Innovation

Making Waves

How strategic acquisitions and an innovative product market helped a PROFIT 500 all-star inch closer to its goal: $500 million in sales

Written by ProfitGuide
#1 Rentcash Inc.

Edmonton, AB
Short-term loans and rent-to-own furniture
Revenue 2001: $456,121
Revenue 2006: 154,168,953
President & CEO: Gordon Reykdal

FIVE-YEAR GROWTH:

Right on the money

A smart acquisition, coupled with an innovative approach to retailing, helped payday-loan company Rentcash become Canada’s Fastest-Growing Company. But the firm is about to face some major hurdles.

By Raizel Robin

Neither a borrower nor a lender be—unless you’re Gordon Reykdal, who has forged a career out of it. Undoubtedly Canada’s king of rent-to-own, Reykdal built and lost a furniture-rental business twice before finally starting his current firm, Edmonton-based Rentcash Inc. (TSX: RCS), a short-term loan and furniture-rental company with retail outlets across the country. But Reykdal’s failures may be his best assets. “My best experiences have come from my failures,” says Reykdal. “Building one company, losing it and starting all over again, you learn a lot and you don’t make the same mistakes twice. Then, building a third company, you make things happen much faster, as you know where the finish line is before you start.”

Enter the PROFIT 500 ranking of Canada’s Fastest-Growing Companies now!

Reykdal does like to move at a brisk pace. Since he started Rentcash in 2000, it has grown to 423 stores, making it a major player along with Money Mart and CashMoney. Rentcash doles out about a quarter of Canada’s so-called “payday” loans under the brand names The Cash Store and Instaloans. Rentcash’s rental division, Insta-rent, which rents brand-name furniture, appliances and electronics, opened eight new stores in 2006, for a total of 92. Rentcash’s revenue exploded from $456,121 in 2001 to $154 million in 2006, giving it top spot on the 2007 PROFIT 100 ranking of Canada’s Fastest-Growing Companies.

Responsible for this top-line growth is an aggressive acquisition strategy and an innovative approach to retailing and customer service, allowing Rentcash to charge higher prices. But although the company’s growth has been fast, it hasn’t always been easy. Along the way, Reykdal has faced criticism from consumer groups, the media and investors. And some of the biggest bumps may still lie ahead.

Reykdal started his first company, Rentown, as a TV- rental business during the 1980s, and grew it into a chain of 50 furniture rental stores with annual revenue of $30 million. But in 1991, he lost it to bankruptcy when a major financier suddenly called all outstanding loans—worth $29 million—and Reykdal couldn’t round up the cash. “I felt like a big failure to my employees and my family,” Reykdal told a reporter in 1997. The financier, Transamerica Corp., bought the company for $20 million.

After “moping around” for a while, Reykdal made a list of things he thought he could have done better. At the top was the fact that the firm had been financed through demand loans, which allowed the lender to demand repayment at any time. Reykdal vowed to buy Rentown back, which he eventually did in 1994. With the help of private investors, he paid $10.8 million and called it RTO Enterprises. In 1998, RTO ranked No. 2 on the PROFIT 100.

But in 2000, with RTO bleeding money, Reykdal left the firm over a difference of opinion with management, he says. He began research into payday loans: small, short-term loans to customers who, for the most part, have exhausted more traditional means of credit such as banks, credit cards or friends and family. “We determined that there was a huge void in the marketplace, that it was being underserved, at least compared to what was happening in the U.S.” Canadians now spend 2% more than what they earn—a big change from 25 years ago, when they saved about a third of their earnings—and nearly two million of them take out payday loans every year. Industry-wide, the average loan is $280 and has a term of 10 days.

