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FoneWorx strategic shift produces solid results

We’ve progressed well, migrating away from pure technology into consulting.

JSE-listed IT solutions and telecoms provider Foneworx (JSE:FWX) posted its provisional consolidated audited financial results for the year ended June 30 2014 on Thursday, and the numbers are impressive. Group revenue grew 10.1% to a record R118.2 million, with much of that growth attributed to the company’s MediaWorx division, which increased its revenue by 35.9% to R57.7 million from R42.4 million in 2013.

MediaWorx – the FoneWorx division focused on information and entertainment services – maintained a steady gross profit margin of around 40%, resulting in a gross profit of R22.7 million, up 34.7% on the previous year’s R16.9 million. This, according to CEO Mark Smith, is no accident.

“That is the result of an intentional strategic direction we’re following,” he says. BizWorx, the division that houses FoneWorx’ Fax2Email and Email2Fax solutions, has continued to contract as a result of “a highly competitive market” and a “decline in consumer consumption and spending”, prompting the company to look more towards its consulting services to shape the sales of technology products, rather than trying to sell products for their own sake.

“I think where we’ve progressed very well is in migration away from a pure technology play and into the consulting arena,” Smith says. “We’ve moved the technology to the periphery of our discussions with clients. We now go through a consultative process with clients and identify their particular weaknesses before bringing the technology we have to offer into play, rather than trying to find places where we can make the technology work in an organisation.”

Asked whether the sort of growth displayed in the last financial year is sustainable, Smith is bullish. “We definitely believe it’s sustainable. We think the focus going forward is on the knowledge economy. We’re sitting with clients and moving them away from traditional mass marketing to one-to-one marketing. And, with PoPI (the Protection of Personal Information Act) having been passed, customers need to move rapidly to clean up databases, enter into dialogue with their customers, and provide platforms for customers to exchange data with organisations. We see huge potential in that space.”

Smith says the biggest challenge on that front is the “paradigm shift organisations must go through to understand this.”

Because FoneWorx’ model has traditionally been a B2B (business-to-business) one, Smith says the company “gets the collateral damage of our clients who deal with customers directly,” but adds that clients are beginning to understand that “when the market contracts and it’s more difficult to extract value from the consumer, they need to go back to the drawing board to make relationship with the customer more efficient”.

He says this is the core tenet that informs FoneWorx’ “Knowledge 350°” project. “Our clients need to have deep understanding of their customers to give them the value they’re looking for. They need to build demographic and psychographic profiles of their customers. We see this as a positive. Our clients need to understand their customers’ needs better, especially when the market contracts.”

The 2014 results were spared the knock of the legal costs incurred in 2013 as a result of the failed merger between Value+ Nettwork and FoneWorx that was spearheaded by former Primedia boss, William Kirsh. “Those were costs associated with drafting of shareholders agreements and the costs incurred when the deal fell apart. But it was a once-off cost. If you look at the 17-year history of the company we’ve incurred minimal legal costs, in part because we do much of that in house. I’m an attorney and we have an advocate on staff.”

FoneWorx also generated substantial net cash from investing activities of R8.7 million (79.3% up on the previous year) which Smith says is the result of the business being “very cash generative” and the fact that the funds that aren’t used to run the business are invested via Investec and FNB Money Market accounts.

The last financial year also saw FoneWorx buying equity in two businesses: a 44% stake in Livingfacts Proprietary Limited and a 35% stake in BMi Research Proprietary Limited. Smith says similar acquisitions or investments are likely to follow in the coming financial year, particularly in the fields of gamification – which he believes will be important for permission-based marketing – data mining and analytics, and SEO and social media platforms. “To these ends we’ve identified some potential acquisitive targets,” he says.

See FoneWorx’ full results here.

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