Internal investments hold back Stratatel profits

Sales, marketing teams get boost as company record large drops in profits, EBITDA

Continued investment into sales and marketing teams at Perth-based telecommunications and IBM services provider Stratatel (ASX:STE) have caused a decrease in the company’s earnings before interest, tax, depreciation and amortisation (EBITDA), according to managing director, Michael Fairclough.

Stratatel’s financial results indicate a drop in EBITDA of 19.4 per cent to $1.24 million for the 2010 financial year, despite a 53 per cent increase in revenue to $12.46 million.

Net profit was also down for the period, with a 64 per cent drop to $405,770.

The company reported cash assets of $1.56 million and no debt at the end of the financial year.

In answering qualms about the EBITDA decrease, Fairclough told Boardroom Radio Australia that the company’s internal investments provided positive benefits that outweighed short-term shortfalls.

“That’s something that certainly I’m not pleased about per se, but it’s important to recognise when you’re going for substantial revenue growth that you need to be a lot of investment back into key areas of your business and that’s what we did with our sales and marketing effort,” he said. “We put more money into sales, we put more money into marketing and consequently there’s a lag time in getting the results from that.”

Fairclough also pointed to the economic downturn and the “large number of sales deferrals for new business from customers” that resulted, leaving Stratatel with potential customer retention issues.

“One of the challenges we had faced was retention of customers, particularly when you’re integrating new businesses into the group but I’m pleased to say in terms of client retention we have that under control,” he said.

The 2010 financial year began with Stratatel’s $500,000 acquisition of Resource Systems and the addition of a software and services arm to the company, reselling IBM products under an agent agreement. According to Fairclough, the acquisition drew a lot of Stratatel’s growth for the financial period accounting for over $4 million of revenues, but he said a planned national roll out for the newly acquired assets would see greater benefits in the forthcoming year.

“The strategy in addition to where we’re focussing our sales and marketing is all around further product development of our existing software and refinement of our existing services for improved service delivery and improved margins on those managed services as well as developing new software products, we have a number of those,” he said.

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