Of course, Reykdal wasn’t the only entrepreneur chasing this growing market—there are an estimated 1,350 payday loan outlets in Canada, up from a relative handful in the mid-1990s. To stand out from the crowd, Reykdal brought radical innovation to the retail environment. Stores such as Money Mart put employees behind bulletproof glass; Reykdal wanted Rentcash to have, as he calls it, “a financial institution-like atmosphere.” If you walk into a Cash Store location today, you won’t see any bulletproof glass. Rather, you’ll see an open-concept office, a smiling receptionist, helpful representatives and hot coffee. Acknowledging the security risks that accompanied this decision, Reykdal did away with cash in favour of private-label debit cards that are credited with the loan and can be used at any bank machine. “More than anything, this is a relationship business,” says Reykdal. “Your success is determined by how well you do at the retail level.”

Reykdal extends that philosophy to his own employees. Since he started Rentcash in 2000, he has tried to make time every year for a cross-country tour in which he meets with every store manager. This year, the meetings took place in 22 cities over six weeks, with Reykdal spending nine-hour days with groups of 20 managers. The goal is always to keep in contact with managers in order to renew their enthusiasm and encourage them to think about new ways to connect with and satisfy clients. At every meeting, Reykdal solicits ideas from his staff. “Then we investigate; if there’s a good idea, we act upon it.” Past bright ideas include axing pages from a client intake form. Customers are happier with less paperwork, and Rentcash saves $30,000 a month.

Another key to success, says Reykdal, is to trust the people you hire. “You simply can’t get bogged down by micro-managing your people. People appreciate that trust and they will work harder because of it. Your potential for success is higher if you trust your people.”

But relationships and ambience alone don’t account for the company’s explosive growth. Rentcash took a quantum leap with the April 2005 acquisition of Instaloans, a 99-store Canadian chain. Ever averse to debt since the Rentown days, Reykdal financed the $39.5-million acquisition with the proceeds from a $34.8-million private placement. Instaloans was a perfect fit for Reykdal’s expansionist goals. “My objective has been to move quickly, grow rapidly, secure excellent store sites, establish a solid footprint and start building our customer base,” he says.

It was blue skies for Rentcash, which had watched its share price jump from trading around a dollar to $29.25. Then came a big surprise for all parties involved.

The short-term loan industry is highly controversial. Until recently, companies that offer payday loans have been unregulated; they simply need to respect the federal limit on interest rates, which is 60%. However, because payday- lending companies attach additional fees to each loan, the actual cost to customers can exceed 60%. This has drawn the ire of consumer advocates, and there are currently 10 class-action lawsuits across Canada against various payday-loan companies, including Rentcash.

As it happens, Rentcash’s loans are even more expensive than others in the market, but Reykdal defends his prices: “Customer service is obviously a big factor. It is important also to recognize that payday loans cost what they cost, and all lenders will build necessary revenue into different aspects of their product to account for these costs. We don’t do it. Our customers recognize this and are willing to pay our rates because they know exactly what they will get for that charge.”

Part of the problem with payday-loan clients is that, well, they’re strapped for cash. So, when it’s time to pay back the loan, many clients roll it over—meaning they simply refresh their outstanding loan by paying a fee, instead of paying in full—a practice critics say can lead to an inescapable cycle of debt. Not so great for the customer—and as it turned out, for business, either. In 2005, Rentcash stopped allowing rollovers. “What’s good for customers is good for business,” says Reykdal.

But the result was huge numbers of defaults in 2005—about $7 million. Shareholders thought that it wouldn’t affect the company’s finances much; Rentcash is technically a broker for the loans, matching customers with niche third-party lenders. Rentcash provides a storefront, does customer service, paperwork and loan collections, but it’s the third-party lenders who assume the risk.

Or so investors thought. When Rentcash’s loan partners became antsy with the defaults, the firm backstopped them with $7 million in lender-retention payments, compensating the third-party lenders for the defaults. While net earnings for fiscal 2005 were a huge improvement—$7.3 million compared with a loss of $219,264 the previous year—the surprise disclosure irked investors. The stock has plummeted from $29 in September 2005 to settle around $6.

