pch said:
Don't get me wrong i'm just playing devils advocate here..
They are impressive growth numbers absolutely, but a lot of the exuberence on this thread a few weeks back stemmed from this magical breakeven point at 40,000 subscribers. Now they need to dilute the shares some 25% more to raise capital to upgrade infrastructure and expanded marketing to cope with this larger number to bring them onto 100,000.
So therefore was 40,000 ever a realistic figure?
I guess you can look at it both ways. They could just wait for 40,000 customers and then close their sales office and refuse to sign up any more customers. Their current network is more than capable of handing this number, and they wouldn't have to raise any additional capital. When they break even in a couple of months, they could start putting those funds away, or get a loan for capital expenditure to support a network expansion. Then towards the end of the year, they could open the sales line and start signing up customers again.
I think engin has been having trouble keeping abreast of growth and there has been some evidence where they have been slow to keep the network in front. I guess as soon as they finish one upgrade, they are ready for the next. If they don't manage this properly, then they could be in trouble.
It was a presentation last year that suggested break even would be 40,000 customers.
In a presentation from engin earlier this year, they indicated in the "near future" they would be expanding their network to support 250,000 subscriber lines, move into New Zealand and "scale backend for growth". So a capital raising should have been expected. It's also a high growth sector and lots of things have changed between the break even announcement last year and present.
While its a little sketchy on what the money will be used for, they do indicate it will be used for upgrading "network and support systems to provide a step change in the Company’s operating capacity." While the "company expects to be serving in excess of 100,000 subscriber lines by June 2007", I wouldn't be surprised if this 'step change' will be infrastructure to support the initial target of 250,000 subscriber lines. This would then be give the company some head room for growth should predictions be light and also means this is probably going to be the last significant capital expenditure in a while.
You also have to remember economies of scale and that this will help to lower costs. They also indicate the money could be used for "geographical expansion". This could mean New Zealand, but I read it as extra gateways into additional local call connection points. Another presentation late last year indicated "Additional gateways will be deployed to increase margins" At the moment they have 12 gateways or local call collection points meaning they ware any extra costs where calls must transit another telcos network to reach a local call collection point that engin doesn't have a presence in. Expanding this network, will as the presentation suggest, will help increase margins.
I see the news as quite positive. Engin have been in the business long enough to understand the growth issues, and indications to increase the network to 250,000 indicates they are confident this equipment wont collect dust and never get used.
That's my spin on it.