When George Davis became CEO of Avatech Solutions in 2007, the company was in the middle of its own economic crisis. When Davis spoke to CADCAMNET in December 2008, his attitude toward the current economic climate was “bring it on.” This interview provides interesting background on the recent reverse merger between Avatech and Rand Worldwide.
By Randall S. Newton
Originally published in CADCAMNET
[Editor’s Note: At the time of this interview, George Davis was CEO of Avatech Solutions. On August 18, 2010 Avatech Solutions and Rand Worldwide announced a reverse merger, in which Rand acquired Avatech but also took on Avatech’s status as a public stock company. Davis is now a member of the Rand Worldwide board of directors. For more information on the merger, see “Resellers Rand and Avatech Merge Business Operations.“]
December 2, 2008—When George Davis took over as CEO of reseller and services company Avatech Solutions (OTCBB: AVSO) in 2007, it was suffering its own private recession. The company reported a net loss of almost a half million dollars and morale was down. Davis wasted no time making changes. H1e cut head count from 240 to 210 mostly by reducing management. He redirected the sales team and their developers into new projects with higher margins.
When I sat down with him at Autodesk University 2008 in December, he was eager to share the results of his work. Avatech finished fiscal year 2008 (ended June 30, 2008) with $3 million in net income. The first quarter of fiscal 2009 (ended September 30, 2008) also ended in the black even though revenue was down. It was the company’s fifth consecutive quarter of profitability. Avatech was generating free cash flow and maintaining a sound balance sheet, with $4.5 million in cash and no debt.
As pleased as he is with Avatech’s turnaround, Davis was more interested in talking about the future. He believes Avatech is well-positioned for the current economic problems.
The following is an edited transcript of my interview :
CCN: When you first came to Avatech, the company seems to be in serious trouble. How did you get started?
George Davis (GD): Our first task was to take a close look at the financial fundamentals. We cut expenses wherever we could. We went from a loss in fiscal year 2007 to a positive cash flow. We now have $4.5 million in cash. We have a $5 million credit line. We have a lower head count. Although our earnings are flat they are tremendously improved. It is our goal to achieve confident repeatability before growth.
CCN: Can you give me an example of finding this ‘confident repeatability’?
GD: I realized early on that, while we resell software, our product is really technical competency. So we tested some things. We started with our manufacturing group. We took our sales champions and told them, “Go sell Avatech.” We got $1 million in sales of new services in the first month. Now we have quality work for 10 developers. This is a side to the business we can grow.
CCN: Historically, most of your business has come from reselling Autodesk products. How does this new emphasis on services fit with the mission going forward?
GD: Growing with Autodesk as a VAR over the years, there was not enough consulting and too much sales. Don’t get me wrong, Autodesk is a good place, the ship is sailing well. But it has “VAR anchors” where it is too easy to just sit back and be a box mover. What we are saying is, let’s get some people off the ship and see what they can accomplish.
Our manufacturing experience will help us. Right now 22% of our business is services. We really need to get it up to 40% in next two years. We have 90 people in services, we have great talent there.
Last year Autodesk created $200 million in consulting opportunity for partners like us. That amount will go up to $1 billion in five years and I want 100% of it. When we can come along side Autodesk and provide services. This produces more value for Autodesk and for us.
CCN: The talk here (at Autodesk University 2008) is that things are going to get a lot worse before they get better. What does it look like for Avatech?
GD: We are in a good position to weather the storm. With our expenses down, we think we can hold on and take advantage of opportunities. We plan to pick up technical talent in the months ahead as other companies start shedding employees.
We are right-sized for a normal economy. We hope to avoid further reductions. We are eating peanut butter sandwiches now. Travel and Entertainment is our third largest expense, and we are asking everybody in the company to help us continue to cut costs.
CCN: It is not unusual for a VAR to talk of providing services, but for some it never gets beyond product installation and monitoring license compliance. What specifically do you want to accomplish to improve productivity for your clients?
GD: We are excited about bringing the manufacturing thought process, where PLM has been a big benefit, to AEC. The construction industry really needs consistent methodologies and processes. Right now there’s not much there. There are too many point solutions in the design, engineering, and construction processes, and we touch them all. Manufacturing expects at least a 10x return on investing in this technology, AEC needs to see the same kind of gains. The process methodology is missing.
CCN: AEC, and especially architecture, is notorious as being reluctant to invest in technology. Will AEC invest in services?
GD: We have three of the top 10 AEC firms as clients, and they are still spending money. They are looking for better return, not a 30% return but a 10x return. For others, when things are tight they will spend money on operations first. There will be a delay of spending on product and services, but it won’t disappear. We see delay, not stopping. They will upgrade five seats instead of 10, that sort of thing. We think the return will be huge, in the next year or two, not immediately.
There are exceptions. There is huge interest in making NavisWorks the centerpiece of the construction life cycle.
CCN: What others areas will you explore?
GD: There is a need for more education, up and down the line. One untouched area is the executive view, especially in construction. Selling CAD to architecture, there is a tight decision-making path, the value is understood up and down the line. But in construction, how does the CEO see the value of new technology and new processes? We need a better platform for explaining value to CEOs.
CCN: Avatech is one of the few companies in the CADCAMNET stock index traded over the counter. What is the equity market like for you now?
GD: We have 1,200 common stock shareholders, mostly individuals as opposed to institutions. We also have a smaller group of preferred stock shareholders. The main issue for us is liquidity. Right now only about 15,000 shares trade on a daily basis. I travel to New York often to speak to analyst and investment firms, looking to increase interest in Avatech stock to boost our liquidity.
CCN: Is there much interest?
GD: Overall, micro-cap stocks are down 65% so far this year (early December 2008). Soon cash is going to become available and then buyers who want back in the market will look for value. When we show strong earnings they will come. But with our lack of liquidity they can’t buy. So increasing liquidity is our first priority.
CCN: I’ve been told hedge funds are sitting on cash, from before the downturn.
GD: Hedge funds do have money sitting on the sidelines, but they are down 50% or so this year. We are not a buy for every investor. Our investors have to be long-term. We have a good balance sheet. We have cash in the bank, we have good credit.
CCN: How do you see things going in the economy?
GD: I can’t see it getting much worse. I remain excited but cautious. It is certainly no time to be Pollyanish. We are being prudent with every dollar we spend. There are good spots and bad spots. Civil engineering is getting killed right now. Our civil business was down 30% last year. But building was up.
We have a wider line than just Autodesk products and our technical consulting. We are the only Autodesk reseller also doing Leica scanning, and that’s a growing market. We also resell and support the Archibus line of facility management software. Autodesk sees what we can do, and they are reaching out to us with a new attitude.