Going down with the Joneses

Wednesday 1st August 2001

It was once a media darling, now it's New Zealand's biggest tech-wreck. Denise McNabb probes the rise and fall of Telemedia.

Leaning forward at the boardroom table at his once-busy Auckland office, Telemedia boss Chris Jones rests his cheeks on his knuckles. He periodically drops his head, his short-cropped hair almost sweeping the tabletop, as he reflects on the demise of the company he nurtured from birth in 1996.

He is weary, glum, a glaring contrast to the man who usually bursts with pep. His trademark dark pin-striped suits and flame ties are replaced with smart but casual light trousers, an open-necked shirt and jacket. When receivers are your daily masters there is no need for power dressing.

In the end, it came down to $A5 million. The amount would seem trifling. Particularly since Telemedia, a company specialising in software systems for the telecommunications industry, was valued at $A700 million ($NZ886 million) at its peak 18 months ago and $A50 million at its lowest ebb in March. For just $A5 million Chris Jones reckons he could have saved his company and been spared the ignominious title of New Zealand's first real tech-wreck casualty.

But perhaps the situation isn't as grim as it seems. Receiver Ferrier Hodgson is due to present its statement of affairs anytime now. Although the receivers had yet to sign off on a deal as Unlimited went to press, several players are showing interest in buying Telemedia's interests and assets.

The most likely purchaser seemed to be venture capitalist Jenny Morel who has set up a company called TM2 (Telemedia Two) and is coralling a clutch of deep-pocketed investors with $10 million to invest to give Jones and his staff another go. Investment bank FR Partners, with former Telemedia vice-president of operations Liz Taylor, was also in the fray, as well as Swedish telecommunications company Teligent, which had approached both parties with an interest.

Morel says the deal has been accepted by the receiver but awaits formal documentation. Both she and Jones are directors of TM2.

Whoever does win will have their work cut out for them. Tentacles of the Australian-listed, Auckland-based Telemedia Networks International were already well stretched when Westpac Bank hauled in the receivers on June 5. Chief executive Jones blames a rash of unexpected slow payers and bad debtors on the bank's decision. The company was woefully under-funded; the bank was protecting its fixed and floating charges over the company's assets. Not helping was the company's purchase of two US software companies early last year for $A50 million ($63.29 million) which, at latest reports, have been valued at just a few million dollars.

"Telemedia didn't have enough horsepower to weather a 100-year hail storm," laments Jones, drawing an analogy between the company's demise and Sydney's catastrophic storm last year. The nub of the problem, he says, was nervous vendor financiers who pulled the plug on large projects for big telcos when technology stocks tumbled on the stock market. This caused a ripple effect out to third party suppliers like Telemedia. Deals that once took three weeks to secure finance expanded to three months. Company cash flows dwindled.

Jones is reluctant to name the slow payers or bad debtors, but says there are a couple of small ones in New Zealand. It is no secret that one client on both sides of the Tasman was WorldxChange. Its US parent World Access filed for Chapter 11 bankruptcy protection earlier this year. US clients, accounting for 30% of the business, were Telemedia's bigger debtors.

Perhaps the writing was already on the wall.

The contrast

Jones' life has changed abruptly. It is ghostly quiet in the large building where Telemedia had the top three floors. Apart from Jones and an assistant, there are now only the receivers and a skeleton staff providing technical phone support for software applications in a back room behind closed doors.

Downstairs, reception is a scene of abandonment save for a prying close-circuit television that monitors the building's security, and a solitary coffee cup sitting on an empty moss-green shelf. The building's owner, Telecom, has it up for sale.

"There is no upside for Chris Jones, apart from the experience," Jones says wryly. Gone is his smart late-model Mercedes; in its place, a Pajero jeep. Gone too is the gruelling 20-hour-a-day, seven-day-a-week regime, much of it spent on planes, at meetings and on conference circuits in different countries. Jones says he never took a holiday. Now he has anxiety attacks in the middle of the night when the expected phone calls don't come from America or Europe. International calls around the clock had become a way of life.

His immediate future includes getting back to the gym and spending more time as a family man. The one bright spot on his uncertain horizon is pending fatherhood. His wife Jo will give birth to their first child this month. "Maybe it [Telemedia's fall] is a blessing in disguise," he says.

But Jones is eager to get back into the workforce. He wants to put to good use his "expertise" gleaned as a young chief executive in charge of a technology sector company in a global market. He claims to have been offered some impressive jobs abroad but is passionate about remaining in New Zealand. He sees it as a base for realising international aspirations.

