| Engin: We've blown $26m; we got it wrong, now give us $8.4m to keep afloat |
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25 February 2008 Having blown the $26 million that Seven Network pumped in when it took a 33 percent stake in 2006, VoIP provider Engin has terminated its ambitious triple play intentions and is asking shareholders for another $8.4m just to keep it in business. The company has announced a rights issue to raise $8.4 million by offering 281 million shares at three cents each, a 37.5 percent discount on their closing price on 22 February. And it has providedi its long suffering shareholders with remarkably little information on what it intends to do with their money. Just about the only information in the 34 page prospectus is contained in chairman Ian Smith's letter in which he says the money is needed to "address the immediate cash burn issue; to provide the funding needed to complete the strategic restructure of the business [and] provide capital to grow the subscriber base in the broadband telephony environment and allow the business to consider deploying additional complementary products such as broadband and TiVo and provide ongoing working capital." Engin had cash and cash equivalents of $3.5 million at 31 December but burnt through half of this ($1.7m) in January. The prospectus offers no guidance as to the future prospects of the business. The offer is fully underwritten by Seven subsidiary Network Investment Holdings. In his letter, Smith explained that: "your company will be going through a period of further restructure in order to maintain its underlying operation, align overheads and staffing more closely with the current revenue base and position it to grow...As a leading player in the broadband telephony market we believe there are substantial opportunities to be gained by focusing on our core telephony business, achieving a cost base appropriate to that business and positioning it to grow...The board and management are confident that shareholders will be best served by a focus on the core telephony business." Most of the $26 million Seven pumped in went to build customer numbers for Engin's VoIP service but, as iTWire has previously pointed out, the cost per customer aquired was an order of magnitude greater than that of rival provider, Mynetfone. The big turnaround, as previously announced was Engin's abandonment of its plan to be the exclusive Australian provider of the TiVo personal video recorder to which its largest shareholder, Seven, has the exclusive Australian rights. In his letter, Smith said: "Engin had previously embarked on an aggressive 'triple play' growth strategy aimed at successfully growing the subscriber base while expanding the strategic direction with broadband and TiVo. The board and management considered both the company's ability to execute this strategy as well as the associated risks...The investment to date in TiVo has not been significant. However, the next stage of TiVo would have seen the company commit to several million dollars had it proceeded." Smith said that Engin had "successfully negotiated a termination of this agreement and is in the process of finalising an arrangement that will enable Engin to sell TiVo to its large customer base without taking on the very significant financial and inventory liabilities and risks associated with being an exclusive distributor." He added that "the company has acted to maintain a component of a triple play strategy," but did not elaborate on what this entailed. Engin announced in June 2007 that it was aiming to become a leading provider of triple play services by signing up as a primary distributor of the TiVo and becoming a reseller of Optus ADSL2+ services. Under that plan, Engin would have taken on the mass retail distribution of TiVo through its current reseller relationships and by expanding these it would also have been responsible for coordinating product development and marketing of the TiVo brand, managing the TiVo website and undertaking direct sales. The TiVo service was touted as combining free-to-air broadcast content with the TiVo service, including SeasonPass recording and WishList searches. Shortly afterwards it announced the appointment of seasoned UK marketing executive Matt Alexander to replace founding CEO Ilka Tales to drive its ambitious transition from VoIP to triple player. Alexander, however, never took on the job. A month later the company announced that he had backed out "due to personal circumstances". Not that it was keen to make shareholders aware of this loss of a cornerstone of its ambitious transformation strategy: this information was buried in a statement to the ASX headed "Engin Team Changes" beneath the announcement of the departure of chairman Will Jephcott and of the departure from the board of founder and director Chris Shaw "due to the ongoing demands on his time from the expanding Direct Group that he controls." Despite that little setback, shareholders could have been forgiven for thinking that things were going swimmingly as Engin proceeded to help Seven acquire Unwired and talk up synergies between the two businesses. In his address to shareholders as late as 29 November 2007, the company's chairman was sounding upbeat claiming that "with appropriate funding your company is well poised to deliver on the exciting triple play strategy in market with substantial growth opportunities that can capitalise on Engin's leading position in the broadband telephony sector." However it now appears that Engin was already well advanced with plans to largely abandon its triple play strategy, and must surely have known that a cash crunch was looming. In a business update in January the company said a strategic review of the business had been undertaken in October and November 2007, and that an outcome of this had been to put on hold the company's ADSL2+ project and to relinquish its TiVo plans until its strategy to "provide a nearer-term path to profitability for the company's core telephony business" had been successful. With prices for VoIP services continuing to fall and with ever more ISPs offering VoIP as part of their broadband service bundle investors might be waiting a long time. ITWire |
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