Critical Times ahead for Mitel?

Mitel’s long-term future depends on it generating enough cash to cover its debts according to Canalys.

At the end of December, Mitel announced its intention to file for an IPO to generate up to $230 million (€161 million) in cash. This is its second attempt to go public, following an abortive effort in 2006, when it cited challenging stock market conditions as its reason for halting the process. The main objective of the latest IPO attempt is to address its worryingly large level of debt, which it incurred through the acquisition of Inter-Tel for $729 million (€508 million) in 2007. Its balance sheet for its last fiscal year, ending in April 2009, showed that Mitel had debt exceeding $428 million (€299 million), while its cash flow was only $28 million (€20 million). Consequently, the credit rating agency, Moody’s, downgraded Mitel’s status to the third lowest tier, labelled as a substantial risk. If it fails to service its debts appropriately, clauses in the loan agreements will trigger early repayment terms. This will force the Canadian vendor to seek alternative credit sources at less favourable rates due to its poor credit rating, or spin off parts of its business at below market prices, such as the Lake unit and the North American managed services operations.

New and existing customers could be perturbed by its current balance sheet and credit rating issues, especially in light of Nortel’s demise. Customers need assurance of Mitel’s financial viability and to be guaranteed support throughout the lifespan of their investment. Its channel also needs the same assurance of its viability as a long-term technology partner. Without this assurance, which Mitel can potentially get through a successful IPO, it will struggle as businesses increasingly scrutinise their suppliers’ financial position as part of risk assessments. Analysis of its operating results and loss of market share, however, will not make good reading for potential investors. For its latest fiscal year, Mitel reported revenue of $735 million (€513 million), up 6.2% from a year earlier, but this is distorted as the previous fiscal year’s results only include eight and a half months of Inter-Tel activity. It also reported a net income loss of $194 million (€135 million), though this was impacted by a non-cash goodwill impairment charge of $285 million (€199 million), some of which was offset by other gains. In terms of telephony call control shipment performance, Mitel has lost share over the last four quarters. In Q3 2009, Canalys estimated its worldwide line shipments declined 27.9% year-on-year, compared with the market average of 17.8%. Its market share also fell from 3.6% to 3.1% in the same period, driven by a strong decline in its main markets in North America.

A successful IPO is vital for Mitel’s future. But this will be challenging, especially with its current credit rating, financial and market position, as well as the general economic conditions. Mitel is not the only vendor in this position. There are still over 50 vendors active in the telephony call control market worldwide, many of which have small market shares. The top five vendors, including Cisco, the combined activities of Avaya and Nortel, NEC, Alcatel-Lucent and Siemens, control nearly 60% of the market, and with Microsoft, IBM and Google emerging, as well as open source vendors gaining momentum, the future of many is uncertain. What is certain is that customers will be carrying out more risk assessments on investments following the events of the last 18 months. Vendors and also the channel, therefore, will have to focus on the strength of their balance sheets and increasingly be open about their financial positions.