Telstra puts a spanner in Fone Zone's works

Stuart Corner
Tuesday, 27 February 2007 09:02

IT Industry - Deals

Telstra's handset subsidy and dealer remuneration policies on its Next G network have had a devastating effect on the financials of Fone Zone, which claims to be Australia's largest specialist mobile communications retailer.

The company has reported a 41 percent decline to $6.1 million in EBITDA for the six months to 31 December despite boosting revenues 13 percent to $99.1 million. Net profit after tax fell from $6.2 million to $1.9 million. The company integrated 15 stores acquired from Communique and opened a further during the half year five taking its total to 149.

Fone Zone said the decline in EBITDA had resulted principally from a decline in gross margin from 50 to 43 percent of operating revenue, "The mix between the mobile repayment option (MRO) model and sales subsidised by Telstra is the key driver to Fone Zone's gross operating margin."

Other contributing factors were an increase in operating cost as a result of increased store numbers and an increase of $700,000 in the expense for share options.

The company said that an initial shortage of Next G handsets had constrained sales but that margin had also been impacted by Telstra's decision to promote Next G through the less profitable subsidy model, a change in focus of dealer payments by Telstra on Next G handsets and reduced margins for other handsets."

CEO David McMahon claimed that these short term issues were being contained. "The Next G network was launched much earlier than previously announced and the unexpected shift between subsidy and MRO was not anticipated. We have refocussed our sales efforts on MRO handsets and these measures have allowed us to achieve recovery in gross operating margin."

Fone Zone warned the market about the impending problems when it issued updated guidance for the year to June 2007 on 18 December when it said that "the full range of Next G handsets has been positioned and promoted in the less profitable subsidised environment, which has reduced the group's gross operating margin. Additionally, while sales of non Next G handsets have grown, the focus of incentive payments on NextG handsets has meant the margin on these other handsets has declined, further reducing the Group's gross operating margin."

It was hopeful that the situation would improve. "Following extensive discussions with Telstra, Fone Zone is confident that the Next G handset range will continue to expand and evolve through the first half of 2007 and anticipates that the range will more than double by then, with a full complement of handset manufacturers coming on board. As a result, Fone Zone anticipates a return to more customary margins and incentive arrangements through the second half."

Just three days before it issued this update, the company had been singing the praises of Next G, with an announcement in which Fone Zone's group marketing and product manager, Lee Moore, described Next G as an innovative and long-awaited development. "We are right behind this brand new technology, and currently offer an exciting and expanding selection of capable products and services", he said. "Next G is simple to use, achieves much faster speeds and is available in more places than ever before".