Collateral Benefit, Business Plus - October 2008
The credit crunch may be bad for banks but it's good news for software firm Rockall Technologies, writes Brian Skelly.
Luke Nestor should be feeling like a condemned man. The company he heads, Rockall Technologies, sells software into the global banking sector, which is in the throes of an unprecedented financial crisis. However Rockall is in expansion mode, taking on new staff and planning to double revenues this year. How has he managed it? The short answer is that Rockall is one of a growing band of software firms that is focused on the one area on which banks are spending money - risk-management software. But the Rockall story is long and complicated and its success is perhaps a lesson to startups about the importance of being resilient, flexible and above all willing to grasp opportunity when it comes you way.
Rockall started out as an IT services company in the early 1990s. Back then, it was a self-funded partnership known as Nestor Software, run by Luke Nestor and his brother, John, who has since left the business. The company developed PC-based business applications for Bank of Ireland, EBS and National Irish Bank. By the late 1990s, Nestor Software was enjoying considerable success, not only developing banking applications but moving into web systems and securing several clients in the US.
The fund the company's growth into the US, the brothers raised approximately €1m in Business Expansion Scheme funding in 2000 and became a limited company, the new name, Rockall Technologies, reflecting the transatlantic ambitions of the new company. The company seemed to be on a roll. "Then suddenly the dot com collapse happened and a couple of our big US clients went bust." muses Luke Nestor, a UCD computer science grad and self-confessed workaholic, sitting in the company's Cornelscourt offices.
The dot com crash and the resultant drop in IT spending hit the business hard and scuppered Rockall's growth plans. Plan A having failed, Nestor scouted around for an alternative strategy. Gradually it dawned on him that perhaps products rather than services were the way to go. Then years ago, National Irish Bank asked Nestor Software to develop a software tool that could run its collateral management function. The product went into service not only in NIB but in other National Australia Group=owned subsidiaries in Ireland and the UK as well. Yet at that time, the product was viewed as a mere sideshow to the main services business.
Says Nestor: "Even though we were doing all this business, we didn't say, 'Let's market it as a product' because our services business was going well."
But when services revenue took a hit, Nestor, 46, looked anew at the product opportunity. It would require a fair bit of work before it could be sold to a wider market so the company spent the next three years refining it in partnership with its Irish customers. The result was Securities/Collateral Activity Management (SAM), which is not Rockall's flagship collateral management product.
When the Irish economy was booming, collateral management was not a priority for the banks. They would secure loans against property, shares, cars and other assets but times were so good that bad debts were far outweighed by the profits flowing into their coffers. At the same time, they were keen to centralise collateral management and were happy to work with Rockall to achieve this.
Then, towards the end of 2004, Nestor got the sort of call that company bosses dream about. At the other end of the line was Wachovia Corporation, a top five US bank. "They said they'd seen a product on our website that interested them," said Nestor. "It turned out their focus was on loans to wealthy clients that were secured predominantly by marketable securities and they needed a system that would do the ongoing tracking of collateral."
The deal was ultimately worth $1.4m to Rockall, but Wachovia got its money's worth too, Nestor pointed out. "Since we've done business with then, their business has increased from $3 billion loan-book to a $30 billion loan-book because they have absolutely certainty of the collateral they hold."
Buoyed by the Wachovia deal, Rockall opened a US sales office in Jacksonville, Florida, and it wasn't long before a second big client was hooked. This was the Federal Home Loan Bank, a small chain of 12 banks across the US that specialises in lending to the other banks. Rockall first sold SAM to the FHLB in Boston, followed by the Pittsburgh and New York sites and expects to ink deals with three further FHLB locations - Atlanta, chicago and Topeka (Kansas) - in the coming months. Each deal done so far has been worth between $800,000 and $1.2m but, just as importantly, the margins being made are very healthy.
Nestor expained: "When you win a deal there are two aspects - delivering the products and integrating it with the client's internal systems. If you have to do a lot of integration work, that's a services job and you rarely make significant money on services. So in ideal world, if you win a contract worth €1m, you want €700,000 to be product and €300,000 services. We have recurring revenue from each sale because we sell on a license basis and charge an annual maintenance fee of 20%."
The new contracts are starting to feed through to the company's P&L. In its last financial year, ending 30 April 2008, Rockall made a profit of €300,000 on turnover of €2.1m, according to Nestor. He expects sales to double to €4m in the current financial year and to continue growing rapidly. "Rockall will be a €10m turnover company within two to three years," he confidently predicted.
Such growth levels are all the more remarkable given what's happening in the wider financial market. Did he not feel nervous operating in such a volatile and unforgiving sector? Nestor shakes his head. "This niche we're in is the place to be. Within the next 24 months, we can see significant earnings, significant growth and significant profit levels," he said.
Rockall's ambitions don't end there. Its next step is to develop an 'enterprise' collateral management system that can work in any banking function that has a collateral management need, be it capital markets, commercial lending, home loans, private banking, or business to business. The advantage of such a system, which is expected to be ready to go by the end of the year, is that Rockall will be able to go to any bank and offer a single solution that meets all their collateral management needs.
Nestor feels there is real momentum behind the company now. "I always felt that when times were good it was going to be much harder to sell a product like SAM. Now I believe that a lot more focus is going to be on the collateral that organisations hold. And there's been a big change in banks' spending habits - 18 months ago it was all about replacing core IT systems, now it's all about risk and compliance solutions."
Rockall employs up to 30 people - depending on how many contractors it is using at any given time - and Nestor expects the numbers to grow further. As it grows, the company will inevitably come under the gaze of potential suitors and a trade sale will become a very real possibility. this would, as Nestor acknowledged, provide a welcome exit for the dozen or so BES investors who own 20% of the firm (Nestor owns 40%, while chairman Terence Buckley and chief technical officer Dan Kelly each own 20%). But the other option - to continue growing as a standalone company, has not been ruled out either, he said.
"Our intention is to grow significantly and then get to a point where we make a call about whether we continue to grow or find a suitor. And I wouldn't be leaning either way at the moment. I'll wait until we get to the point where we feel we're in a good position to take either route. I think a lot of successes come from somebody seeing an opportunity. Sometimes people see opportunities but don't drive them through."
What Rockall Technologies Does
Rockall Technologies develops collateral management software. Its software currently manages well over a trillion dollars worth of collateral on behalf of Rockall's client base. Collateral management is the taking, processing and management of loan collateral such as property, car, shares and life policies.
The concept is straightforward concept but in the banking world it is a highly specialised and complex function. Not only can a loan involve dozens of items of collateral, each of which has to be tracked and managed, but the bank's borrower can be a hierarchical organisation, comprising a holding company plus several subsidiaries and offshoots with all sorts of relationships between them.
In the business banking sector, there is the added complication that the client can be a business owner as well as mortgage customer, and is looking to use his personal property as security for both his own mortgage and a business loan.
According to the company founder Luke Nestor: "What our system does is allow the bank to monitor the putting in place of that collateral and then track the value of that collateral to the loan that's held. With liquid collateral such as stocks and shares, the lender wants to be able to closely track the collateral value to make sure the loan-to-value ratio is being maintained."
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