Freshtel going backwards - fast

Stuart Corner
Tuesday, 03 March 2009 02:10

IT Industry - Strategy

VoIP provider Freshtel (ASX: FRE) seemed to have struck gold in 2006 when it signed UK retail giant Tesco to resell its VoIP service, but that deal has consistently failed to deliver and now things are looking distinctly grim as the company burns cash at an increasing rate.

For the half year to 31 December 2008 Freshtel reported a decline in revenue from ordinary activities of 57 percent to $1.01m and an after tax loss of $4.81m, 39 percent bigger than the previous corresponding period. Cashflow in the half year was a negative $4.19m leaving the company with cash reserves of $3.97m.

Despite the Tesco deal, some innovative product offerings and a string of other promising deals signed in recent months Freshtel's directors were unable to sound very optimistic in their report filed with the half year accounts.

They blamed the revenue decline as being mainly due to "a decline in customer projects revenue received from...Tesco," but gave no explanation why the deal with Tesco had failed to deliver, saying "Tesco, with Freshtel's assistance remains committed to growing its customer base and to exploring new technology."

Tesco also must have been pretty bullish about the Freshtel service when it signed up. In December 2006 Tesco invested $12.3m in Freshtel, leaving it with a cash balance of almost $20m.

Freshtel listed several recent initiatives in its report but made no comments on the prospects for any of these saying only that "Freshtel has taken steps to significantly reduce overheads. At the date of this report a redundancy program has been put in place that will decrease employee expenditure by $192,0000 per month. Administration expenses have also been reviewed in detail and a decline of $115,000 per months is expected. These measures are part of a comprehensive turnaround program that has been endorsed by the board on February 10." No further details of this program were given.