As the meeting progressed, the executives calmly ran through a Powerpoint presentation of its progress in marketing broadband. It was no secret that the company was behind target, but there was a surprise in store for those attending.
At the end of the presentation the management listed the positions within the team that were being made redundant. Every manager in the room featured on it. In all, 26 of them were told to collect their belongings and vacate the building. They would be paid six weeks’ wages and their mobile phones would be disconnected within 48 hours.
“We were shocked,” said one of those present. “We knew the business had problems, but we never thought they’d do this. We only joined a few months ago. There was a total lack of humanity about the way it was handled.”
The early morning execution contrasted starkly with the same team’s triumphant hiring. Flashing hefty salaries of up to €90,000 and big bonuses, chief executive Fanning poached a total of 49 staff from Eircom last year to provide the bedrock of a 120-strong door-to-door sales team that would drive broadband subscriber levels to 64,000 by the middle of this year.
The recruits included Kieran Cremin, Eircom’s former head of national residential sales. Eircom initiated legal proceedings to try and enforce a clause in Cremin’s contract that prevented him from working for a competitor for 12 months.
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After lengthy legal haggling with his former employer, Cremin only began work with Smart at the beginning of April. Five months later he is out of a job.
Last weekend, Fanning told The Sunday Times that his ambitious target for broadband subscribers had not been met and would be extended to the middle of 2007.
He blamed Eircom for dragging its feet in switching over customers to Smart’s service and said the public had also grown tired of the direct sell.
“Door-to-door is now driving people mad,” he said.
Those in the sales team said it had proved impossible to meet their targets because Smart had not been able to get its equipment into as many Eircom telephone exchanges as was originally planned. As a result it often had no service to sell.
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According to Fanning, Smart has 18,000 “live” broadband customers with another 6,000 in the pipeline. This gives it about 6% of the market, which is still not a significant share.
The company is now switching its marketing focus to inbound telesales. Those who want to “get Smart”, as it were, will have to ask for it.
()“The problem with that strategy,” says one insider, “is that a lot of the people who ring in still can’t actually receive the service as Smart’s coverage is limited to certain parts of the country.
“So they’ll have to throw even more money at advertising and marketing to meet their targets. That’ll be a tough ask.”
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SMART TELECOM’S current problems represent a big speed bump in one of the most extraordinary comebacks in Irish business history.
As founder of MMI Stockbrokers, Fanning blazed a trail in Dublin investment circles in the mid-1990s.
Young and hungry, he and his fellow brokers were dubbed the masters of the universe for their naked ambition and the manner in which they tweaked the noses of established rivals.
Fanning lived the high life. He bought a stately pile in Kildare for IR£350,000 (€450,000) in the early 1990s and drove a flash car. When MMI went bust dramatically in February 1999, owing creditors more than €10m, he went into self-imposed exile.
He reinvented himself as a telecom entrepreneur in late 2000 when he was invited by Smart director Ken Barry, a former Waterford Glass cutter and father of the magician Keith, to join a small start-up. (Keith Barry is the face of Smart TV adverts with their “it’s not magic, just Smart” slogans.) Smart started out as a payphone operator and phonecard seller. But Fanning aggressively branched out into practically every sphere of telecoms.
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The company is now Ireland’s third-biggest residential phone company behind Eircom and BT and was listed on the Alternative Investment Market in London two years ago.
It has more than 50,000 landline voice customers in addition to its 18,000 broadband subscribers. It has also dipped its toes into the lucrative corporate market.
Smart’s share price rose by almost 33% to 27p when news broke that it had secured a licence to offer 3G mobile services last November. The licence has since been withdrawn and is the subject of litigation.
Losing the 3G licence was a blow to Smart. Securing it meant it was the only company here, with the exception of Eircom, that had both fixed line and mobile operations.
With a mobile licence in the bag, Smart should have been attractive to a bigger player, similar to the turn Denis O’Brien made when he sold Esat Telecom to BT for €2 billion.
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Last week, Smart shares were trading at just 9p, less than two-thirds its flotation price.
“It’s a company that has repeatedly missed its targets and the market has given its verdict through the share price,” said one unnamed analyst.
()“It originally said it would have 64,000 broadband customers by the middle of this year. Then in June it said it would have 40,000 by the end of the year. Now we’re told the original target won’t be met until the middle of next year.
“It also recently said it would break even at an operating level in mid-2007 when it was originally supposed to have done so by the end of this year.
“It really has to demonstrate to the market that it can execute on its strategy.”
Revenues in the year to December 2005 almost doubled to €45.6m, and analysts predict turnover this year will top €60m. Smart has also had success securing government contracts, a sign it is taken seriously. In June it said the Irish Prison Service had awarded it a three-year contract to provide a network linking the country’s 14 prisons. In total, the group has been awarded €2m-worth of contracts by the government this year. But the bottom line for investors is that Smart racked up losses of €23m last year and the loss for 2006 is forecast at about €35m.
