Commander: Can the turnaround succeed?

Four months into Commander's 'turnaround' plan, CEO Amanda Lacaze is confident that the ailing IT services company is heading for better days.

It was what financial analysts referred to a "five minutes to midnight" appointment.

IT services company Commander was struggling. Revenues were growing, thanks to former CEO Adrian Coote's appetite for thinking big. But costs, and debt with it, were getting way out of hand.

In the six months to December 2007, Commander lost AU$245 million. Some AU$400 million was also wiped off the company's value on the stockmarket in under a year — with shares worth over AU$2 plummeting to around the 10 cent mark. Its debt facilities with major lenders, sitting at around $360 million, were exhausted. Key stockmarket investors had either fled (Babcock and Brown) or sold down their stakes significantly (Perpetual Investments, AMP).

Enter investment house Hunter Hall, and right behind it a new CEO to lead the company back from the precipice — former AOL/7 CEO Amanda Lacaze.

The Lacaze/Hunter Hall partnership had worked once before. Together they had taken struggling telco minnow Orion Telecommunications from a company trading at 12.5 cents per share to a company worth twice as much when it was sold to M2 Telecommunications.

Lacaze's appointment at Commander, says BBY financial analyst Mark McDonald, came at a "dire" time for the company.

"The extent of the negative cash flow in the six months prior was in the order of AU$100 million," he said.

The dilemma was best explained by the closing remark in the half yearly report by auditor PriceWaterhouseCoopers.

The company's spiralling debt and lack of cash, the auditor said, "indicate the existence of significant uncertainty whether the consolidated entity will continue as a going concern".

The 'turnaround'
Pulling Commander back from the precipice was always going to require something drastic. In a move that saw ex-employees dub her "cyclone Amanda", Lacaze announced a massive restructure.

The company's headcount was reduced from 2000 to well below 1400, with most of the cuts being made in a single day. Management positions were gutted. Business units that were deemed external to the company's core value propositions were put up for sale or dissolved.

Lacaze says it wasn't the least bit nerve-wracking.

"My view from the outside of the company, which has been confirmed by my experience on the inside, was that Commander is a business with really significant value areas for its customers," she says.

What she also saw was a business that had lost its direction.

"A large share of its revenue line was contributed by the resale of IT hardware," she says. "There are businesses out there that make money out of distribution — but you have to be experts at logistics, relentlessly focused on costs, operating with very, very slim overheads. It's not an area where Commander could add significant value."

Commander's highly transactional hardware resale business, she said, required high overheads but delivered low margins.

The provision of IT services, however, had "very healthy" margins and resulted in recurring revenue streams.

Lacaze opted to axe the resale business — and only sell products when part of broader services relationships with a customer. Any employee involved with pure hardware resale — be it the product salesforce or roles that indirectly supported them, were made redundant.

With no financial institution willing to lend the company any more cash, Lacaze also went about selling off some assets to provide Commander some working capital.

Wholesale telecommunications arm Unitel was sold to Orion's buyer M2 Telecommunications, networking integrator Nexon was sold back to its founders, while Commander's West Australian ICT business was sold off to Empired for a mere AU$30,000.

"What I aim to do is ...

...unlock the intrinsic value of the business," Lacaze says. "Our focus now will be on the provision of services that have customer intimacy, rather than focusing on trying to be an efficient distributor of products."

Key telephone systems, professional services, managed services and the company's OneStream voice and data network jumped off the page as the profitable parts of the business to focus on, she said.

Core strengths
Bjarne Munch, research analyst for IT industry watchers Gartner, believes that despite Commander's financial woes, its product and services offering is compelling.

Munch credits Commander for building a next-generation IP network, OneStream, an investment he feels the major carriers are still playing catch-up on.

While the carriers are still tapping the last few dollars from their investment in Frame Relay and ATM networks, OneStream is based on the MPLS protocol. It provides carrier-grade IP telephony and VPN, and is "application aware" -- built for such converged applications as presence and unified messaging. It's these applications Lacaze describes as the "sexy end" of the communications market.

Munch says that Commander has made the right investment in managed network services to compliment this network rollout. As IP telephony becomes mainstream, he says, organisations will seek more complex applications to derive value from it, and will soon realise they need external help to manage them.

"Commander have a good, sound strategy for network services - they seem to understand the value proposition," he says.

"I am no financial analyst, but I find it hard to believe that Commander won't successfully get through this phase," he continued. "It comes down to execution now, whether they can get their costs under control."

Drowning in debt
BBY analyst Mark McDonald says Lacaze is doing a good job in terms of getting back into a position of stability in terms of cash flow.

In the January and February of this year, the company bled AU$100,000. It earned AU$7.7 million in customer receipts and salvaged AU$10 million from the sale of Unitel to M2 Telecommunications, offset by AU$14 million in redundancy payments and a further AU$3.8 million related to past debts.

"That's a significant turnaround from the six months to 31 December," according to Lacaze.

McDonald agrees. The company is cutting down on its appetite cash, he says, in an environment where its debt is fully drawn. Commander doesn't have any recourse to further borrowing.

"The single biggest issues is Commander's very high level of debt," he says. "It appears that the asset sales thus far hasn't made much of a dent in that debt. You get the impression that those funds have largely being used to assist in the company's working capital requirements."

"It is difficult to image that we'll see this situation change in the short term," he said. "Their position remains very tight. The share price isn't going to go anywhere while these debt issues remain. We're unlikely to see significant new investment until these issues are resolved."

"I do believe Commander's management, with their stakeholders, have viable options," he concludes.

"They're hopefully a survival story. But the jury is still out."