Rob Clarke

Rob Clarke is the chairman of digital services minnow Hyro, which has just emerged from a hellish three years that saw the business hit by the collapse of Lehman Brothers, some poor acquisitions and the GFC.

After cleaning the business up, Clarke has raised $3.4 million to pay off tax debts and is confident the business is ready to perform. Today he talks to us about rebuilding a wreck of a company and moving from survival mode to growth mode.

Can I start by asking you to give us a feel for what Hyro does.

That’s probably why I described myself somewhere recently as being a bit of a hybrid between media and technology, because a lot of people don’t know where to place us. I think that’s probably because of the breadth of our offering.

There are four key strands to the business. There is the strategic component but focused on the digital channel, so helping enterprises and government departments generate insights about where digital business is going, and how they can interact using the digital channel to their advantage.

There’s an experience component, how can we help create, design and generate a good positive customer experience using all the variety of digital channels that are available, from the handheld PDAs to iPads to computers.

Then there’s the technology component which is really building the services. You know the digital channel is really by its definition technical and Hyro has significant depth in experience and expertise in the different technology platforms whether it be writing Java code or .NET code.

And then there is what we call operations. So once you establish an online presence then it has to be functional 24 hours a day through managing it, maintaining it and adapting it to move with how people are interacting with you.

It’s difficult to pigeonhole Hyro in a way because there are very few companies really that have those four components all under the one roof. You’ve got advertising agencies playing in a particular place, you’ve got software developers playing in a technology space but you don’t really have those that cut horizontally to deliver across all those four.

Right, so it’s a comprehensive offering. But what went wrong? It sounds like an offering that a lot companies need right now, but you’ve had some big problems in the last few years.

I joined the board in 2007 and the previous board and management were probably consistent with a group of other companies at the time in the digital industry that were driving for rapid growth, so they were out essentially acquiring revenue and building scale as rapidly as possible.

Hyro was one of those and it went beyond the Australian borders and went to China, went to New Zealand and purchased companies essentially to buy revenue. What it didn’t do well was properly investigate those companies through due diligence and didn’t integrate the companies as well as it could have.

Therefore in 2007, the financial forecast that we had put into the market was significantly under delivered. If I can remember we had released financial figures to the market of $86 million in revenue and an $11 million profit. As it turns out we posted a loss of $45 million and it was a disaster.

And you joined the board after this point?

No, I joined the board about six months before that result and I was handed the chairmanship about five months before that result. Then I had to deal with the ramifications of that result.

How do you deal with those ramifications, what were the steps?

Firstly, I had to pick myself up off the floor when the CEO rang me to say we need to meet because we’re not going to hit our numbers – little did I know that we were not within a bull’s roar in getting anywhere near them.

It became very clear that we needed to make change, so the CEO departed and I brought on Bill Votsaris. Bill is still the current CEO. I went through a process of renewing the board and Bill then of course went through from a management point of view and pulled the business apart.

Now, the other components I suppose that we had in the business at that time is we had a $21 million convertible note with Lehman Brothers and we had built up a what turned out to be a $12 million tax debt at that time.

We had huge debt, we had very scratchy revenue and no profit, so we were facing oblivion and then the GFC hit in the middle of all of this.

Perfect timing.

Because of a fixed and floating charge courtesy of the Lehman convertible note we couldn’t raise any additional capital through conventional channels, such as bank debt or whatever. We had a balance sheet that was a disaster and we had these outstanding liabilities.

Yes, there was interest in the category but the GFC came along and of course everybody cut their budgets, particularly investment budgets into digital and other sort of exploratory areas.

So the big opportunities dried up, companies that might have been interested in Hyro looked at our balance sheet and said we don’t want to take the risk. We were living hand to mouth.

Did you end up in administration?

No. And we didn’t end up in that period of time going to the market trying to raise capital either.

So how do you pull off a treading-water-while-paddling-for-the-shore sort of strategy?

Let’s just say there were a lot of sleepless nights over that period of time. Bill is a very accomplished CEO and an extremely talented businessman. He and I committed to each other that no longer were we going to go out and use smoke and mirrors if you like to ride the interest in the space. We were going to stop talking, get the fundamentals of the business back in shape and let the business do the talking. And it’s taken us three years. Hyro has not been out in the marketplace saying anything for three years and that was a deliberate strategy to rebuild the business.

What did that rebuilding involve?

Well the first part was obviously a clean out of management.

