and Cisco switches, and software used by large corporations. Nothing wrong with those businesses in 1999, of course - but the cliff was coming. After the "tech wreck" the industry in Canada fundamentally reorganized itself. We still have some successful telecom and software companies of course (those are still important industries, even if they aren't growing the way they did in the bubble), but we are much more diversified. The Fast 50, Green 15, and Company-to-Watch winners are spread all across the country, and are from all kinds of different industries and end markets.
That shift to being less concentrated on any one end market means that we are unlikely to see the explosive boom we saw in 1999 - but we also should be spared the bust.
From Azza Abdallah, of Canada: RIM keeps taking a beating. Should I hang in there or throw in the towel and accept my losses? Thanks.
Duncan Stewart: Hi Azza. That sounds like a question on stock valuation, and that's not something I can comment on for Deloitte. I will say that regardless of the share price and its ups and down, as a company RIM is doing very well. The only "beating" they are taking is on the stock exchange - in the real world of selling millions of phones to consumers and enterprises they continue to thrive.
They are one of the two most successful companies in the smart phone arena, and Deloitte is forecasting smart phones to keep growing. By 2013 as many as half of all the phones sold in the world are likely to be smart phones, up from about 20 per cent today. Whether or not RIM (and Apple) are going to be as dominant by then as they are today is almost impossible to predict - but they are certainly in the right sector! And based on the evidence so far (12 consecutive appearances in the Deloitte Technology Fast 50) they are pretty good at staying on top in what has been an incredibly competitive space.
From Brian Van Steen, Kanata, Ont.: What is the likelihood of "success" at the climate talks in Copenhagen, and how are you defining "success"?
Duncan Stewart: Hi Brian. There is no question that the Kyoto treaty was only a beginning, and the new round of talks in Copenhagen this December will be watched by many, not least those interested in the clean tech industry.
But I want to push back and not tie the success or failure of clean tech to the success or failure of the Copenhagen Climate Summit - however you define it. There's a great quote in the Bible (Psalms, if I remember) that says "put not your faith in princes." Any clean tech company that is counting on getting the leaders from 192 countries to agree on something and act swiftly is taking a terrible gamble.
What Deloitte is seeing in the success of its Green 15 award winners is a more pragmatic approach. Yes, they want to save the planet. But in addition to that they always have a strong business plan: they offer proprietary technology solutions to customers who are willing to spend money in the belief that there will be an economic return on their investment. If you have that then you will succeed, no matter what happens in Copenhagen. And if there is a brand new treaty with huge incentives for clean tech? Then your already sound business plan will succeed even better!
From Albin, of Canada: I have a macro-level and a particular interest. First, what's your assessment of the overall health of venture capital in Canada, as compared with the U.S., which has been experiencing a real slowdown, impacting tech? How much is government stimulus compensating for private sector VC risk aversion?
Second, I have a particular interest in "smart grid" technology and government incentives to utilities, and own shares of Ambient, Duke's partner in the U.S., which has been anticipating federal stimulus. I don't find similar investment opportunities in Canada - when I look at Canadian utilities' smart grid "partners" they seem to be closely held or giants that have a small unit doing something, but no pure play. Your ideas appreciated.
Duncan Stewart: Hi Albin - thanks for the shopping list of questions. :)
1. Venture Capital in Canada is unequivocally in a crisis. We have fewer players with less money than five years ago, let alone 10 years ago. Of course, Canada can have a technology industry with inadequate venture capital - it will just be smaller and weaker than it would have been with more help. VCs don't invent things or develop them, but they do provide the capital to make them, sell them and distribute them worldwide. U.S. venture players do invest north of the border, but that tends to be later-stage money and isn't helping the funding "gap" we currently have between startup and $10-million in revenue. One of the reasons (in addition to the recession) that we have seen the average growth rate of the Deloitte Technology Fast 50 falling over the last three years is almost certainly due to that funding gap.
2. Government stimulus helps, but as most who read the Globe and Mail will know, much of that stimulus is directed toward troubled industries and maintaining jobs in old economy sectors. That is important too, of course, but at Deloitte we think a significant percentage of stimulus money should go to the future of Canada, and not its past. Technology companies spend stimulus money on new ideas and new jobs, and we need some of that, too. But to answer your question, all government programs together (stimulus, tax credits, outright grants) probably make up less than half of what we lost from VC funding, so we are net down.
3. Deloitte loves "smart grid" too - it was our leading prediction in January of 2009 and it is coming true in spades. Take a look at our Fast 50 and Green 15 award winners for some Canadian possibilities: RuggedCom, Distech Controls, Ecobee, Sempa Power Systems from this year, last year saw Sustainable Energy from Calgary, and in 2007 we highlighted Xantrex from Vancouver, which subsequently got acquired at a large premium. They aren't all public ... yet. As the IPO window opens we would expect to see a lot more smart-grid pure plays both in Canada and around the world.
From Nick Waddell, Dollarton Venture Capital: It seems there is a double standard in Canada with regard to incenting small companies. I am talking about the fact that "flow through" tax credits exist only for resource and energy companies, but not for technology. What do you think would need to happen to change this? A change of government, or a change of political will at the grassroots level?
Duncan Stewart: Hi Nick. As a long-time watcher of the tech and resource spaces I share your thoughts - there is a double standard. Of course, at one time there was a flow-through structure for Canadian software, but the program was abused and the government shut it down. That made sense at the time, but it is now 20 years later and I think it is possible that the government (any government) might look at the venture capital funding crisis I mentioned earlier and say "Hey - that's a basically good and fair idea, and this time let's do it right." If so, some flow-through funding system would be a huge help and start driving our innovation economy even faster. Grassroots will help that, so bring it up with federal and provincial politicians when you can.
From Dave McGregor of Canada: Where do you see Intel Corp. in two to five years?
Duncan Stewart: Uh-oh, sounds like yet another stock-market question ... and not exactly about Canadian technology! However, at Deloitte I need to spend a lot of time thinking about the entire global technology ecosystem, and I recently met with Intel in Santa Clara, so maybe I can offer some high level thoughts without making it investment advice.
First, Intel is running into the problem that a lot of tech companies are hitting. The personal computer industry is getting long in the tooth - growth is slowing, margins are falling, and consumers are not buying as many (or as expensive) computers as they used to. The most expensive (and profitable) chips that Intel makes are great for servers, but the rest of us don't need that kind of silicon firepower.
So Intel is doing some very clever things, and they are using their latest and most advanced manufacturing techniques to make new processors that aren't ultra-powerful, but are cheaper and smaller and use less energy. That looks like the sweet spot to me - get into netbooks and smart phones and tablets and TVs and embedded processors inside factories. There are billions of those devices sold every year, and although the margins are lower than in the old businesses that Intel was good at, they are a good growth market. It is too soon to tell whether Intel's strategy will succeed, but it looks like a sensible strategy to me.
Dave Michaels, globeandmail.com: Well, that's all we have time for today. Thanks so much, Duncan, for spending time with us, and thanks to our readers for the questions. Cheers.