By JENNY RUTH
Losing the bulk of your business, as GDC Communications and Cabletalk did when Telecom decided last December not to renew their maintenance contracts, would be catastrophic for any company.
But of the two, Cabletalk now seems in better shape as both companies seek to reshape and rebuild their businesses.
That's even though the Telecom contracts accounted for more than 70 per cent of the company's revenue and it had a 14-year relationship with Telecom through its founders.
GDC had been contracting to Telecom since 1999.
Cabletalk seems to have had two advantages, although they weren't apparent as the share price plummeted after news of the lost contracts, which were worth $37.2 million in the year to March.
It had a strong balance sheet, and had already recognised that its dependence on Telecom made it vulnerable and had been seeking contracts in other quarters.
In chairman Ross Keenan's view, expressed at the annual meeting in late July, "the market has treated us harshly".
The annual report also said: "Although there were significant lengths of time to run in the remaining contracts (in some cases to April 2005), the sharemarket savaged our share price as if we had suffered an immediate loss of revenue and business."
In the event, Cabletalk came to an agreement with Telecom to quit all the contracts by the end of June this year.
That Telecom was prepared to pay Cabletalk to end the contracts early suggests how keenly the two successful tenderers, Downer and Areva (formerly Alstom), bid.
Cabletalk shares, issued at 50c each between November 2000 and August 2001 through the now defunct New Capital Market system, fell as low as 16c this year.
But the market dramatically re-rated them after the annual meeting, reflecting the company's comments that, by the end of September, it would have repaid all debt and have about $5 million in the bank.
Managing director Peter Wilson also said earnings before interest, tax, depreciation and amortisation (ebitda) and cashflow were likely to be higher in the year ending next March than in the previous year.
The shares were trading at 45c yesterday.
By contrast, GDC - although it has been able to replace some of the contracts it lost by subcontracting to the successful tenderers - is having to raise $3 million through a rights issue to pay off its apparently nervous banker.
The other advantage Cabletalk had was that even as it lost the Telecom contracts, it picked up a five-year contract with TelstraClear worth between $20 million and $30 million a year.
It is that contract which allowed Wilson to promise higher profits, even though he believes revenue will drop from $54 million in the latest year to $40 million in the year to next March.
That forecast includes three months of revenue from the Telecom contracts, but Wilson is confident the company will be able to make up that shortfall in 2006, so that $40 million is now the company's core annual revenue.
Cabletalk had already worked with TelstraClear and also counts others in the telecommunications market, such as Vodafone, and suppliers such as Nortel and Nokia, among its customers.
"The appreciation that we needed to diversify the business goes back a couple of years," Wilson said.
Losing the Telecom contracts "was a big blow, but that's business". Cabletalk had put that behind it and ending the contracts early removed an unwanted distraction.
Wilson said about 95 per cent of the staff previously employed on the Telecom contracts had found work with the new contractors or elsewhere.
Cabletalk's workforce has shrunk from a peak of 467 to about 210.
Unlike GDC, Cabletalk isn't interested in subcontracting to the successful Telecom contractors.
"If you make the decision that you're not going to reduce your prices for the principal contract, I'm not sure you're going to make a lot of money sub-contracting to those people," Wilson said.
Instead, Cabletalk is looking to expand into related fields outside telecommunications, such as security, electricity delivery, eftpos services, IT support and closed circuit TV services and is looking for complementary acquisitions.
Wilson told the annual meeting he expected to have "a worthwhile acquisition" within 12 months.
He said that although the company's work with TelstraClear might expand as it gained market share, "we accept that you have to be with Telecom to get the major slice of that industry".
Cabletalk started to diversify in the 2002/3 year by establishing its Talking Solutions division, which supplies PABX and other telecommunications equipment, and Gotit, an IT services division aimed at small to medium-sized businesses.
Wilson says Talking Solutions broke even in its first year, but Gotit is still in a fledgling state.
"We're still struggling with it. We've got some plans on how we're going to rectify that."
Looking at what's happened since, Keenan's comments to the company's first annual meeting in 2001 look prophetic: "It's probably the easiest one we'll ever have."
On top of the melt-down telecommunications went through in the early 2000s, Cabletalk blotted its copybook by not meeting its prospectus forecasts.
That was largely because the merger of the three companies which created it took longer to achieve and costs blew out by $4.3 million in the year ended March 2002 when the company reported a $1.6 million bottom line loss.
With the write-off of goodwill, the following year's result was an $11.7 million loss.
But in the latest year, the company had a $1.9 million profit.
Despite losing the Telecom contracts, GDC and Cabletalk pride themselves on being the most efficient and low-cost operators in the networks maintenance business.
As I reported last month, GDC managing director Geoff Lawrie doesn't think the contracting industry can last in its present shape.
"Under the rates prevailing at the moment, I find it impossible to understand how the business can sustain quality and service levels," he said, adding someone could make more money driving a truck than being a skilled telecommunications contractor.
Wilson is of a similar frame of mind: "We believe that we added value. There's a cost involved in that. Telecom viewed things differently."
At the annual meeting, he said Telecom viewed contract services as a commodity item and added "We don't."
Profitability from the Telecom contracts may not be as crucial to the multinational incumbents as it was to the two New Zealand companies. But you would expect rationality to apply sooner or later.
How the two contractors will perform is yet to be seen as they are still taking over the contracts.
But late last month Areva put businesses in Australia and New Zealand - including the telecommunications services business in New Zealand - up for sale.
Cabletalk Group
Managing director: Peter Wilson.
Revenue: $54.6 million in the year to March 30; $41.7 million the previous year.
Ebitda: $2.8 million in the year to March; $1,3 million the previous year.
Npat: profit of $1.9 million in the year to March; $11.7 million loss the previous year.
Market capitalisation : $14.3 million.
Cabletalk listed as a New Capital Market company in November 2000 after raising $600,000 in capital. It graduated to the main board in September 2001 after buying Cabletalk Astute Network Services for $15.4 million - $4.5 million in cash, the rest in shares. The purchase was financed through a nine-for-one rights issue. The company is a telecommunications networks services contractor.
Life after Telecom stays in the black
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