Obviously when Lehman Brothers went under it gave us a perfect opportunity to try and extricate ourselves from that convertible note which had then become $24 million because we hadn’t paid any interest on the $21 million. We were – and this is confirmed by the Lehman administrators – the first company worldwide to do a deal with the Lehman Brothers administrators and Bill was able to negotiate the $24 million for a payment of $1.2 million in cash and 17% of the business in equity which equated to $3 million at the time. So for about $3.5 million we were able to relieve the balance sheet of $24 million in debt.

So that was the first step, the second step was to identify the underperforming business units in the group. We closed two offices in China, we closed New Zealand, we scaled Australian operations to be back to the core offering. So it was a pretty radical cost reduction.

Am I right in saying a couple of subsidiaries ended up in administration?

Last year we put three subsidiaries into administration and that enabled us to negotiate through deed of company arrangements with the ATO to relieve our balance sheet of $12 million in ATO debt for a payment of $1.2 million, coupled with a payment from Hyro Australia, which owed the Tax Office $2.2 million. That $3.4 million is exactly what we’re doing the capital raising for right now which closed yesterday.

That will then leave the company for the first time ever with positive net assets on the balance sheet to the tune of about half a million dollars, no legacy debt. Last year’s revenue is $26 million and an EBITDA of $5.2 million.

So you’ll be back to having a relatively clean business. Was the task of raising that money difficult, given what’s been a tale of woe?

Well I can tell you we closed oversubscribed. It’s been an interesting journey in that sense. We have had fantastic support of key shareholders, Macquarie Bank being the largest institutional shareholder, and there are a number of significant private individuals who have stuck through us through the journey. They have not only stuck with us, but they have wanted to get more of the action through this rights issue. There is significant interest in this industry, in the digital channel. I mean you’ve only got to see Gerry Harvey and Bernie Brooks of Myer coming out and saying what they said, it just shows where a lot of the action is now and it is in digital.

I guess you’ve in some ways relieved one lot of pressure, but is there now a bit of pressure to show what this business can do?

That’s great pressure to have. I wish that was the only pressure that I had. Yes look, there is performance pressure but that’s great. In the past it’s been survival pressure and that’s a different sort of pressure and I must say the board and the management are very relieved to be in this position. I think our big customers are relieved to see that Hyro has made it through and survived because it really is a phoenix rising from the ashes story and now the business can truly sing. Yes, it needs to be able to demonstrate a strategy. It needs to demonstrate a growth path and that’s what we’re working very hard on doing.

I think you’ve got over 200 staff, am I right in saying that?

We have 100 staff in Thailand and we have about 150 in Australia.

Obviously they’ve stuck with you too. Is management going to have to do much work in changing their mindset from survival to performance?

I don’t think so, I think management has done a very good job in isolating the staff from a lot of the pressures that the board and Bill have been dealing with. They have been focused on doing their job and doing it well and I think that’s probably helped us to withstand the perils of what we’ve been through and actually come through with a committed staff focused on performance.

I mean, I’m sure there’d be a sense of relief that the company’s still here when you know a number of competitors along the way have gone. BlueFreeway has gone, look at how many companies in the Photon Group have gone. So there have been many bigger companies and bigger names than us that haven’t survived and I think therefore there’s a bit of a sense of the minnow coming good.

What sectors loom as the big opportunities given that you’ve got such a broad offering?

Well, the financial services sector is an obvious one. We have invested significantly in a product called idaptive that is our security and access management product. With the whole shift towards cloud based computing, access management and identity security is vital and in our product idaptive we have something that we believe is quite unique and is very, very competitive against the offerings of IBM, Oracle, Computer Associates. So financial services, insurance and a range of government departments, anybody that has digital channels open to multiple people, needs some sort of security and access management software to manage all of that.

For you personally Rob, the trials and tribulations you’ve been through are enough to have anybody heading for the exit door. What made you stick with the company?

I love a challenge. I was in the advertising industry for 20 years and then in the professional rugby management for five years, both very competitive environments and I thrive on that challenge. But I suppose that key thing caused me to stick at Hyro when it was all looking very, very grim was that Bill Votsaris and I looked at each other one day and said to each other that neither of us are used to failure and we’re going to give this everything we’ve got to try. It came down to that and that’s no bullshit.

Now everything’s cleaned up, is there any danger you’ll get a takeover offer pretty shortly given how hot this space is at the minute?

Look I think that’s probably a danger our shareholders would love to confront. That said, we have a firm belief in the value of this business and it’s not based on our market cap today, it will be based on where we see it in the future. So anybody that wants to come and knock on our door needs to be serious.