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Melbourne Has What IT Takes

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Melbourne IT’s transformation of its enterprise services business from an infrastructure as a service operation to a managed services business should provide improved earnings quality.

After a rough time on the sharemarket over the last decade, long-suffering shareholders in internet service provider Melbourne IT Limited (MLB) could be forgiven for losing patience, but the company has bitten the bullet on a restructuring that gives them at least some cause for optimism – however guarded.

Melbourne IT offers Internet domain name services, critical Web hosting, online brand protection and promotion, video content delivery and managed IT services. It is the largest Internet domain name registrar in Australia, and the sixth largest in the world, with more than 500,000 direct small-to-medium business (SMB) customers in Australia.

MLB has two business divisions, SMB eBusiness Solutions (SMB) and Enterprise Services (ES). The SMB division provides Australian and New Zealand SME businesses with integrated online solutions, as well as a technical and support solution for domain name registration and other online business services. The Enterprise Services Division provides managed services and business-grade web application hosting services to corporate and government clients throughout Australia.

The restructuring that Melbourne IT is conducting is aimed at transforming its enterprise services business from an infrastructure-as-a-service (IaaS) operation to a managed services business. While the company is a market leader in domains and hosting for SMBs, Melbourne IT has been remaking its enterprise division into a services business – driven by declining revenues from dedicated hosting for the enterprise sector.

In its transformation Melbourne IT has ditched some businesses and picked up others. In February last year MLB snared rival web domain registrar NetRegistry, in a deal that merged the two biggest players in the domestic market. That was followed in March with the sale of its lucrative digital marketing division to US rival Corporation Services Company for $152.5 million, an amount almost equal to MLB’s market capitalisation at the time.

In November, MLB announced an agreement with leading social media marketing platform Tiger Pistol, which the company said would broaden the reach of the SMB division beyond its traditional web presence into high-growth social media solutions, as a major element in the company’s strategy to provide small and medium-sized businesses with innovative solutions to enable them to be successful online.

At the same time, Melbourne IT revealed that it had become one of only 28 Amazon Web Services (AWS) Premier Consulting Partners in the world, from a global pool of more than 7,000 partners. The firm is building a range of managed services on top of the cloud infrastructure operated by AWS in Australia, including data centre consolidation services, managed web application services, managed ecommerce and managed content management systems (CMS).

The twin announcements encapsulated the breadth of the Melbourne IT offering, which extends from helping small businesses build a profitable online presence through to managing the complex web environments of large enterprises and governments.

Last month, Melbourne IT announced the acquisition of Canberra-based cloud services provider Uber Global, for $15.5 million. The acquisition will see Melbourne IT take on 70,000 customers as well as more than 400 resellers. Uber Global provides direct domain registration, hosting, cloud applications, white-label business services through channel partners and bespoke cloud solutions.

As the ES business evolves to a managed services business model, it will move away from reliance on Co-location services, dedicated website hosting services, managed operating systems and managed IT applications, towards a managed services business offering managed CMS solutions, e-commerce solutions, communication and collaboration services, web application services, cloud solutions and internet performance and security management. MLB estimates its total addressable market size at $600 million, with $300 million in managed services, growing at 16% compound a year.

In the domains business, MLB says the NetRegistry purchase has been a major boost, adding to its business capability, providing a strong customer-facing technology system it will use across its business, and bringing with it a mature customer base, more products and a stable, recurring revenue stream from small-to-medium-sized business clients. MLB says it can now leverage its brand portfolio: as in Melbourne IT/Domainz, “get the best domain;” NetRegistry, “get your business online;” and Webcentral, “get the solutions you need.”

In February, Melbourne IT reported a $24.3 million increase (21%) in revenue to $124.7 million for the financial year ending 31 December 2014. Excluding revenue from NetRegistry, revenue before interest from continuing operations was down by 1.9 per cent to $98.9 million.

Net profit after tax fell 90%, from $6.2 million to $600,000; but after normalising for impairment and the costs of acquiring NetRegistry net profit after tax rose by 27%, to $7.9 million. In its guidance for FY15, MLB says it expects to achieve “high single-digit organic growth” in underlying EBITDA (earnings before interest, tax, depreciation and amortisation.)

Melbourne IT’s transformation of its enterprise services business from an infrastructure as a service operation to a managed services business should provide improved earnings quality. A full-year contribution from NetRegistry should also contribute more significantly in 2015: in the 2014 result, NetRegistry contributed $25.3 million, or 20.3%, of group revenue, and $3.8 million, or 29.7%, of EBITDA.

According to the analysts’ forecasts collated by Thomson Reuters, the analysts that follow Melbourne IT see strong profit growth. The consensus sees Fy15 earnings per share (EPS) of 8.6 cents – compared to 0.72 cents at December 2014 – rising to 12.2 cents in 2016. The dividend, which was 5 cents a share in 2014, is seen as rising to 5.7 cents in 2015 and 6.1 cents in 2016. Staying at 80% franked.

As the company has gone through three years of restructuring, the share price has slowly responded, moving from 92.5 cents in late 2011 to levels around $1.30 at present. On December 2015 forecast earnings, that prices Melbourne IT on 15.4 times prospective earnings, and a forecast yield of 5.8%. Analysts have a consensus price target on the stock of $1.64, implying 20% upside from current levels.

View More Articles By James Dunn

James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au



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