UPDATE 2: Enablence sell-off likely includes Teledata

Elizabeth Howell
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Ottawa firm bought Israeli telecom solutions provider for $50M in 2010

Enablence Technologies Inc.’s (TSX-V:ENA) planned sale of its underperforming systems division is likely to include the business from Teledata Networks Ltd., which it bought just last year for $50 million.

(Stock image)

The takeover last year had been intended to raise the Ottawa firm’s profile in markets such as Russia, China, Brazil and Eastern Europe, where the Israeli company had already established customer relationships with tier-one service providers.

Both Teledata and Enablence's business focuses on helping telecom service providers upgrade their communications infrastructure to a newer one including Ethernet and Internet protocols. However, Enablence fixates more on fibre-to-the-home while Teledata focused on linking older copper-line networks with newer, multi-gigabyte technology.

When Teledata was brought into Enablence’s fold, it merged with the company’s systems division.

On Thursday, Enablence announced it is going to sell off that division as it has spotty contracts and had burned half the firm’s cash reserves in just four months. It will focus on buttressing its remaining line of business, optical components.

That said, in November Enablence noted the June 23, 2010 acquisition drove a 39-per-cent increase in revenue as Teledata’s presence attracted more customers, making the systems division perhaps a more lucrative selling target than a year ago.

OBJ calls to Enablence for comment went unreturned Thursday, but the firm did discuss the performance in its systems division in a conference call early that morning. Only one analyst, Daniel Kim from Paradigm Capital, asked questions in the call, which was announced just an hour beforehand.

“Fundamentally, this is about the third quarter in a row where we had push in major business that was a lot less predictable than we thought it might be,” said chief executive Tim Thorsteinson, who heads a company of about 25 people, in the conference call.

“We don’t have the scale to survive that. If we were much larger, these large deals pushing wouldn’t put a cash strain on the company like they do. But we’re not, and it will take time and money to build up to a position where we would be larger. We looked at the resource allocation and it doesn’t make sense.”

Preliminary numbers released Thursday for Enablence’s quarter ending Dec. 31 show cash-on-hand of $8.5 million, a decrease of about $9 million.

Revenue was $14.7 million, including $8.2 million from the optical components and subsystems division and $6.5 million from the systems division. The full numbers will not be released until sometime in late May.

Enablence had warned in February that it had a murky outlook for future quarters despite posting a record $34.6 million in revenue in its Q2 results. It did not give a reason at the time. Its systems division had made up $25.7 million of that total revenue, which included the largest single order ever, for $12 million, to an undisclosed Central Asian customer.

In Thursday's call, Mr. Thorsteinson said it wasn’t so much the size of the contracts that was the problem, but the unpredictability. In fact, the systems division had brought in new business in April, news Enablence chose to hold off on announcing as it did not want to create false impressions.

“This quarter looks like it could be better,” he said in response to a question from Mr. Kim about how business has been looking lately.

However, the long-term outlook is not quite as rosy. He said Enablence is competing against a number of larger firms in that space with more resources, “starving” its optical components line of the resources it needs to grow.

Enablence's four-point plan for increasing optical business includes:

- Expanding its product innovation contracts in its Ottawa design facility. These are contracts that sell new components to customers beyond the one who originally ordered the design;

- Expanding its sales staff to its facilities in Fremont, Calif. and Zurich;

- Bumping up its "product sales opportunities" outside of telecommunications in markets of high demand for optical components;

- Garnering revenue and margin expansion from the Chinese joint venture.

After pledging to focus its efforts on the optical division Thursday, Enablence further announced a private placement to raise up to $10 million through offering 45,500,000 common shares, which is expected to close May 4.

That money is targeted for "the growth and expansion" of this division, including funding a previously announced joint venture with Sunsea Telecommunications Co. Ltd. in China. That partnership is expected to bring up revenues and visibility in the fast-growing region.


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