Questions about the Business Model
What are Datalab’s main services/products?
Our main product or solution is the PANTHEON business IT system, which enables small to midsize companies to completley monitor business processes. By tightly linking all business functions, PANTHEON makes it possible for companies to increase productivity, optimize business resources, and cut business costs.
Using the PANTHEON business IT system, as well as Datalab’s other programs, organizations gain solutions for improving business operations. With Datalab’s business solutions, organizations do business in accordance with the law and business standards and reduce business risks.
PANTHEON is available in a number of editions and can be closely adapted to the needs of users. Using Pantheon, companies can simplify a number of processes and tasks, from writing invoices and trips to planning manufacturing, calculating payroll, and analytical support for decision making.
Who are Datalab’s main customers?
Our solutions are meant for small and midsize companies in South East Europe. Our solutions are as of May 2011 used by over 23,000 users in over 7,500 companies. The current number of users is displayed in the user counter in the header of this web site.
What Is Datalab’s business strategy?
We develop business solutions that are open, adaptable, and powerful. We want our solutions to work in all IT environments and allow users to freely select technology based on their business strategies.
We are committed to constant improvement and innovation. We believe in the abilities and commitment of our employees and partners. We nurture a culture of teamwork that gives employees the chance to unleash and develop their potential by using the latest technology and knowledge.
We develop a modular business solution that can be easily expanded through the additional solutions created by our development partners. We guarantee our users advanced functionality, which makes it possible for them to adapt information support to their business operations and to effectively add new business services.
What is Datalab’s market share in its key markets and what is planned for the future?
The market for ERP systems in small and mid-size companies is incredibly fragmented. There are many small providers, with no single one having majority.
Our market share in the Slovene ERP system market was just below 9% in 2010. In the long run, we are aiming to at least a seven percent market share among all small and mid-size companies in our target markets.
Growth potential: How many companies are in Datalab’s target group?
Our target group are small and mid-size companies in Southeast and Eastern Europe. We are currently present in the following markets: Slovenia, Croatia, Serbia, Bosnia and Herzegovina, Macedonia, Montenegro, Bulgaria, Albania, and Kosovo. There are over 970,000 companies in those markets that fall into our target group.
We are aiming for a 7% market share in all those markets. We estimate that in that case, the ecosystem’s revenue will exceed €70m, and Datalab’s €23m.
Is it possible that, in the future, the company will be forced to lower the prices of its products? Is it possible that, in the near future, Datalab will lose market share to the competition?
Datalab’s main competitors in the key markets are:
- Microsoft (Dynamics NAV),
- SAP (All-in-one),
- small local vendors (around 220 in Slovenia and 2500 in the region).
We estimate that our prices are competitive, as we currently do not feel pressure from users or the competition. Therefore, when selling our solutions we practically do not grant any kind of discounts. Instead, we provide flexible payment options (payment plans for license purchases, hosting, software as a service).
We believe that our quality services and flexibility towards customers’ needs will allow us steady market share growth in the future, be it with the same or higher prices of our products.
Sales channel: What share of revenue is intended for the sales channel in the future?
The sales channel’s share of revenue will roughly stay the same. Datalab’s business model is based on the rapid growth of the number of users and consequent rapid growth of revenue. Here, the quality of our sales channel is crucial. This is why we wish to maintain a very healthy relationship with partners who sell our solutions.
Is repositioning of sales within the company planned when the company reaches a certain size?
We constantly monitor the entire business process and look for possible improvements. There are several possible scenarios, depending on how our plan targets are getting fulfilled. We actively seek out new sales leads and close deals in the segment of micro businesses and newly founded businesses.
What will the funds from the capital increase in 2010 (any any subsequent ones) be used for?
Funds from the capital increase will be used to accelerate the development of our services, marketing, sales, and M&A activities. Furthermore, funds will be used for achieving strategic goals in existing and new markets.
Has getting listed on the Ljubljana Stock Exchange increased costs?
Like with other projects, one of the key goals in getting listed was rational use of our resources. We have outsourced some activities that come with being a publicly listed company (investor relations and some others) in order to conserve internal resources.
Due to regulatory requirements, auditing expenses are higher as we have to prepare consolidated financial reports that include all subsidiaries. There are also some administrative fees for listed companies. Being listed costs around €50,000 per year.
The costs of interal operation have not gone significantly up due to the listing, as we have been preparing detailed financial reports before.
How fast can Datalab increase the number of users and the related revenue?
For some time now, we’ve been noticing great demand for our products in the market, and that the existing sales network can barely meet it. This is not a matter of selling solutions in the narrow sense of the word: our program solutions need to be adapted to each individual company and users must be trained to use them.