Once touted as one of New Zealand's richest men, Jones says income is now a problem. His shares are no help. Though he owns 64% of the company (diluted from 74% through new issues), he says he sold no stock and never intended to.

Typical of initial public offerings, he put the shares in escrow (basically barring them from sale for a set period) when the company floated on the Australian Stock Exchange on October 26, 1999. He could have sold the first half when it came out of escrow last December. The second half was tied down till Christmas this year.

Telemedia's share price yo-yoed from a high of $A10 ($12.65) in April last year to $A0.73 ($0.92) at its last trade, after reaching an all-time low of $A0.27 ($0.34) on March 30, a year to the day from the $A10 high. When the company folded, Jones' stake was worth $A31.9 million ($40.3 million) after a once heady high of $A438 million ($554 million).

Tech-wreck

On a large whiteboard at one end of the Telemedia boardroom, key suppliers Lucent, Sun/Solnet, Hewlett-Packard, Oracle, Informix and others are scribbled in marker pen amid a sea of strategy plans, testament to days gone by. Before the fall, Telemedia had 140 staff, 60 of them in the New Zealand office, which handled research and development and back-office work such as accounts and support engineering. Staff were paid US dollar salary rates to keep their software designing skills in New Zealand.

Telemedia was forced to halt its stock from trading on the Australian exchange in May after short-term cash flow deteriorated significantly. But plans to find a buyer or funder came unstuck because no investor would make a decision quickly in such teetering circumstances.

Now that interest in kick-starting Telemedia has revived, the game plan looks set to change once more for this company that designs, develops, integrates and supports software for telecommunications carriers and service providers around the world. Among its applications are voice messaging for mobile phones, multibilling systems and pre- and post-paid mobile telephone cards.

Jenny Morel won't name the investors injecting $10 million into Telemedia, but it's thought it will be channelled through her investment bank's venture capital fund, No. 8 Ventures. Importantly, she has Jones alongside and has moved to keep his staff secured.

On the day Telemedia collapsed, the vultures had already gathered. Personnel consultants waited outside the office, handing business cards to staff as they left. "It has been such a good shop, a good grounding for everyone. We have provided for big multinational companies around the world. You just don't get that here in a local company," says Jones, high on his trademark sales speak.

In his view, the company's fixed assets went hand in hand with intellectual property. Any chance of a sale relies on the two components staying together - rebuilding from scratch would be too expensive.

Flying high

If you believe the business literature, fear of failure is one of the major dampeners on New Zealand's entrepreneurial culture. If United States models are anything to go by, Chris Jones' star could well rise again. So what is the background of our first decent failed tech entrepreneur?

Jones is the 38-year-old Kings College-educated son of a South Auckland dairy farmer. He was so eager to chase the big technology bucks he dropped out of Auckland University in the early 80s, three papers short of a Bachelor of Arts degree.

Instead he beat a rapid path to management, including heading the voice messaging company Televox International and Singapore-based Atlas Telecom. Last year just months after Telemedia's successful listing, raising $A16 million for expansion and research and development, Ernst & Young declared him the IT category winner of its Entrepreneur of the Year awards. But "the level of experience I got in two years in a global market is beyond an award", says Jones.

He is adamant that if Telemedia had just had some money in the bank it would still be alive and kicking today. The growth was there, the prospects were there and no, he didn't believe things were moving too fast. It was a matter of judging the risk to get the hit, he says.

Trouble was when the tech sector slumped, Telemedia had no backup plan to bridge the funding shortfall. It had never needed one before. By comparison, rival US companies such as Converge, enjoying 35% growth, faced a similar situation but had plenty of money in the bank.

If you believe Jones, there weren't any visible early warning signs of what was to come. "When push came to shove, our loyal customers had their own pressures and you can't get inside their businesses. It wasn't a case of whether our clients were going to pay, but when."

The accounts

Is he right? Jones says a US merchant bank gave him a blueprint of 25 key points to follow for cracking the highly competitive US market. He was up to the part about bringing in more top management with experience in the technology-servicing sector. Just weeks before the company collapsed he appointed two US directors, Sun Microsystems chief financial officer Michael Lehman and Qwest's chief financial officer Cliff Dodd. And he was scouting around for a hands-on US-based chief financial officer. Jones says one potential applicant pointed out Telemedia had to be able to weather the cycle at its lowest point. It didn't.

Jones says he and staff didn't know what stage the cycle was at, so there were no plans in place to manage it. When the share price plummeted, the ability to raise funds went with it.

