It’s not a matter of whether cities and countries will move to high-speed broadband Internet systems. It’s a matter of when, according to Ottawa-based Enablence Technologies Inc., and it seems that emerging markets in Asia are pulling ahead in the shift to faster and longer-lasting network infrastructure.
While the company, which builds and sells optical components and systems, continues to have “a very large footprint in North America,” it has become “a global company over the last twelve months,” says VP of Strategic Analysis and Marketing Peter Kallai.
With 340 employees and over 600 customers worldwide, Kallai says Enablence now has the “financial and company scale” it needs to bid for – and win – larger projects.
We’re not in the Chinese market today in the kind of significant way I think we need to be in to dramatically grow this company over time.
But telecommunications companies aren’t just looking for leading edge technology. They also want companies that are reliable.
With just $5 million in cash at the end of the last quarter, Dev Bhangui, senior research analyst at Fraser Mackenzie says Enablence made a good call in issuing an equity offering (priced at $0.58 and scheduled to close on December 6, 2010) to raise working capital.
Since Enablence is growing and obtaining more Tier One customers, explains Bhangui, it needs to have money on the balance sheets. That would serve the dual purposes of showing that Enablence is a viable business and ensuring it has enough “horse power to withstand a burgeoning or bulging account receivables” should new, larger customers take longer than 30 to 45 days to pay for large projects.
Enablence ended its first quarter of the 2011 fiscal year on September 30, 2010, with $28.1 million in revenue. That’s almost double the revenues reported in the quarter ending October 31, 2009, but it’s still well below the expectations of analysts.
Bhangui says the shortfall can be chalked up to a large contract that was scheduled for Q1, but unexpectedly ended up in the next quarter. He expects Enablence to make up for the shortfall and exceed expectations in the coming year.
On a conference call with analysts in November, CEO Tim Thorsteinson said that next year will see Enablence make significant business contacts in emerging markets.
“We’re not in the Chinese market today in the kind of significant way I think we need to be in to dramatically grow this company over time,” he said. “I visited one joint venture partner over there that builds a million telecom cabinets a year – and if we get an order for 8 or 10 of them in North America we get excited. So that market is growing dramatically and we have the technology to take potential advantage of it.”
Thorsteinson recently announced a non-binding memorandum of understanding with a Chinese company that Bhangui expects to morph into an agreement by year end.
This would be an advantageous partnership because China is such a low cost jurisdiction for mass manufacturing, says Bhangui. A possible joint venture would provide Enablence access to additional large customers.
“China is one of the lowest cost jurisdictions there is, especially when you’re going for mass production,” he says. “By outsourcing manufacturing to this Chinese partner, they are reducing the cost of goods sold which means indirectly you are improving your gross margins and your profitability.”
Enablence’s recent growth has made this kind of partnership possible, Thorsteinson explained in the call. He said the company has “actually had to exit markets in the past with our technology because we didn’t have capability of building the product in a lower-cost geography and there are markets we could re-enter if we can get the right kind of relationship going.”
GROWING DEPENDENCE OVERSEAS
Enablence is increasingly looking to markets outside of North America, with North American revenue dropping to 32 per cent in the most recent quarter as opposed to 58 per cent in the comparable quarter of last year. Two thirds of its revenue now comes from outside of North America.
The difference between fast-growing, emerging markets in Asia and Canada’s market is that they’re ready to jump on board with the better technology.
In North America, Kallai says stimulus funding has been slow to move through the market. After the U.S. government announced that spending, there was “a lag in the market” as telecommunications companies waited to see whether their projects would qualify. Even after contracts are signed and money starts to roll out, Enablence has to wait 12 months before networks are designed and new optical cables are laid down.
“Only then will they buy our equipment to link those networks and provide the services,” says Kallai.
The optical components sold by Enablence are well beyond the speed and capacity that is needed today, says Kallai, “but it’s what we’ll need for the next 20 years that we need to put in.”
The difference between fast-growing, emerging markets in Asia and Canada’s market is that they’re ready to jump on board with the better technology, says Kallai.
Looking for business in emerging markets is a sound strategy, according to Bhangui, who says these markets aren’t afraid to “leap-frog” over current industry-standard technology.
“You don’t have to worry about protecting the existing networks” he says, because the system that currently exists in a country like India is older and far below the capacities of what we have in North America, where companies are hesitant to transition to fibre while the existing network is still working.
ACQUISITION PROVIDES NEW CUSTOMERS
It was Enablence’s acquisition of Israel’s Teledata Networks Ltd. in June that “put [Enablence] in the game,” according to Kallai, since the company had access to large customers in these high-profit countries.
“It was a perfect match from the point of view of product, from the point of view of customers and from the point of view of geography because there were no overlaps,” says Bhangui.
It was also timely to bring in Tim Thorsteinson as a new CEO at this point, he adds, because the company has been undergoing growth and evolution and “the new CEO has operational focus and turnaround credentials.”
Thorsteinson stepped into the role of CEO in April 2010 after serving three months as Enablence’s President and Chief Operating Officer. Before moving to Enablence, Thorsteinson worked as President of the broadcast divison of Harris Corporation, an international communications and information technology company headquartered in Melbourne, Florida.
Moving forward, Thorsteinson outlined his vision for Enablence on the recent conference call, pointing to four key areas: “Growing the top line, improving our gross margins, managing capital and cash flow, and, finally, implementing quality and process improvement programs across the business.”
Enablence is currently undergoing a rebranding exercise, according to Kallai, which will highlight the company’s position as a new global player while re-emphasizing its strategy of vertical integration.