Hostech eyes high margin revenues from "millions" of SMB telephony end points.

Stuart Corner
Tuesday, 01 September 2009 05:16

IT Industry - Strategy

The chairman of small business telephony systems and services provider Hostech (ASX: HTC) has tantalised shareholders with what he says is the prospect of high margin revenues from the millions of endpoints in Australia's 800,000 small businesses. However it is a market hotly fought over my many large and experienced players.

Announcing the company's FY09 results chairman Campbell Corfe said: "We estimate that every handset (or end point) that sits in a business generates over $120 of revenue per month on average ... Our goal is to capture as many end points and as much revenue as possible from the value chain. We will increase our focus on areas such as carriage, maintenance and hardware margins. Ultimately, our aim is to shift our sales focus to building a higher proportion of recurring annuity revenue to build sustainability and consistency in our results."

He added: "There are over 800,000 businesses in Australia in the small to medium business sector, our target market. This represents millions of potential end points each generating $120 of high margin revenue per month."

Corfe - who joined the board in June following a significant share placement to Flaxton Hunter - said: "At the outset, I saw Hostech as a company with the fundamental building blocks in place and a focus around a core proposition to maximise revenue opportunities from the lucrative business telephony market. [Hostech] has the capability to provide both traditional business phone system solutions (PABX) and the emerging, hosted, Internet based telephony through its Sholl and OneNetwork brands respectively."

In FY08 Hostech acquired what are now its three operating subsidiaries - Sholl Communications, OneNetwork and AK Communications - and it says it has undertaken a significant reform programme and restructured the businesses to improve efficiency, reduce costs and increase sales revenue. Revenue increased 16 percent to $5.3m and the company reduced costs by 33 percent to $4.0m.

Hostech reported a net loss of $7.9m for FY09, including a $6.3m goodwill write down. Operational loss was $1.6m, a considerable improvement on FY08 loss of $3.5m. Despite raising $2.5m from the rights issued during the year, Hostech managed to reduce its end of year cash balance from $5.8m at June 2008 to $2.3m at June 2009. (In FY08 it raised $6.1m from the issue of shares).

The company said the decision to write down goodwill had not been taken lightly and had followed "a significant review of...strategy, operations and business plans going forward." It added: "The key focus of the board over the next 12 months is to deliver profitability and add scale through acquisition and organic growth. Progress on the first acquisition that is anticipated to deliver against these goals is progressing in line with expectations."

Hostech announced on 15 July that it was undertaking due diligence on the acquisition of an un-named entity capable of delivering $10m in annual revenue and in excess of $2m EBITDA, and strongly aligned with the Hostech vision to become a leading provider of business telephony. Hostech said it was planning to pay $2.75m in cash and $3m in shares for the acquisition.

On 13 August it announced satisfactory completion of due diligence and said that completion of the deal was awaiting further legal review and commercial conditions precedent. It gave no additional information in its results announcement.