A closer inspection of Telemedia's accounts by an experienced chief financial officer might have provided a better insight into what was in store. At first glance the financial picture looked quite good. Had all the money come in from customers, Jones expected Telemedia's sales to be around $A60 million ($75.9 million) for the June 2001 year, providing a small but positive pre-tax profit. In the six months to December the company reported sales of $A28.82 million ($36.5 million), a quantum leap from the whole of 1999's sales of $A4.57 million. It was twice the growth of the Australian telco systems industry in 2000.

Cash is king

But dig a little deeper and the problems emerge. As US investment management and advisory firm Wright Investor Services points out, the accounts also showed outstanding customer debts in that December period of $A25.92 million ($32.8 million) - a whopping 89% of Telemedia's revenue. That was well before Jones says his clients bleated that they were cash-strapped. But Jones says that is not how it was: debt ratios looked high because the orders had been made, the software dispatched and the accounts registered just before balance date. He wouldn't have expected the money to have come in before then.

But there were other warnings. Go back to the June 2000 accounts and it's noticeable that while Telemedia clocked up $A24.02 million in sales, the cost of those sales was $A21.42 million, or 89%. The gross profit was therefore a mere 11% of sales.

Coupled with that, the company was also making hefty write-downs on goodwill for business acquisitions and plant. The plan was to write off $A40 million in five years. It was a harsh call for the young balance sheet. At the end of last year intangible assets were $A44.14 million. Against this, Telemedia reported a $A3.69 million loss in the interim December 2000 period, below its prospectus forecast.

The receiver's report to creditors will show just how much, if any, of the money owed by customers has come in since December. Westpac is owed $A13 million and unsecured creditors owed about $A30 million.

Going global

Before Telemedia floated, Jones had established a healthy demand for its software in Japan, a market he describes as the most advanced in the world. In January the company secured its biggest single deal worth $A10 million ($12.6 million) with TU-KA, a division of Japan's second-largest telecommunications company, KDDI, which has more than four million mobile phone subscribers. Telemedia was to provide TU-KA with pre-pay mobile systems worth $A6.6 million this year and $A3.6 million worth of support services over the next four years.

The deal replaced three of Telemedia's competitors' systems with its one integrated countrywide application. Jones was ecstatic. Now he's unsure just where that deal is right now. "By being successful in Japan we could roll products out to other parts of the world," he says.

In New Zealand, Telemedia worked with Telecom on its text messaging system for mobile phones. In Australia it provided services for Virgin Mobile, Optus, AAPT, Global Network Australia and Light Technologies. In Hong Kong it installed telecommunications equipment for Asia Touch International and in Singapore it had a $A1.5 million ($1.89 million) alliance with CommVerge Solutions.

Last year Telemedia spent $A50 million on two US software companies to secure a foothold in this highly competitive but lucrative market. Jones says 10 of the US tier-one telco carriers told him they would do business with Telemedia because it had a head office in the US. Its competitors were just down the road. "They were not going to buy from an Australian company." Telemedia was still looking for a key account with a telecommunications provider in the US when it went into receivership. By then plans to list on Nasdaq had also been put on the back burner.

Some analysts who had wooed Telemedia in its early days did an about face when telecomm stocks bombed and they had to justify stock prices to their clients. Jones learned a lot about the way a market can move on the slightest murmur. But when asked what part the analysts might have played in the demise of Telemedia's share price, Jones wouldn't answer.

UBS Warburg picked it as a buy not long before the company collapsed. Merrill Lynch was touting sales of $A200 million to $A500 million in three to five years. An analyst who declined to be named says Jones simply took his eye off the ball. Another says his concept of financials was in Wonderland. "We didn't anticipate the financial squeeze in the US market. We had never had to anticipate it before," Jones says. "We got so close [to seeing it through] but we just didn't. Oh boy … everything was planned. I mean, one minute we are a $A5 million company, the next $A24 million, then $A60 million … "

The scavengers who tried to pick over the carcass of the former high-flying company have been shooed away for the time being. Some wanted the shell and the company shareholders for a back-door listing of their own. Just what, if anything, will be realised for shareholders is still to unfold.

What would Jones do differently next time? He would go straight to the American market from New Zealand rather than via Australia. With good fundamentals and good revenue streams, you can have a successful listing here, he says. Whether Morel shares his thoughts on this and other issues, only time will tell.

Denise McNabb
denise.mcnabb@xtra.co.nz

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