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Testing times

By Jenny Ruth

Tuesday 21st June 2005

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 Jenny Ruth
Zintel provides a range of telecommunications services including toll-free "word" numbers and buying wholesale capacity from telephone network operators including Telecom and Telstra.

It's also the sole importer and distributor in New Zealand of Ericsson business phone systems and one of two importers and distributors of Ericsson systems in Australia.

The numbers: Zintel has a proven track record of increasing profitability - until now. (While it reported a net loss of $3.2 million in the year ended March 2002, that reflected a near-$5 million write-off of goodwill when the company bought the New Zealand Ericsson business in late 2000. Underlying profitability was up that year.) After reporting a $6.2 million pre-tax profit last year, the company has lowered its forecast for 2005 three times. Zintel said in mid-February that it expects to report a pre-tax profit of about $5 million. The share price has plummeted since August 2004 when it hit $1.55. In mid-April this year, it was trading at 90 cents.

Management: Zintel was founded in 1995 by businessman Nick Gordon, who also started eftpos company Advantage, now Provenco. Because the company is listed on the NZAX, which has less onerous rules than the main board, Gordon is able to be both managing director and chairman of Zintel, which listed in November 2003. Gordon's family trust owns 60% of Zintel. Since the New Zealand Ericsson division's manager Kevin Francis resigned for personal reasons in October last year, the company has moved to integrate that division with its other New Zealand unit, Zintel Communications, under Tony Waldegrave. While in the early days it had been appropriate to run the two divisions separately, it's now preferable to manage them together, Gordon says. "We're really starting to see synergies between the businesses in New Zealand."

Current strategy: One major reason Zintel's net profit will be down for the year just past is that Gordon is aiming to build recurring earnings streams through its leasing arm. The company can immediately book all revenue and profits when it sells an Ericsson system. Not so for its lease income, which has to be booked only as it's received - even though the lease contract guarantees monthly revenue and profits over a three-year period. While this strategy depresses current earnings, it will make Zintel less prone to profit swings in future. Another reason for the hit to profit is the $1.1 million cost of starting its Ericsson distribution business in Australia - it gained its Australian distribution rights last July. The startup costs are mainly wages and other staff expenses and can't be capitalised. Zintel already had an established toll-free business in Australia which broke even in 2003 and contributed 20% to the 2004 earnings.

Recent track record: The third reason for the profit downturn is purely a timing issue. Gordon explains that two particularly large Ericsson orders in New Zealand were significantly delayed. "It just took longer for the wheels to turn," he says. One of those orders was signed after the March 31 balance date and is in the process of being installed. The company has been awarded the second contract but the deal hadn't been inked by the time of writing in mid-April. "It will be the largest order we've ever received," he says.

The company had been braced for a downturn in its share price before it announced its plan to start the Australian Ericsson business, Gordon says. "The market doesn't favour a company going into Australia as a startup." He points out that as Zintel's largest shareholder, he's the one hurting most from the share price slide. "I guess it's some comfort that I'm very happy with the decisions that have been made."

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