Pinnacle drops on margin falls

Pinnacle Telecom, the Scottish company which has won the contract to supply the BBC with data services during the London Olympics, has fallen dramatically this morning after revealing falling revenues from mobile services and a drop in gross margin.

The company provides five separate streams of services related to its core IT, data, telecoms and mobile products. The "big idea" is to cross sell the services so Pinnacle is "hard wired" into its clients' business, boosting retention and profits.

On the surface the numbers look impressive: in 2011 it saw saw operating profit (before certain items including exceptional acquisition costs) come in at £165,299, a 110% increase on 2010. Turnover reached £8.5m a rise of 29% over the prior year.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Part of the problem for Pinnacle, though, is it still operates at a loss (operating loss after all costs, including discontinued operations), in 2011 this declined 60% to £98,305, from £246,072 in 2010.

Nevertheless losses are losses and it seems some of this reduction was due to a change in amortisation policy which reduced the charge by £82,702. The company argues its previous policy on amortisation did not reflect how effective it is at retaining customers. Investors may see this as fair enough.

The real problem appears to be a 15% fall in mobile sales compared to 2010; down to £565,460 from £663,551.

Another issue was that gross margin from revenue fell from 30.4% in 2010, to 28.9% in 2011. This is a significant warning sign for investors looking at what is still a loss making entity.

The margin appears to have been affected by Pinnacle's headcount increasing during the year, pushing administration expenses up 14% to £288,420.

By 10.33 Pinnacle shares had fallen 10.3%. Over the last 12 months the stock has dropped 17%.

BS