re: dog Hehe - C'mon, be Colin for us!!! MGBGT needs someone to...

re: dog Hehe - C'mon, be Colin for us!!! MGBGT needs someone to cuss! Colin's not around any more and I've been too nice to MGBGT (and too mean to PEO) to be a good target.

Actually - I was thinking Merlin about what you said about margin benefit - improvement. (I know, I should get past this issue..)

But anyway - let's consider the possibilities.

1) - Telstra screwed them on wholesale pricing. This would neatly fit as an explanation insofar as the drop was so profound and neat. It's backed up by the fact that just about every other telco is crying foul at telstra and PEO is the only one that claims a good relationship. One could perhaps explain their silence on it by a confidentiality requirement by telstra on the terms of their wholesale relationship. The difficulty with this interpretation is that it would directly contradict their announcements to the ASX (and Colin's statements) - and I don't believe it is somethign they would risk.

2) Things are more as Merlin suggests - PEO secured a margin benefit (i.e. a better price from Telstra) - but gave up any margin improvement (i.e. gross margin figure) - in favour of spending on growth (lower prices etc).

After some thought I think this is the more likely state of affairs. Firstly - as an explanation it avoids the disadvantages of the above position... i.e. would be consistent with all previous announcements by the board. but what's more - and perhaps more significant - is that it would suggest a policy by the board which is TOTALLY consistent with their previous policy... i.e. neutral net profit figure - and as much growth as this would afford.

This means a number of things -1) that despite the drop in EBITA and the net loss for the first half PEO is in better shape than it has EVER been, but 2) Investors are not likely to reap any reward from this stronger position.

Discussing each in turn:

1) Why is it in a better position? Because it means that the drop in EBITA was totally deliberate. They realised that with the goodwill no longer being amortised - they had another 1.9 million that they could spend without producing a net loss figure. They decided to spend it. The one thing they didn't count on was that someone would still 300k of mobile phones. BUt if you look at it - if that event hadn't occured, then their net profit would have been almost totally neutral - which is what they been aiming at consistently over the past two years. On this interpretation the EBITA did not drop because they are in a weaker position - but because they spent it so as to grow the company as much as possible and to put themselves into as strong a position as possible.

2) - So then - why won't this be of benefit to investors? Well - it just happens to be that the market is shallow (I keep changing my mind as to whether the market is shallow or not) - and tends to just look at the figures without coming to an understanding which would EXPLAIN the figures - i.e. investors tend not to look for a plausible story that would explain the figures. It is very likely the PEO is going to continue to gear the company toward neutral profit (it has for the last two years) - probably at least until the climate in the telco market changes and things aren't so cut throat anymore. So no good news for the share price then - without a net profit it will not go up.

The thing about it is - is that the share price is a loaded spring. As soon as PEO reverses its policy and starts gearing the company for profit - those who have bought in significantly at the lower prices are going to make a fantastic amount of money. But it really could be years away. Who knows?

They may have just set an arbitrary point in time - or they may be waiting for the right market conditions. Probably the latter I would say. This means that picking the right moment to jump into this stock (or jumping back in for many of us) - will be contingent on picking the telco market. And this is some long term level speculation... One has to consider which was the regulatory decisions are likely to go - convergence of players in the market... all sorts.

That iinet is imploding is a good sign for those watching reseller stocks like PEO. It means that market convergence is starting to happen - propelling us forward to the time where margins improve. I'm thinking back to Colin's old post about the tech cycle. There is still a long way to go. CEOs are showing their weakness - iinet should have given up a long time ago - from a position of strength. They were foolish... and many of us were predicting their demise long ago (myself included). But despite this, CEO's are failing to bite the bullet and accept convergence. MAQ is a good example - but look at AAPT... Telecom NZ is still dilly dallying with their decision over that. They really need to DUMP THE SUCKER.

So we'll have to wait until the market (mostly telstra) - forces them to consolidate - and all the pain n hurt that will involve. That could take some time. Which means that those who are waiting for PEO to come good profit wise, could be waiting for quite some time.