Canada Connection: Software? In Canada?

The last thing most small cap investors think of when they look north of the border is for opportunities is Canada’s emerging software industry.

Other than Corel Corp. (Nasdaq: CREL), once a titan in Canada’s equivalent of Silicon Valley outside the country’s capital Ottawa, Canada is not seen as a hotbed of high-technology. But oddly, it is becoming increasingly so. Since the famous worldwide high-tech meltdown in 2001, Canada’s industry has been struggling to recover. And, in recent years, it has recovered considerably. The Conference Board of Canada, the Ottawa-based equivalent of the New York-based board, said just recently in its review of the software industry that nearly two-thirds of emerging software companies reported profits last year, while computer and other technology hardware makers saw their profits soar.

"Profit levels for Canadian computer and electronic product manufacturers nearly doubled last year," it said. Profits hit C$2.1 billion in 2006, with the surge due primarily to dropping capital and material costs. This year, profit margins are forecast to reach 6%, which is just below where they stood during the tech boom (although in real dollar terms, far short of the C$4.3 billion the Canadians profited in 2001).

"This industry is smaller and leaner than it was at the height of the tech boom," says Louis Theriault, director of the Conference Board’s industrial outlook division.

Meanwhile, PricewaterhouseCoopers in Toronto said in a similar review of the fledgling industry that 63% of emerging Canadian software firms were profitable last year, adding that's "good news" and in line with the 65% in 2005, and 56% in 2004.

The report, based on its fourth annual survey of software firms, found that as in past surveys, chief executives officers of these firms continued to predict significant revenue increases for the year ahead.

"However, while the majority of CEOs reported revenue increases of at least 10%, many fell short of their forecast," they found. 

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