"INTL Risks
There are several risks for Inter-Tel.
Size Matters - Inter-Tel is a small company relative to its major competitors.
If Avaya and Nortel were to get their issues under control, they may find more
resources to allocate into Inter-Tel's focus area. As shown above, both
companies have an R&D budget a multiple of the size of Inter-Tel's. However,
both Avaya and in particular, Nortel, are in multiple businesses.
Macro-Economic - If the consumer rolls over and the economy double dips in the
second half / beginning of 2003, then basically every enterprise equipment
player will be hurt. This issue is pertinent to Inter-Tel. If the economy
rolls over, less people will be hired and less need to buy additional lines.
Also, budgets would be cut and companies expected to do some kind of an upgrade
may push out the purchases.
Convergence is another risk. Just as there was an upgrade from analog to
digital there will be an upgrade from the current circuit switched architecture
to IP. The question is will some of the data networking companies such as
Cisco have a large advantage as networks truly converge. With an IP network,
both data and voice could all go through one central network. An IP PBX phone
channel could be just an incremental blade on a router. We believe the market
is moving in that direction but it will take a very long time for something
such as this to occur. The first reason is that voice is a critical
application and most routers and IP networks can not guarantee the high level
of service needed. Secondly, there are several technical issues. For
instance, it would be difficult to incorporate such capabilities such as
conferencing and music on hold. Therefore, separate boxes would be needed to
provide such features.
Off Balance Sheet Financing - Inter-Tel typically generates approximately 25%
of its revenues from leases. The company holds some of these leases on the
balance but also sells some with recourse. On and off balance sheet, the
portfolio was approximately $252 million at the end of last quarter. We do
not believe this is a major issue as the company is adequately provisioned
(typically 4%-6%) of the portfolio. However, in any slowdown scenario, the
company could be adversely affected. Inter-Tel attempts to mitigate the
portfolio risk in several ways. The first is that the portfolio is spread over
12,000 plus customers (making the average size of the loan approximately
$20,000). Secondly, the customer base is widely spread by both geography and
end markets. Lastly, the company is conservative when estimating residual
value. Typically, under a four to five year lease agreements, the company
assumes only 10% of the initial price for residual value. If a customer ends
up defaulting, Inter-Tel can repossess the system, upgrade with new
software/some features and then resell the product to make up for at least part
of the deficit. Many of the leases are renewed after the first period, usually
resulting in a profitable revenue stream over the remaining life of the
equipment." |