Therefore, we estimate that the implementation of our solutions with new users is the bottleneck for the faster growth of future sales. This bottleneck can be widened by improving our solutions in such a way that the need for program maintenance, user training, etc., would be decreased. Furthermore, we are constantly expanding the sales network, thus increasing the capacity for the sale of our solutions.
Can Datalab offer additional services to existing users? What is the impact of such services on revenue?
We continuously try to offer our users new solutions in fields that are beyond our main activity. This way, we wish to harness the potential of internal knowledge. But those new solutions are not meant to be direct competition to our sales partners, therefore we are not developing solution that already our partners offer (CRM solutions, online shops, etc.).
We are aiming primarily at services related to our software. The most successful of such services is the Datalab Academy, our training department, started in 2007. Several other services are planned.
How many users/companies do you need to gain in a new market in order to cover the costs of entering that market?
We need about 600 companies in a new market, or about 2,000 users. We decide to enter a new market if we notice a real possibility for achieving these numbers in two years time. Of course, the particularities of individual markets demand more or less adaptation of our solutions, which affects the actual figures of a successful entry.
How much went into the development of PANTHEON? How long is the release cycle?
Around €7 million went into PANTHEON development. Most of it are salaries of our developers, who are the key to our success. Another €2 million are planned to go into development in the following year.
In the weeks and months around significant changes in legislation or accounting standards, we release major versions monthly, otherwise quarterly. Around 150 various improvements are made per month.
New generations of the program are planned roughly every four years and major between-generations releases halfway through that cycle. The development of a new generation costs us an estimated €3 million. This will most likely increase with time as we cover an increasing number of markets, each with its specific demands which takes time to implement.
Pricing power: how much are customers willing to pay for PANTHEON? How much of it goes to the sales network?
Our experience in various markets shows that customers are willing to pay for our solution roughly the equivalent of a secretary’s gross salary. Of course there are differences between individual organizations, depending on their size and requirements. Our prices are not the same in all markets; they are higher in developed markets and lower in less developed ones.
Sales partners get discounts that vary according to their sales or partner status. With licenses, the partner discount can be up to 40%, while with upgrade contracts and RLGS up to 35%.
Questions about Operating Results
Why are receivables a relatively large part of assets?
Most of our sales are made towards the end of each year, the last two months, when we make one-third of a year’s revenue. Datalab has relatively few assets (we own no real estate or buildings, for example), but high revenue. That is why other categories (including receivables) represent a higher percentage in assets than in other companies.
Why is the operating margin relatively low (below 10%) when compared to similar companies?
Datalab is growing and expanding, expenses are therefore high. The IT industry demands rapid development of new services which drives the cost of development up. The operating margin depends on the sales volume, as developing a solution for one user costs the same as developing it for a million users.
In the current phase, our goal is to gain as many users as possible and expand to new markets. The next phase will be consolidating our presence in those markets while still aiming at new markets. User number growth and profitability will be very important. Datalab’s business model is building on economies of scale which, when achieved, will result in a higher operating margin.
What is your relationship wtih subsidiaries?
We cooperate closely with our subsidiaries, especially in sales. We are monitoring their results through standardized monthly reports.
Large long-term financial investment is Datalab’s assets show how important subisiaries are for future growth. A notable exception is the company E-POS Rešitve which was sold off as it was not in Datalab’s main industry.
In search of the best possible business options, we are taking advantage of Slovenia’s financial market, which is more favorable compared to other SE Europe countries. This way, we were able to get better loans for our subsidiaries than they would have gotten in their respective countries.
Why has operating revenue in 2006 dropped?
Datalab’s operating revenue in 2006 decreased because of Slovenia’s adoption of the euro. Businesses were reluctant to switch their business software, which they were busy adapting. After the euro was adopted the situation got back to normal and Datalab is again achieving the planned growth goals.
Why did Datalab not go through with its IPO in 2007?
The IPO was planned after the launch of PANTHEON 5.5. Delays in development caused lower sales figures than expected. That is why we have decided to postpone the IPO until 2008 and stick with the original plan of doing it at the same time as releasing PANTHEON 5.5.
The 2006 Annual Report says that the value of all PANTHEON-related activities was €3.48M, but revenue in the same year was €1.79M?
Apart from license revenue, this figure includes revenue of our partners that they earn from implementing PANTHEON; those are of course not Datalab’s revenue.
What are the benefits of Datalab’s partnership with Oracle?
The partnership with Oracle is of strategic importance to Datalab. It helps us improve our services for our users, as they are able to get an Oracle database solution licensed together with PANTHEON at a very competitive price.
The partnership also benefits Datalab in finding new partners in existing and new markets, which in turn brings in new users.
