i posted this because its related to telecom news.....mergers etc..The spectacular 20 per cent profit downgrade at Vocus Communications about two months after it confirmed its full year profit guidance delivers a possibly fatal blow to the credibility of the management and board.
Chief executive Geoff Horth and chairman David Spence will have to face the wrath of shareholders who watched as Vocus shares plunged 26 per cent on Wednesday. The fall wiped out about $540 million in value.
A market update issued by Vocus at 7.10 pm on Tuesday night shattered the general market perception that the company was well managed and on track to deliver higher profits this financial year.
The reality is that Vocus is failing on so many fronts it is hard to know where to start.
Chief executive Geoff Horth shed more light on the mess inside Vocus during an analyst briefing on Wednesday morning and later during a presentation to the Macquarie conference in Sydney.
It is now clear that one of the fastest growing telecommunications in Australia has been unable to integrate the acquisition of Amcom, M2 and NextGen Networks.
Each of the acquisitions made sense at the time but the execution of the integration has failed miserably.
Horth revealed that as a result of the expansion Vocus went backwards in terms of the quality of financial information, the systems of control over sales and in its service to wholesale customers. He admitted the company bit off more than it could chew.
Chanticleer understands that the new head of enterprise and wholesale Michael Simmons discovered that sales numbers being recorded in the division were not actually delivering the promised revenue. He calls it a failing in the "sold to toll".
This particular problem hit revenue by $12 million this financial year.
Horth told the Macquarie conference that the provisioning of telco customers in the enterprise and wholesale business was broken. He admitted that orders were disappearing "into a black hole" and this was harming the company's reputation.
Horth said there was no common set of products in the enterprise and wholesale division but there was a plan to fix this.
Simmons stepped down from being a Vocus director just before Christmas to run wholesale following the departure of Matt Hollis. Hollis went to a rival company and Vocus wholesale customer, Bevan Slattery's Superloop.
Simmons is a highly experienced telco executive who could step up to be chief executive if Horth was forced out by angry shareholders.
The profit downgrade included a change in the way the company reports the revenues and profits from long term telco contracts. The company had previously thought that when it received cash up front it could report this in the current financial year.
But the new chief financial officer Mark Wratten, who took over in January from Rick Correll, took a hard line and said the recognition of revenue and profits must be over the life of each contract.
Six contracts accounted for the $40 million hit to revenue in this fiscal year including a contract with Superloop. The positive cash flow benefit of $45 million will now be recognised across 2017 and 2018.
Wratten was previously the CFO of ASX-listed Recall Holdings, and before that held a number of senior roles at Brambles.
He barely had his feet under the desk before the release of the half year results. It is only since then that he has been able to get his head around the Vocus financials.
The profit downgrade has the same look and feel as the "kitchen sink" approach taken by a new CEO. Everything that could be written off or reviewed has been. The only exception to that comment is that the carrying value of M2 needs to be reviewed given it is in the books at a value more than the market cap of the entire company. Total goodwill is $2.9 billion and the market cap is $1.55 billion.
Wratten told the Macquarie conference soon after he joined the company he was concerned about the cash flow in the first half. He says key business leaders now have a "massive focus on that".
Wratten said he was comfortable with the company's balance sheet and current leverage ratio. That should dampen the discussion among analysts about a potential capital raising.
The question about accountability for the failure of the company to integrate and manage the expanded business will inevitably fall at the feet of Horth and chairman David Spence.
Spence told Chanticleer: "We are very disappointed in the result. The transformation of four businesses into one in Australia and two in New Zealand has proven to be a much bigger and more costly endeavour than we had originally thought."
"We still believe in our overall strategy and the opportunities to leverage the national fibre networks we have built and acquired. It's just going to take longer to merge."
Spence is probably safe for the time being but if the pressure on him proves too much the board could turn to experienced businessman Bob Mansfield, who joined the board in January.
Wholesale changes in management and board positions at this time would probably cause more disruption than it is worth.
But shareholders are likely to ask Spence to dust off the medium term corporate succession plan for himself and Horth.
The latest problems faced by Vocus will inevitably resurrect discussion about last year's board room split in October when Tony Grist and James Spenceley left the company.
Spenceley argued he was the best person to run the company. The clear implication was that Horth was not up to the job.
However, Spenceley did not endear himself to Vocus shareholders when he sold the bulk of his shareholding in the company in August.
Shareholders were not pleased that he abandoned the company so soon after pushing through the $700 million acquisition of fibre networks company, NextGen, which required a $650 million capital raising.
