Chalkie: 'Doing a Diligent' a compelling story

It is one of the hottest things on the New Zealand stock market this year – but it is a United States rather than a Kiwi company.

Diligent Board Member Services Inc is a small-but-growing New York-based technology company that has seen the price of its NZX-listed shares nearly triple this year in an overall flat market.

The company markets a specialised product through which company directors can access board papers electronically. This saves directors the hassle of lugging around reams and reams of paper.

And right now the product is flavour of the month. Diligent's sales are rocketing. In the three months to September it had revenues of US$4.8 million (NZ$5.9m) compared with just US$2.2m for the same period in 2010.

The company was recently named 156th-fastest growing business in North America on Deloitte's 2011 Technology Fast 500 list.

Diligent is making waves.

Its main market is North America but it is now making strong inroads into Britain and Europe and for the past year has also been targeting Asia and the Pacific as well. At the end of the September 2011 quarter, more than 800 companies were using the Diligent product.

Maybe none of this would have been possible for Diligent if the company hadn't decided four years ago to both raise money in New Zealand and publicly list its shares here.

The decision was not quite as out of left field as it sounds, because one of the business's founders Brian Henry – who resigned as chief executive shortly after it listed – is a Kiwi. Also, a couple of the directors are New Zealand-based and most of the software development is done here.

Would Diligent have been the success it is now if it had not been able to access money from Kiwi investors?

The company had been around since the 1990s but was still essentially in start-up mode when it listed on the NZX in December 2007 after raising $24m from about 800 investors here. It was not an overnight success.

The company projected net revenues of US$5.8m for the December 2008 year, but made just US$2.9m, with an operating loss of US$11.8m.

By late 2008, Diligent shares, which had cost $1 each in the float, could be grabbed for under 10c each on the open market. Diligent conceded that it would run out of money about March 2009.

But to the rescue came two American investors, collectively pumping in US$3m, and Diligent was given breathing space.

For the next two years the company quietly plodded on, gradually improving its sales.

However, in September last year came the move that changed everything. Diligent released its first boardbooks package that was compatible with Apple's super-popular iPad tablet computer. Diligent's annualised licence fees – its key internal performance measure – hit US$10m in December 2010 and then in the next nine months virtually doubled to just under US$20m.

To this point Diligent has yet to make a profit, nor has it paid any dividends. In the six months to June the company had revenues of US$6.64m, compared with US$3.66m at the same time a year ago.

The operating loss in the period was a touch over US$450,000 compared with a deficit of US$1.45m for the comparative period.

However, after its scorching third quarter Diligent announced that on an operating basis it had now become profitable for the first time in its history.

Chalkie reckons should such revenues continue in the final quarter of the year Diligent will record its first after-tax profit – possibly up to US$1m – for the full 2011 year.

If Diligent can continue at its current rates of business growth your columnist reckons in two years from now it could easily be generating after-tax profits in excess of US$10m.

All of which is terrific for Diligent. But should we be getting excited about a company that is actually American registered and does most of its business overseas?

Well, the success of the business is great news for the small band of Kiwi investors who kept the faith. The original $1 a share invested, which came close to disappearing altogether at one point, has now reaped a compounding annual rate of return in excess of 15 per cent.

Of course anybody who got in when the price was about 10c has made truly astronomical returns.

So that is one good thing. But there are potential wider ramifications as well.

Diligent – an internationally focused business – has successfully used a New Zealand stock market listing to get through its difficult early years and set itself up for what looks a potentially spectacular future.

The emerging success of Diligent offers surely a fantastic case study for what the NZX market could perhaps do with other small, overseas, globally-aspiring companies that might be having difficulty raising money at home.

Picture it. New Zealand the willing home for up-and-coming technology companies. Float your company here and watch it "do a Diligent". Doesn't that have a nice ring about it?

OK, Diligent is just one company – but it would be a splendid example to use for NZX to promote itself overseas at a time when our market operator is crying out for new listings. There appears to be an opportunity here, but will it be grabbed?

Chalkie is reminded of the case of Swiss company Cavotec MSL. This growing infrastructure engineering company recently abandoned a New Zealand market listing in favour of putting its shares on the Nasdaq OMX in Sweden.

The way Cavotec became listed here was a nice story that Chalkie can't recall NZX making enough of. Cavotec was a privately held company that liked the innovative automated port mooring system devised by New Zealand firm Mooring Systems. The New Zealand company needed more money. In 2006 Cavotec agreed to merge with Mooring Systems. But it also agreed to list the combined company on NZX. It was just the sort of progressive listing our market needs.

But four years down the track the ambitious Cavotec did not find the NZX listing sufficiently fitted its needs. The company commented earlier this year that the development of its share value had been affected by a downturn in capital markets worldwide "combined with a generally illiquid trading environment on the NZX". So, it is gone.

Could more have been done by the NZX to keep Cavotec? The new listings on the New Zealand market this year can be counted on the fingers of one hand. The NZX surely needs to be more proactive in seeking listings so that Kiwi investors have fresh options and the market itself is rejuvenated. The Diligent story shows that NZX doesn't just have to wait for Kiwi companies to take the plunge.

But as Diligent's star becomes more ascendant in the US, then so it might be more attracted to the idea of a Nasdaq share listing in the US. And, if it does so, would it then abandon New Zealand altogether?

Somehow it would be all too typical if Kiwi investors, having witnessed a company nearly crash and burn on the New Zealand market, then see it take its listing overseas once it actually becomes a success.

As a nation we need to make sure opportunities presented by the unexpected success of businesses such as Diligent are grabbed with both hands – something we don't do well enough.

- David Hargreaves is a former Fairfax business reporter and columnist now writing freelance. Chalkie's name is derived from the people who used to "chalk" up the share prices on trading floors before the market went electronic.

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