It’s just over a year since the Perth-based groupERG sold its telecoms and manufacturingbusinesses in order to concentrate on supplyinglarge-scale smart card systems. An earlyindication of the company’s new, single-mindedapproach was the purchase in February 2001 ofMotorola’s stake in the ERG Motorola alliancefor A$46 million.

At A$ 299 million, revenues for the 2001financial year were down by 28% against theprevious year; the company had to concentrateon getting the mass transit automated farecollection (AFC) projects already in hand — inRome, San Francisco and Singapore — up andrunning. All three projects should be using AFCsystems provided by ERG in early 2002.

Next step is to put the finishing touches toAFC systems in Sydney and in Seattle;meanwhile work is beginning on new AFCprojects in Bordeaux, Gothenburg and theRhein-Ruhr region of Germany.

And, as evidenced by the company’s successfulSeattle tender, ERG has not been impeded in the

US market by severing its formal links withMotorola.

StrategyERG is one of those rare companies where thesenior executives spell out to investors in straight-forward language what they are trying to achieve.At the AGM investors were told that the long-term strategy is to build up a level of recurring(‘annuity’) revenue and to build asset values.This can be achieved through investments inconsortia and other companies or through thestructures developed to manage the out-sourcedsmart card fare collection systems, such as on thewest coast of North America.

“By developing recurring revenue streams,” saidchief financial officer Michael Slater, “the actualasset or vehicle that creates that income will inturn have a considerably enhanced value…”

Chief executive officer Peter Fogarty thenspelt out the group’s objectives. The aim, he said,is to win contracts in as many cities around theworld as possible for integrated transit-basedsmart card projects. Once the contract has beenwon, ERG should then be in a position toexploit the card base and the infrastructure thatit has put in place.

PortfolioERG can now claim to have a portfolio of smartcard technologies and products that is only rivalledby those of SchlumbergerSema and Gemplus. Thisportfolio consists of the MASS (contactless) transittechnology (previously co-licensed with Moto-rola); Proton’s (contact) card payment and identitytechnology; and the Venus Platform just acquiredfrom Motorola (This Issue, p. 1) — Venus which isthe only dual interface (contact/contactless) smartcard that supports ERG’s transit application andthe Proton technology.

As part of the acquisition of Proton, ERG hasnegotiated long-term contracts with the Belgianbanks (Banksys), the Dutch banks (Interpay)and American Express. These contracts shouldunderpin Proton’s performance over the next 5-7

years. And the other benefit of the deal withProton (whose business has been rooted insupplying the financial sector) is that the Protonhas relationships with some 500 banks andfinancial organizations, participates in the majorsmart standards bodies and immediatelyproduces recurring revenue.

ProfitsHowever, the path ahead is not entirely smooth.Analysts like to see profits (from the sort of dealsthat ERG has been making) flowing in at a fasterrate than ERG can deliver.

“The reality is that the investments are long-term and take 2-4 years to build,” Fogarty toldinvestors. “We invest considerable sums in theinfrastructure and that uses cash – raisedspecifically for this purpose.

“At an appropriate point in time we expect to beable todemonstrate the true value of the infra-structure we have built. That infrastructureconsists of core hardware and software and sophis-ticated communication networks. The operatingcontracts we have [will] then generate long-termrecurring revenue, where revenue increases overtheir life and costs proportionately reduce.

“The returns over the life of the contract aregood and improve as other applications orsystems are added. It is similar to investing inroad toll infrastructure – where the investmentis up-front and the returns are over many years,weighted to the back end.

“We remain committed to the transit sector andsee it as the core area of growth for our business.”

RevenuesSo for the immediate future, revenue and profitfrom project sales will continue to be pulleddown by the costs of establishing the operatingcompanies.

Peter Fogarty estimates that it will take at leastanother 12-24 months before full revenue is beingearned from Gothenburg, Manchester, Rome andSan Francisco. The contracts being negotiated inSydney and Seattle are not expected to generatefull revenue for at least a further 2-3 years.

But by 2004 he expects the level of recurringrevenue to exceed $300 million, which is greaterthan the total AFC and card revenue in 2001.

“In all of these projects we are seeing increasingdemand to add additional applications, such asparking, tolling and retail [point-of-salepurchasing]. This is the case in Australia, Rome,San Francisco and the United Kingdom.”

“Our objective is to be the leading provider oftechnology to the smart card sector globally andby doing so to produce superior returns toshareholders.”

Contact Shannon Yujnovich at ERG Group, Tel: +61 89273 1210, email: www.erggroup.com

12Card Technology Today January 2002

ERG’s plan forsuccessGemplus and SchlumbergerSema make more smart cards than anyone else. ButERG from Western Australia is bidding to take a place alongside the twoEuropean leaders as one of the world’s major providers of smart card-basedsystems.

feature

Eighteen months at ERG

• Terminated alliance with Motorola.

• Acquired Proton World for $100 million plus.

• Acquired American Express, Banksys,Interpay and Visa International asshareholders.

• Acquired rights to Motorola Venustechnology.

• Entered agreements for licensing coretechnology in Germany and the Netherlands.

• Won tenders in Bordeaux, Gothenburg, Oslo,Seattle and Sydney with a total estimatedvalue of over $700 million.

• Completed alliances with Interpay (the DutchBanks), NRMA and Transurban.

• Delivered Rome, San Francisco and Singaporeprojects.

• Acquired Sema’s interest in PCL, the UKmulti-modal transit operation.

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