Lastly, being an Oracle partner improves the Datalab brand.
What can you tell us about the 2007 capital increase?
The 2007 capital increase increased the employees’ share in company ownership. This was done because we wanted to further motivate our employees and strenghten their loyalty.
Shares were valued in accordance with best practices when selling them to employees; the price was lower than the estimated value they had reached when they were publicly traded.
In the 2007 Annual Report a rise in debt can be noted. Why have you increased your debt?
Some debt goes to loans which fund our growth, especially subsidiaries in new markets. Much went into the development of the next generation of PANTHEON.
Furthermore, we changed how license leases are financed. Previously, our own funds were used for that; as interest in license lease grew, we began financing it with bank loans.
Why are there no consolidated financial statements for 2007?
Three factors influence whether we prepare consolidated statements: information value of consolidated statements to target audiences; the cost of making them and having them audited; and legal requirements.
Datalab’s minority stake in its subsidiaries and their low revenue had a negligible effect on Datalab’s results and statements. The cost of preparing consolidated statements outweighed their information value and we were not required by law to prepare them, that is why there are none for 2007.
What are the benefits of becoming publicly traded?
Growth entails new challenges that we must tackle with new approaches. Becoming a publicly traded company is one of the vehicles of our ambitious drive towards sucess.
The driving force of our growth so far has been our ambitious and motivated employees, who got the company from its humble beginnings to a leading position in SE Europe.
As employees own relatively many shares, we have to let shareholders know how much those shares are actually worth. Two things come of this: first, shareholder employees are better motivated and more loyal, and new hires get an incentive; second, the value of publicly traded shares is always known, which makes M&A’s easier, as funding can be obtained by issuing new shares.
In the long term, being a publicly traded company will raise brand awareness and improve financial stability .
What about the company’s corporate governance? Have small shareholders any influence on decisions?
The governing bodies of the company are the management board and the shareholder assembly. Even though Datalab is a relatively small company, it follows most of the generally accepted guidelines of corporate governance.
Regular independent audits ensure that our financial reports are accurate, which we have been preparing since 2005 and are getting better every year: we have been entering our annual reports in a national competition for best annual report for several years; the 2007 annual report was ranked fifth best among SMBs, and the 2009 annual report won.
Regular reporting is established: the parent company and all subsidiaries hand in profit/loss and financial statements on the 20th of each month.
Besides the main objective of generating value for shareholders, another key objective is transparency, so that our shareholders and potential investors are informed about the company. That is why we have adopted a code for handling internal information which is binding for employees who deal with information that could have an effect on the share price.
What do you consider an ideal ownership structure for Datalab?
Every investor is welcome as we believe that Datalab’s growth is interesting for many. Most welcome are investors who know the company, the industry and are aware of the real growth potential.
We strive towards an ownership structure with shareholders that believe in the company and are ready to support its long-term growth on one hand, and investors that trade with Datalab’s shares at the stock market on the other, the latter for achieving better share liquidity.
We believe that the ideal ownership structure would be similar to this:
- 30% owners/founders,
- 30% financial investors,
- 40% partners and users.
Own shares have been purchased from the largest owner at €310. Comments?
This trade was conducted in 2005. Then, in 2007, a 1:11 split followed. The share price displayed the highest growth after 2005 and we believe that the price was real. As a side note, the shares were purchased by employees.
Why do you maintain a trust of own shares? How do you add to it? How do you inform the public about transactions?
Own shares are used for two purposes.
- For employee/management stock options in the parent company, also planned for subsidiaries. Note that Datalab is the only Slovenian company with the Ministry of Economy’s permit to share profit with employees through stock options. This is advantageous for owners, employees and the management, plus it’s favorably taxed.
- For market consolidation. M&A activities with competitors in the region are funded mostly through our shares, which is again advantageous for Datalab and the M&A partner.
Own shares are acquired only through trading, either on the stock market or over-the-counter. The rules for trading have been defined on the 10th shareholder assembly on 28 February 2011.
Information about conducted transactions is published on this website, among the public announcements in the Investors section, specifically as a decision of the management board about buying start (listing the number of shares and reference price) and an announcement at buying end, where the number of purchased shares and their average price are stated.
What is Datalab’s dividend policy?
The dividend policy has remained unchanged for several years. We abide by the principle that 30% of the profit goes to those who “produced” it (employee and management options), 30% to those who made it possible (as dividends to owners), and 40% are reinvested into software development. Recent years have been development-heavy, which is why the shareholder assembly repeatedly voted that no dividends to owner are paid out, but are instead reinvested into software development. Dividends to owners will most likely be paid out again in 2012.