The Economy

THE HIGH-TECH SURPRISE

Julian Beltrame January 15 2001
The Economy

THE HIGH-TECH SURPRISE

Julian Beltrame January 15 2001

THE HIGH-TECH SURPRISE

The Economy

Julian Beltrame

Adam Chowaniec is not panicking—and not because he doesn’t understand the situation. The CEO of the small Ottawa high-tech firm, Tundra Semiconductor Corp., is in the middle of the kind of year that made his sector the blockbuster business story of the last decade. The company announced that in the quarter ending in October, Tundra racked up its best quarter in its five-year existence, topping all expectations with revenues of $16.1 million, 68 per cent higher than the corresponding period the previous year. Tundra is receiving kudos from tech analysts for its solid performance, professional management and sound business model, and, by all accounts, its future is rocksolid. Yet the company’s share value has nose-dived from a high of $78 early last year to the low $40s. The day it announced its record earnings, Tundra shares actually slipped a notch on the Toronto Stock Exchange. “I’m just happy we haven’t dropped too much,” says Chowaniec with a shrug.

“Were doing better than most.”

Tremendously better, actually. Consider Nortel Networks Corp. Canada’s richest company hit the stratosphere at $ 124.50 a share on the Toronto Stock Exchange in July, then hit the skids in October despite posting impressive earnings. Corel Corp., Ottawa’s once high-flying software maker that used to entertain notions of taking on Microsoft, imploded after topping out at $64.65 a share in December,

1999. Barely a year later, it is hovering in the $3 range and

The technology sector is far healthier than its stock prices would suggest

fighting for its life. Toronto’s hyped new start-up, 724 Solutions Inc., shot up to $345 within weeks of its initial public offering, only to be brought back to earth to under $30 by year’s end. And those are the good companies, firms with earnings. In the dot-com sector, the question is not how far have they have fallen but whether they will recover. Overall, the tech-based Nasdaq Stock Market in the United States suffered the worst year in its 29-year history, falling 51 per cent from its March high. Talk about annus horribilis in the highflying information technology sector.

For the people paid to watch and profit from these wild fluctuations, irrational exuberance has given way to bottomless gloom. “We’ve gotten to the point that it doesn’t matter what a company does, people hate it,” grouses Duncan Stewart, a fund manager with Tera Capital Corp. in Toronto. “If it’s good news, like Nortel reporting 40-per-cent growth, people are mad because it wasn’t good enough, and if it’s bad news, they take you out and shoot you.” Still, it’s hard to believe the good times are anything but just postponed.

“How did we go from the hottest of industries to the coldest in 12 months?” asks Lynda Leonard, vice-president of communications for the Information Technology Association of Canada, the voice of the high-tech sector. The simple answer, she says, is that IT isn’t dead, it just looks that way on the stock market.

What may have died, never to be revived, are the overnight sensations in the dot-com sector, analysts say. Over the past few years, hundreds of entrepreneurs, often pimple-faced whiz kids, began operations offering to sell goods and services already available through other sources. Their key innovation: do it on the Internet. Yet the buzz about the ability of the new technology to transform the way people lived was so strong that companies with minuscule or no earnings were commanding valuations in the billions. There were naysayers, who warned that such quaint notions as profits still mattered. But why listen when start-ups like Priceline.com Inc., a U.S. dot-com that auctioned discounted airline tickets over the Internet, achieved in a cyber-flash a higher valuation than every U.S. airline put together? A new paradigm was at work, said Priceline founder Jay Walker, who boasted about “re-engineering the DNA of the future of business.” Just as suddenly, its stock has plummeted from over $ 100 to about $ 1.

In retrospect, the surprise is that so many investors bit so hard on such a thin premise. The business model made no sense, says Harry Jaako, co-CEO of Discovery Capital Corp., a venture capital firm in Vancouver. If it was easy for someone to begin selling books, toys, funeral plots, golf bookings,

or whatnot on the Internet, it was just as easy for competitors to get into the game and cut into the profit margins. Moreover, he adds, it was a simple matter for existing retailers to tack on an Internet function to their established business. “Guess who’s best at getting a head of lettuce from the farmer’s field to customers, a new start-up or the existing guys who have been doing it for 50 years?” Jaako asks. He doesn’t wait for a reply. “Those dot-com guys, if they’re not dead, their lights will be turned off this year.”

Nobody is suggesting the lights are being turned off on the IT sector as a whole. Despite drastically reduced share values, Canada’s tech sector—which was not as exposed by the dotcom meltdown because there are fewer of them here than in the United States—is still growing. In fact, Industry Canada says the information and communications technologies sector remains among Canadas top performers. In 1999, the sector contributed 20.4-per-cent growth to the gross domes-

tic product, compared with 4.3-per-cent GDP growth overall. In terms of jobs, about 512,000 Canadians are now employed in high tech, mostly in Toronto, Ottawa’s Silicon Valley North, Montreal and Vancouver. That’s about

100.000 more than the previous year. “People haven’t stopped hiring because of what’s happened on the stock market,” says headhunter Terry Scullion, group manager for Quantum Management Services in Ottawa.

Still, the shakedown won’t leave Canada’s high-tech sector totally unscathed. Jaako believes 2001 will be a difficult year for start-ups with bright but untested ideas. “There are

7.000 early-stage companies just in the Vancouver area, and all they need is a million or two to develop,” he says. “Some of them won’t be able to find it.” Others, who last year may have demanded $30-million valuations for their start-ups, have scaled down their expectations. That’s a good thing, Jaako adds. “We couldn’t believe the valuations these entrepreneurs wanted for their businesses, so last year we sat on our hands,” he says. “Now that sanity has returned, we’ve made a string of investments and we see that continuing.”

Canadas big IT players also see no end to the growth cycle. The economy may be slowing, but Nortel head John Roth has forecast a year of solid growth. JDS Uniphase Corp., an Ottawa firm that makes fibre-optic components, plans to add 3,000 to its workforce this «, year. “The real companies out there—the I Nortels, Ciscos or JDS, who make stuff that ? even if dot-coms go to zero it doesn’t really I matter—are actually doing quite well, even if I their stocks aren’t,” says Stewart.

I Looking out the window from his second^ floor office at Tundra headquarters, Chowaniec can see a string of high-tech plants along March Road. Direcdy opposite is Alcatel, the French network builder that last year swallowed Ottawa’s Newbridge Networks. Farther along is cellphone maker Nokia Corp., Mitel Corp., Cisco Systems Inc., Siemens Canada Ltd., and a clutch of smaller players that have created a sprawling cyber city from virtually nothing in Ottawa’s west end. Those structures are not mirages, he says. Last year, high-tech companies, with an estimated

70,000 employees, surpassed the federal government as the largest employer in the nation’s capital region. “In a few years, that street is going to be clogged with traffic,” Chowaniec says of March Road. “What’s happening is growth rates are slowing, but they’re not going to zero.” Of Tundra, he admits he’d like to see the value back in the $70 range, but the company still has a valuation of $700 million. That’s a wonderful result for a five-year start-up—something that might apply to the entire IT sector in Canada. CD