But Reykdal remains positive. “There is no question that we are facing some hurdles right now, but we have a solid strategy to address them.” The industry is still fairly new to Canada and is changing constantly—new legislation was passed in May, for example, which will allow the provinces to set their own rules about payday loans. Some provinces have already drafted legislation, and the Canadian Payday Loan Association—which Reykdal help found, but has since abandoned—estimates that there will be a cap of about $20 on a loan of $100 for eight to 10 days, including all fees and interest, in each province by next year. Rentcash plans to lobby against such caps, although the association says that the industry has largely agreed that the $20 cap is something it could live with.

What’s next for Rentcash: more diversification. “A single-product proposition is never a smart one over the long term,” says Reykdal. The firm is expanding its cheque-cashing business, which was generating revenue of slightly more than $100,000 per month in the fourth quarter of fiscal 2006. “We believe that there is substantial opportunity to grow this revenue stream and have developed processes and enhanced systems to support this market,” stated Reykdal in Rentcash’s 2006 annual report. The company also plans to roll out services such as tax filing. “I am in this for the long term,” says Reykdal. “There will be ups and downs along the way—I expect that. More than anything, it gives me an incentive to stay focused on the end-game.”

#2 Digital Oilfield Inc.

Calgary, AB
Invoicing software for the oil and gas industry
Revenue 2001: $134,747
Revenue 2006: $11,934,402
President & CEO: Rod Munro

FIVE-YEAR GROWTH:

8,757%

Billing for oil

Digital Oilfield identified a lucrative niche and conquered Alberta’s oilpatch. Now, the electronic invoicing firm hopes to prevail in the global energy business.

By Andy Holloway

Rod Munro can afford to sit back and bask in the glow of his firm’s recent success, and wonder about its promising future. With thousands of happy clients, Calgary-based Digital Oilfield Inc. is widely recognized as the North American leader in electronic invoicing for oil and gas companies. And big numbers in big oil mean big opportunity, something borne out by Digital Oilfield’s revenue growth of 8,757% over the past five years. But it wasn’t so long ago that Munro, the firm’s CEO, was wondering whether his company would even get off the ground.

About four years ago, Digital Oilfield was in the midst of a drought of new customers for its electronic-invoicing service, and oil and gas companies—not to mention, pretty much everyone else—were a little tired of hearing that technology could solve their operational headaches. Munro, who co-founded the firm in 2000 with the idea of solving some of those headaches, was also at the forefront of a new trend: software sold as a service and accessed through the Internet. The bewildering array of provider acronyms, such as ASPs, MSPs and XSPs, left customers confused about who could do what. It’s the kind of time when execs naturally wonder whether all their efforts are worth it. Not Munro, who says seeing EnCana—one of Digital Oilfield’s pilot customers—receive electronic invoices in late 2002 provided confirmation that they were indeed on the right page. “Every time we did a gut check, we said, ‘No, we’re definitely on the right track. Let’s just keep at it’,” says Munro. “But you never really know until you have customers using the solution and coming back to you and saying there’s real value in this.”

Invoicing is a headache in any industry, but especially so in the oilpatch, says Munro. A large company typically deals with 10,000 to 25,000 other companies; each invoice costs about $50 to process, and takes three or four months to turn around, according to a study by Digital Oilfield in 2000. Munro’s firm can cut the processing cost to about $5, with a turnaround time measured in days, not weeks.

Large financial-software developers can certainly provide that service, but in the software-as-a-service business, smaller can be better, according to a report by technology researcher IDC. Unlike the big guns, small to mid-sized businesses are more interested in niche service offerings that address specific problems, rather than a one-size-fits-all approach. That gives an edge to players such as Digital Oilfield, which can highlight specific industry expertise. One of Munro’s favourite tales involves a generalist competitor that categorized a “drum”—a 44-gallon container commonly used in the oil biz—as a musical instrument.

Enter the PROFIT 500 ranking of Canada’s Fastest-Growing Companies now!