Last November it raised €30m through a rights issue underwritten by Brendan Murtagh, a director of building materials group Kingspan who was a prominent client of Fanning at MMI and provided a loan of €28m to Smart to help to pay an instalment for its 3G licence.
The company has had an insatiable appetite for cash over the past four years, completing fundraisings with an aggregate value of just under €60m.
“It has been literally one continual fundraising,” said a leading corporate financier in Dublin. “It’s understandable given the nature of the beast, but it’s never raised enough money to fund its expansion.”
Fanning’s strategy is to build an alternative to Eircom. Rather than reselling Eircom broadband, Smart puts its equipment in Eircom exchanges. This allows the company to take direct control of its customer base in a process called local loop unbundling (LLU).
“To be fair to Oisin and to Smart, they are trying to do the right thing by challenging Eircom’s monopoly,” said one former senior employee. “Unfortunately, Eircom hasn’t been willing to play ball, but you can’t knock Oisin for trying.”
The problem for Fanning was that liberalisation of the telecoms market happened some years before. “Denis O’Brien had first mover advantage and made a pot of money out of it,” says one financier. “Smart is trying to replicate that, but the boat has already sailed.”
According to insiders, Smart planned to have 64 exchanges unbundled by August, but capital constraints and delays mean the company so far has just 34 of its own exchanges. The result is patchy coverage. Many inside the company believe its €6m a year national advertising and sponsorship campaign is a waste of money.
“It sponsors the Rose of Tralee festival each August, yet it doesn’t have one exchange in Kerry,” said one insider. “So you have people there ringing up looking to sign up for broadband who can’t receive it. All of that local branding around the festival is wasted.”
The company currently can only offer a service to residents in parts of Dublin, Cork, Dundalk, Limerick, Letterkenny, Galway, Sligo, Portlaoise and Waterford.
“There’s no doubt Smart has helped to bring down the price of voice and broadband products,” said Tom Hickey, chairman of Alto, a lobby group for telecoms liberalisation.
“The problem for the company is that it has had problems switching customers over (from Eircom) and largely because of this a whole host of rivals have been able to counter its pricing,” he added.
Smart is offering a 3MB broadband product for just €11 a month. It has also offered free phone line rental for life and earlier this year undercut competitors with a bundled package called Smart Talk costing €35.99 at peak times.
()“[Smart Talk] is a good product,” said one former staff member. “Unfortunately it’s about 12 months too late.” Competitor Digiweb, based in Louth and run by Colm Piercy, was founded in 1997 and originally acted as a web-hosting company. It has since branched out into broadband by reselling Eircom’s product or offering wireless and satellite packages.
It has 18,000 customers, the same as Smart, but these have been acquired at a fraction of the cost. According to John Quinn, head of strategic development at Digiweb, it spends about €1.5m a year on marketing, about one-quarter of Smart’s annual spend.
“Our strategy is that we will engage in the LLU process once the regulatory and financial environment is right for us to do so,” Quinn said.
To compound its broadband travails, an intensive win-back campaign from Eircom has seen Smart’s number of voice customers fall by more than 20,000 this year.
FANNING says that ditching the “feet on the street” campaign and cutting out the former Eircom sales managers will save €12m a year. The savings will cheer investors, not least Murtagh.
But the former stockbroker now faces two distinct targets: achieving cash break even and nearly tripling his broadband subscribers.
That might not be magic, but it would be pretty damn smart.
COURT IN THE SPOTLIGHT
SMART is awaiting a decision from the High Court on its appeal against Comreg’s decision in February to revoke the award of the fourth and final 3G licence.
Smart was the rank outsider in a three-horse race last November that included Eircom and Meteor, the 2G mobile operator that had just been acquired by Eircom.
Comreg revoked the licence after Smart failed to produce €100m worth of guarantee bonds by an agreed deadline of January 30. The bonds would have been used to penalise Smart if it failed to meet deadlines for the building of the mobile network.
In July, Smart argued in court that it had given Comreg three draft bonds, including ones from BT and Chinese multinational Huawei, which were to build the network and supply the technology.
Under cross-examination, however, Ciaran Casey, Smart’s head of operations, agreed that it had no contract with Huawei obliging it to provide a bond. He also said that a clause in the supply agreement with Huawei stating that Smart itself had put in place a bond with Comreg for €100m was not true.
Most observers believe that this dealt a serious blow to Smart’s case to regain the licence. It also raised questions about the company’s credibility.
Whichever way it goes, the case seems destined for the Supreme Court, further draining Smart’s limited cash resources.
In its 2005 annual report, Smart’s chairman Raymond King said the firm had incurred 3G-related costs of €4.4m last year and had set aside a further €3.3m for this year.