NZ tech company Datacom is much bigger than Xero, but keeps a low profile

Wednesday, 4 December 2019

Vernon Kay, Datacom's managing director in New Zealand, says the company is increasingly global in its outlook, but 'doesn't see an end to growth' in its home market.

With more than 6500 employees, annual revenue of $1.29 billion, and a roll call of global partners including Microsoft and Google, Datacom might be the most under-the-radar company in the southern hemisphere.

Datacom is New Zealand's biggest tech company, dwarfing the likes of Xero, Gallagher Group, and Fisher & Paykel Appliances, according to the latest edition of the technology industry bible the TIN (Technology Investor Network) Report.

While it might sound more like a generic evil corporation from The Terminator than a prized national asset, Datacom has rapidly grown to become one of our most important companies. It employs more than 3000 people in New Zealand alone. The Christchurch-founded company, which traces its roots back to 1965, operates in more than 50 countries, with offices in North America, Europe, and South-East Asia.

Datacom is the biggest Kiwi company you've never heard of. But what does it do? How does it make money? And will this national champion stay put in New Zealand, or head to foreign shores as it becomes a big fish in a small pond?

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Datacom designs and handles IT systems for corporate and public sector clients, and also offers a consulting service. It helps customers improve their platforms, and transforms outdated IT functions to more modern, cloud-based systems. It is best known in the tech sector for providing payroll services and financial sector IT systems. All that led to a post-tax profit of $42 million in the year to March.

The business works closely with technology giants including Microsoft, delivering the latest platforms and software. It also runs data centres (huge secure storage facilities for digital information), outsourced contact centre services, and has a growing cybersecurity division.

Datacom has developed some systems you might have already used, including ASB's online banking platform. It also counts Fonterra, Fletcher Building, and Zespri as big clients. In the public sector, Datacom minds the IT systems of the Ministry of Business, Innovation, and Employment (MBIE) and The Ministry of Social Development. New Zealand makes up 56 per cent of its revenue, with Australia the next biggest market.

Greg Shanahan, managing director of TIN, which analyses New Zealand's tech sector, says Datacom is a 'low margin' business but operates with a lean organisational structure to keep down costs.

'They run on a cost-effective basis. The first time I heard about Datacom, they were based on the third floor of a building where the lift wasn't working,' Shanahan says. 'In typical Kiwi fashion, it's a very egalitarian company, and there's not too much of a hierarchy.'

Shanahan said Datacom had excelled in its market by taking a long-term approach to customer relationships, 'spending money on things like data centres, and providing a point of difference for large corporate customers'.

Datacom is majority-owned by the Holdsworth family, whose figurehead, John, was instrumental in transforming the company in the 1990s. John, once described by NBR as 'perhaps the most private rich lister', stepped down in 2012. The Holdsworths' investment company, Evander Management, owns a 53.98 per cent stake in the company, and John's son, Simon, is deputy chairman.

While investors are unable to snap up the company's shares on the NZX, most New Zealanders have an indirect stake in the business. The NZ Super Fund bought out New Zealand Post's stake in 2012.

Vernon Kay, Datacom's managing director in New Zealand, says the company is increasingly global in its outlook, but 'doesn't see an end to growth' in its home market. 'We're proudly a New Zealand-owned company, it's a big piece of who we are,' says Kay. 'But if you look where we are now, we have $1.3b in revenue and deliver in 50 countries around the world. We're still from little old New Zealand, but we have a global footprint.'

The business recently won its first major contracts in the United States, an area where it hopes to expand and take on established US players like IBM. It is also growing in Asia, partnering with Microsoft to sell services in the Malaysian market. As it grows its overseas footprint, would the business consider floating on the stock market, or leaving New Zealand to go offshore? Not according to Kay, who says a private structure is a perfect fit for the business.

'We benefit from the ability to think long-term with our current ownership structure,' Kay adds. 'And that's one of the main reasons for our success. I don't imagine there will be any change in that.'

Datacom's growth comes as experts predict the technology sector will overtake dairy as New Zealand's biggest export industry. Shanahan believes tech will surpass export revenues of $10b next year, bringing the sector close to the tourism industry in 2020. He believes it will surpass dairy in the 'next five years'.

Kay welcomes the prospect of tech becoming New Zealand's biggest export sector.

News that Xero has made a profit gave its share price a boost.

'We could have a better narrative if New Zealand was more around technology than tourism or dairy-led exports, and that narrative could help support communities and people,' Kay says.

'With our access to green power, the technology sector is a much more sustainable industry in the long-term.'

Kay hopes domestic tech companies will receive better access to capital: 'Obviously, with the likes of Xero, the right elements are there,' he adds. 'But I often think there's not enough support for entrepreneurs, and we could do more in that space.'

The tech industry hopes Datacom will remain a New Zealand's success story for a long time to come.

Shanahan adds: 'It's quite remarkable in the sense you've got a large technology business that's focused on long-term growth. The existing shareholders are probably doing well making money out of the company, and they won't be driven by the demand for an exit. They're building for the long-term, and that's an exciting thing for New Zealand.'

As it plays an increasingly important role in the New Zealand economy, Datacom might not stay under the radar for much longer.