But what really held the company together through the lean years was trust. All four founding members have known each other since the late 1980s, when they joined Munro’s engineering software company. “In trying to build a company from zero, you have enough challenges. And often one of the biggest challenges is people,” says Munro. “If you’re working with a core team that you’ve worked with before, you’ve just removed a big question mark.”

Today, Digital Oilfield has 77 employees and is adding 100 to 150 companies a month to its network of more than 6,500 users—the largest such transactional network in the oilpatch. Profitable since the third quarter of 2005, the company has expanded beyond invoicing to contract management and project management, and will soon try its hand at collaborative scheduling. It set up an office in London, England last fall, and is beating the bushes for business in such far-flung places as Norway, Dubai and Oman. Indeed, Munro believes that his current customers represent just 5% of the world’s oil and gas companies.

Now, that’s a deep well to ponder.

#3 Rutter Inc.

St. John’s, NL
Marine technology and engineering
Revenue 2001: $904,504
Revenue 2006: $74,297,000
Chairman & CEO: Donald Clarke

FIVE-YEAR GROWTH:

8,114%

Making waves

Strategic acquisitions and an innovative product that’s wowing the marine market are helping last year’s No. 1 company inch closer to its goal: $500 million in sales.

By Rick Spence

As befits a company in the maritime business, Rutter Inc. of St. John’s, Nfld. has experienced its share of ups and downs since topping last year’s ranking of Canada’s Fastest-Growing Companies.

Sales of its flagship product—voyage data recorders (VDRs), which are the ocean-going equivalent to an aircraft’s “black box”—were up about 50% in the fiscal year ended Aug. 31, 2006. Plus, says chairman and CEO Donald Clarke, sales of Rutter’s most promising new product, a technology that helps ships’ radar systems pinpoint small objects such as icebergs or fishing boats, have started to take off. U.K.-based BP Shipping Ltd. recently bought 19 sets, one for every ship in its northern fleet, at about $25,000 apiece. If RMS Titanic had been equipped with this product, says Clarke, “it would have been just another ship.”

The downside? In April, Rutter’s stock hit a low of 50¢, down from $1.20 a year ago, before settling recently in the 60¢ range. That performance frustrates Clarke, who wants his marine-technology and engineering-services company to expand exponentially, through both organic growth and acquisitions. Shopping for companies is much more expensive when you’re paying with stock that has what scuba divers call “negative buoyancy.”

But a promising first half of fiscal 2007 has Clarke feeling better about the future. Founded by a group of Newfoundland engineers in 1998 who foresaw a market for VDRs as the International Maritime Organization (IMO) imposed tighter regulation of ships at sea, Rutter has always steered towards growth. In 2001, it had annual revenue of just $904,504. In 2006, Rutter had sales of $74.3 million, good for five-year growth of 8,114%—and third place on this year’s PROFIT 100.

Much of that growth is old news, however. Rutter’s 2006 sales grew just 4.8% over 2005. Clarke blames that poor performance on several problems that, like icebergs, proved bigger than they’d appeared. Among those problems: setbacks in the Newfoundland oil industry that delayed engineering contracts Rutter had been eyeing, and the dropping of a lawsuit against a Singapore customer that had refused to pay an $8-million bill.

Enter the PROFIT 500 ranking of Canada’s Fastest-Growing Companies now!

Clarke seems confident Rutter can now resume its growth course. Indeed, his plan calls for Rutter to be a $500-million company by 2011. With the IMO requiring 15,000 ocean-going ships to install VDR systems by 2010, Clarke says VDR sales should double this year. Rutter is also targeting 70,000 domestic ships not governed by IMO regulation. In February, Rutter announced the sale of 40 systems to Victoria-based British Columbia Ferry Services Inc., whose former flagship, the Queen of the North, sank under controversial circumstances last year. Clarke calls the BC Ferries deal, with 36 ships, the largest voluntary installation of VDRs to date.

