The Great Recession: How These Techs Coped

Faced with a nearly unprecedented business environment, many Canadian tech companies found across the board cuts to their workforce to be unavoidable. But many others found creative ways around the problem. Cantech’s Nick Waddell looks at these companies and finds clues as to why small caps always seem to bounce back strongest from a recession.

Last October 2nd, the TSX fell 813 points in a single day. Two trading days
later it fell 572 points, then tacked on another 400 point loss in the following session. For individual investors, these were difficult times. For public company executives it was worse. Imagine trying to meet payroll when you have no idea what your top line, much less the business world as a whole will look like. Imagine fifty to two hundred families depending on your ability to read an extraordinary situation correctly.

Management of public Canadian tech companies coped with “The Great Recession” in different ways. While some of these companies announced layoffs, many others managed to get through that most difficult period in a way that demonstrates the adaptability of not only tech companies, but of smaller companies in general.

The depth and sudden shock of the recession hit hard. As 2008 turned into 2009 it became clear that for some, across the board cuts were simply not going to be avoidable. For Burnaby based fuel cell maker Ballard Power (TSX:BLD) the timing was particularly bad; the downturn came right in the middle of a restructuring. CEO John Sheridan described the move as “difficult”, but on August 6th The Company announced it was cutting 20% of its workforce.

For Toronto based Firan Technologies (TSX:FTG), an electronics company that makes products for the defense industry, the move to reduce operating costs was, at first blush, more widespread. The Company eliminated overtime, introduced wage reductions and a work-share program and implemented new inventory management processes. Brad Bourne, Firan’s President and CEO described the moves as a “…response to the slowdown in demand caused by global economic conditions…”. Firan managed to avoid the type of cuts that Ballard made, but after all its trimming still had to make staff reductions.

In times when top line visibility is limited, companies know the only thing they can exercise total control over is their cost structure. But while job cutting may appear to be an easy way to bolster the bottom line, some companies learn this is not always precisely the case. For
Burlington, ON based semiconductor manufacturer Gennum (TSX:GND) a 10% reduction in workforce meant a $3.5 million hit in the form of severance charges in Q3, 2009. Ballard Power’s workforce reduction meant a Q3 charge of approximately $4 million.

“Putting someone out of a job is by far the hardest thing you have to do in times like these”, says Serenic (TSXV:SER) President and CEO Randy Keith. “Everything else is a distant second.” While Edmonton based Serenic, which makes accounting software for not-for-profits and public sector enterprises, did have to lay a few people off, Keith and Serenic’s board were as creative as they could be to avoid it. Senior management and the board took pay cuts, marketing expenses were cut back, and the balance sheet was combed over for inefficiencies. While they company made these moves because they had begun to see stalled deals and slow building pipelines in the summer to early fall of 2008 they, in fact, rebounded nicely. Revenues for Serenic’s Q1, 2010 were up more than 39%, while expenses fell by 4.6%.

While no company welcomes the events like those that happened last October, the crisis can serve as a useful fire drill, showing a company how quick and flexible they can be. As early as November 3rd of last year John Hardy, Chairman and CEO of Vancouver’s Versatile Systems (TSXV:VV) warned that operations “have not been immune to current economic crisis and we have been experiencing an overall slowdown in orders from customers which has impacted all areas of our business”. Yet Versatile’s balance sheet actually improved over the next several months; cash on hand grew from 1.14 million on September 30th, 2008 to 2.10 million on March 31st, 2009. A hint to how might have come further on in the same November 3rd press release when CFO Fraser Atkinson noted that Versatile had
“…significantly reduced our cash outlays on investing and financing activities.”

In the United States the fiscal stimulus package was controversial and hyper-political, what with talk of “zombie” banks, auto execs taking private jets to bailout sessions, housing defaults and, finally, “green shoots”. In Canada, the (admittedly much smaller) stimulus package received much less attention. This was mostly due to the fact that in lefter leaning Canada government intervention is a less polarizing issue, but also because the package simply earmarked fund for decades overdue infrastructure spending and extended and buffered existing programs. One of these programs was the work-sharing program offered by Services Canada. The program is described by the Canadian Government as an “adjustment program designed to help employers and workers avoid temporary layoffs when there is a reduction in the normal level of business activity that is beyond the control of the employer.” If anytime was to meet the criteria of this description last autumn certainly did, and several Canadian techs, including Firan (TSX:FTG, Exfo (TSX:EXF, 20-20 (TSX:TWT), and Photon Control (TSXV:PHO) took advantage of the program.

If cuts and programs such as those mentioned here are difficult for companies to swallow they proved to be even more difficult for investors. Small Canadian techs were dumped, en masse, last fall and through the early Spring of 2009. Presumably the theory was that a small company that needs a band-aid is not growing, and a small company not growing is not worth owning. As readers of Cantech Letter know, many of these companies were available at never before seen valuations. But this summer, many small caps bounced back stronger than other sectors, as we are constantly reminded is the norm. Looking at the measures taken by some Canadian techs may provide one clue; many found ways to survive that didn’t involve strapping on debt, which is easier for large companies to acquire. Another important factor is employee retention, even if it means a freeze on wages or a work-sharing situation, creates better morale, or “corporate culture”.

Opinions are currently mixed as to whether we are moving out of the current economic malaise or we’re just in another phase of it. At some point in the future, however we will all be able to point to a time when we exited “The Great Recesssion”. At that point in time many small companies who were creative in cutting during the downturn won’t be part of a group that will still be paying for it.