Rutter is also steaming ahead on its services side. In April, it announced the acquisition of Saskatoon-based industrial-control engineering firm Hinz Automation Inc. Clarke says the $36-million deal will be synergistic. Hinz brings industrial and geographical diversity to Rutter, which has operated mainly in offshore oil and gas. But Rutter is strong in Brazil, so Clarke will introduce Hinz to deals there: “One plus one will make a number much higher than two.”

But the real synergy, says Clarke, will come when Rutter gets its engineering and technology divisions working together. Rutter’s engineers are expert at solving customer problems one at a time, while its R&D staff turn ideas into products. “I would like to see our engineering side coming up with ideas we can funnel to the technology side,” he says, so they can be sold over and over again. “It’s not a tangible right now, but it’s something we’re working on.”

#4 Digital Rapids Corp.

Markham, ON
Hardware and software for Internet TV
Revenue 2001: $208,915
Revenue 2006: $14,773,864
President & CEO: Brick Eksten

FIVE-YEAR GROWTH:

6,972%

The future of TV

Digital Rapids wants to play an essential part in delivering content for your viewing pleasure. Cutting-edge technology and deep expertise are grooming it for the role.

By Tony Martin

If Americans miss the latest broadcast of the hit TV show Medium, they just have to go to NBC’s website, on which they can view the whole episode online. And just as star Patricia Arquette’s character can see the future in her dreams, the founders of Digital Rapids Corp. had the foresight to see a need for Internet TV.

Markham, Ont.-based Digital Rapids’ technology takes moving pictures, captured via traditional TV and movie cameras, and converts them into a digital format that can be stored, transmitted and replayed. It may not sound sexy, but the technology has sparked a revolution in how, when and where we view video, affecting everyone from big-name broadcasters to niche marketers. And as content-makers have rushed to make programming available on your computer, your iPod and even your cellphone, Digital Rapids’ technology has become one of their favourite tools.

Sales last year reached $14.8 million, up from just $208,915 in 2001, putting the company in fourth spot on the 2007 PROFIT 100. If president Brick Eksten has his way, that stunning growth will continue. Eksten wants Digital Rapids to be the go-to company as broadcasters look to customize programming, right down to playing specific ads for individual viewers based on their interests and needs.

Part of the company’s strength, says Eksten, is the founders’ long histories in spanning the divide between program-makers and digital distributors. In the late 1980s, they ran Digital Processing Systems, which provided the technology that allowed local TV stations to process satellite signals and turn them into programming. When that business was acquired, the four drew up the plans for a company that would develop streaming technology, and Digital Rapids was launched in 2001. Everybody told them they were much too early, but Eksten and his partners believed in their vision: that streaming would one day be mainstream.

The naysayers were proven partly right when there was no interest in Digital Rapids’ first product, a streaming technology. “There was a reluctance at the highest level to try it because everybody had gotten burned in the bubble,” says Eksten. Digital Rapids quickly changed its focus to downloading, which, thanks to being both cheaper and less complex, was already gaining in popularity. And while the firm has plenty of competition—from other entrepreneurial firms to behemoths such as Sony and Panasonic—Digital Rapids has a number of competitive advantages that help it win business. For one, it manufactures its own hardware, allowing it to be faster and more flexible than large corporations, which use third-party equipment.

But even more important has been the founders’ extensive knowledge and personal networks. Being in the business for two decades meant instant recognition when they started up, even internationally—helping the firm’s ambitious exporting endeavours. (Eksten also credits channeling leads through local dealers who know the market inside out as key to his company’s exporting success; some 90% of sales are to foreign clients.) The founders’ experience also gave them a deep knowledge of their customers’ requirements right from the beginning. “We give the studios and film guys the peace of mind that we understand their environment and their dedication to quality,” says Eksten.

Digital Rapids’ fast growth—6,972% over the five years—doesn’t seem likely to slow, as telcos are now gearing up to make major investments in streaming technologies. Eksten’s company is busy entering into strategic partnerships with large, non-competitive companies such as Hewlett-Packard; HP uses Digital Rapids’ product as a selling feature, while Digital Rapids gains access to HP’s customers. “We’ve been maintaining 30% to 40% growth,” says Eksten, “and every time I think it will slow down, it just speeds up.”

#5 BTI Photonic Systems Inc.

Ottawa, ON
Optical technology developer for broadband video
Revenue 2001: $219,585
Revenue 2006:$12,532,378
President & CEO: Lance Laking

FIVE-YEAR GROWTH:

5,607%

Need for speed

Smart alliances and loads of venture capital are key to BTI Photonic’s ability to sell cable and phone companies what they desperately need: more bandwith.

By Janet White Bardwell

Watching a clip on YouTube, downloading video to a wireless device or ordering a movie on-demand has become a daily event for many of us. But our love of video is putting more and more pressure on network infrastructures—in fact, they are well on their way to being stretched past their capacity.

That’s where BTI Photonic Systems Inc. is making its mark. What it sells is a box that looks much like a DVD player, but is packed with software that allows cable and phone companies such as Allstream and Cogeco to boost the capacity of their fibre-optic lines. While there are many firms providing the core systems for these companies, and others focusing on the final leg of connectivity, BTI’s interest is in the “second-last mile.” Using a technology that sends multiple signals down a single fibre-optic cable, the boxes—which reside in a company’s many small suburban offices—give customers extra bandwidth to fortify their systems, reach more end-users and provide more services.

Five years ago, Ottawa-based BTI had revenue of just $219,585. But with a savvy leader who’s been able to secure scarce growth capital, forge essential alliances and score top tech talent, revenue shot up to $12.5 million in 2006. That’s a five-year growth rate of 5,607%, landing BTI in the No. 5 spot on the PROFIT 100.

BTI has excelled in peeking around the corner and recognizing a need in the next wave of network enhancements that the big players don’t seem to have much interest in pursuing. “In our industry, there’s a huge requirement on the infrastructure side, and it’s [smaller] companies such as ours that are responding to that need,” says president and CEO Lance Laking.

BTI was formed by a group of Ottawa-based scientists who perfected the technology. Laking was brought on-board in 2001, after the founders realized they had neither the desire nor the marketing know-how to commercialize their product. Laking had 15 years of experience in building growth companies, and although he’d never worked with venture capitalists, he deftly secured some $35 million for BTI from six U.S. and Canadian venture funds. “In any venture-backed company there’s a certain amount of stress,” admits Laking. The solution is to keep investors confident in your skills: “You have to always be demonstrating that you have an ability to navigate the curves.”

One such curve was getting access to the big firms that could become clients. So, BTI set out to partner with established players, bundling its niche product with theirs as a value-add. In mid-2005, BTI struck one such alliance with Richardson, Tex.-based Fujitsu Network Communications Inc., a large supplier of IT and networking products. “Fujitsu is a long-standing supplier to AT&T, and that’s how we have been able to introduce our products to the major carriers such as AT&T and Verizon,” says Laking. He secured the alliance by networking. “There are always people who worked together two jobs ago. You have to take advantage of references and investors who know people.”

BTI has benefited from being located in Ottawa, where there’s an abundance of the high-tech geniuses that can turbocharge a knowledge-intensive business. But not every nerd need apply. “This isn’t a major corporation that has lots of lateral promotion opportunities or deep and wide employee benefits,” says Laking, “so you have to hire the right kind of people.” To that end, he never sugar-coats the day-to-day realities when interviewing candidates.

Next up for BTI: a plan to strike up another partnership, this time with a system vendor in Europe—a move that should solidify BTI as a player on a global scale. “We’re going to see some tremendous growth in the next two or three years,” says Laking. “These are interesting times.”

Originally appeared on PROFITguide.com
FILED UNDER: