opinion After Internode made four senior technology staff redundant last week and acknowledged it had been through some “difficult times”, a number of hysterical online commenters immediately took the chance to claim the sky was crashing down on the ISP’s head, predicting doom for managing director Simon Hackett and his merry band.

“I would say it’s all downhill for Internode from here on in,” wrote one commenter on Delimiter. “First the massive loss of customers per the bandwidth situation, and now the voluntary termination of many of its most senior employees. Unless it can pull a magic trick out of the bag, hmm, it doesn’t look good.”

“Alignment ready for moving to an acquisition phase,” claimed another. “I don’t think the NBN is going to be all rosy for Internode; they will just be another player and not be able to differentiate itself. With a small subset of users compared to the Bigponds and iiNets, they will not have the cash flow to continue. Simon probably wants to cash the business in while it is still worth something.”

On Whirlpool things were heading along the same lines, with one commenter claiming the ISP’s most recent financial report showed a drop in profit over the past several years of over 40 percent. Combined with the “difficult times” comment made last week by Internode CEO Pat Tapper, the commenter inferred “the presence of serious business problems that, if not addressed, could well impair Internode’s future”. “This will be the downward turning point for Internode as we know it,” added another.

Now, I found all of this quite troubling. Internode has long been a very positive force for change in Australia’s telecommunications market, and as iTWire commentator Stuart Corner pointed out, the normally transparent and honest company didn’t exactly handle last week’s restructure particularly well, going to ground for hours after the story broke and refusing to take questions on it after it issued a limited statement later in the day.

However, in this article I want to argue that last week’s announcement does not, as some commenters have claimed, reflect the beginning of the end for Australia’s favourite privately owned ISP. In fact, Internode has a very bright future ahead of it — and one which is just beginning to unfurl.

For starters, let’s take a look at the company’s financial statements.

The most recent financial statements which Internode filed with the Australian Securities and Investments Commission show, as some commenters have noted, that the company’s net profits after tax have dived severely over the 2010 financial year — ending at the end of June last year. In 2010, Internode made net profits of $2.8 million, compared with $4.8 million the year before.

However, this is only part of the picture. If you look a bit closer you’ll see that Internode’s overall revenues soared in 2010 to $163 million — up 20.7 percent on the prior year and up a whopping 41.7 percent on 2008. That’s phenomenal growth, by anyone’s lights — and most Australian corporations would be jealous if they could achieve such levels of revenue expansion.

Internode’s employee numbers have followed. Sure, the company lost a handful of staff last week, but it looks like overall its staff numbers are growing every year — consistent with its revenue expansion. And it is quite possible that Internode’s real-world net profits are actually much better than it claimed in its ASIC filings. With only one shareholder, after all — Simon Hackett — the company has no technical need to make profits and disburse them back to shareholders. By adding on extra expenses such as booking in big bandwidth contracts (see below) and keeping its profit line close to break even, Internode will benefit through investing in its operations and paying less tax.

One area of potential concern we should note is in Internode’s ability to pay its debts on time. The company’s total current assets appear to have been sitting about even or even below its liabilities, which perhaps is OK — but we’re betting it has probably been expanding a little fast in recent times and may need to yoke that back a little, or else its creditors might get a little unhappy.

One factor here might be the extent to which Internode has committed its funds to future bandwidth needs. Its most recent accounts show it has committed over $60 million towards bandwidth costs from its suppliers (for example, Telstra, possibly PIPE Networks and so on) over the next five years and beyond.

Now, we can’t read too much into this financial information when it comes to Internode’s recent performance, as it only covers the period up until July 2010. However, it’s reasonable to suspect that the company would have at least held its revenue line over the past year — and we expect it to have continued its strong growth.

Furthermore, Internode’s capital situation is also strong.

According to its financial documents, it looks like Internode is still fully owned by its founder Simon Hackett, with 50 percent of its ordinary shares held by Hackett himself directly and the other half held by something called “the Simon Hackett Trust”, which we’re betting is some kind of financial structure which Hackett is using to minimise his tax responsibilities, perhaps conduct philanthropic activities and so on.

Interestingly, in February this year, it looks like Internode divided its existing ordinary shares on a one to 90 basis — creating some 1,440 shares in the company, where previously there had been just 16. What this possibly means is that the company may be looking to take on additional investors and diversify its ownership a little.

I’m betting, with Internode’s rapid revenue expansion, that there would be absolutely no shortage of willing investors if Hackett did decided to sell some of his shares in the company. And this kind of activity would also result in a rapid injection of capital into the business, allowing it to attack what looks like a modest problem with current liabilities.

It would also allow Internode to invest heavily in expansion as the National Broadband Network project is rolled out over the next half-decade. As iiNet chief executive Michael Malone has noted, the fibre rollout will flood the market with customers who have previously been locked into Telstra or Optus HFC cable connections and unable to easily churn.

With its strong reputation for stellar customer service and product innovation, Internode would stand to benefit from this customer backwash; and in fact it has already commenced its push in this area, with Hackett declaring Internode will be first to connect customers in every first-stage NBN rollout zone in Australia as the network is rolled out.

Of course, there is also the possibility that Internode’s share expansion could be the precursor to splitting its equity further in a sharemarket float. The company hasn’t previously ruled this out, but to our mind, unless Hackett — already a multi-millionaire — wants to cash out to the tune of several hundred million dollars — there would not be much point in a public listing.

The public listings of similar firms such as TPG and iiNet allowed the pair to conduct substantial acquisitions and grow scale in Australia. But in today’s ISP landscape there are simply not many companies left to acquire, and we doubt Internode would want to get into a bidding war with iiNet or TPG for them, when it’s still growing strongly organically.

Now, all of this is not to say that I agree with everything currently going on at Internode.

With its management structure currently dominated by executives such as Hackett and Tapper who’ve been leading the company for an age, I’d like to see some young guns brought in to give the company a bit more ‘vim & vigour’. As I’ve previously written, I’d like to see Internode quit its complaining about market giant Telstra so much and take some further steps to innovate in telecommunications sector infrastructure investment itself, perhaps with the aid of external investors.

However, with in excess of 450 staff, revenues growing 20 percent per year, new market opportunities opening up and a clutch of veterans at the wheel, Internode is one of the fastest-growing and most stable telcos in Australia right now.

Those currently running around like Chicken Little with their heads cut off and proclaiming that the sky is going to fall on the company need to take a swift injection of reality juice directly to the frontal lobe. The loss of four of Internode’s most senior technical staff and a few other “difficulties” at the company are not evidence of a pending wider collapse.

Image credit: Internode

Related posts:

1. Coalition victory could trigger Internode fibre rollout
2. Internode warns: New PoI model
   could consolidate ISP industry
3. Internode hints at NBN pricing change
4. Internode apologises for pricing plan “stuffup”
5. Internode wants to resell Telstra HFC, Next G

Tweet

1. Michael Wyres
   Posted 05/09/2011 at 4:22 am | Permalink | Reply

   Headline win…

   • Renai LeMay
     Posted 05/09/2011 at 4:25 am | Permalink | Reply

     Heh I couldn’t think of a better way to phrase it. And I don’t work for a mainstream media outlet :)

2. Marcus
   Posted 05/09/2011 at 4:49 am | Permalink | Reply

   yeah, the panicked comments make more sense if you imagine they’re written from the point of view of someone with an emotional investment (like a current or ex-employee).

   Still doesn’t make them right though…

   • Renai LeMay
     Posted 05/09/2011 at 6:55 am | Permalink | Reply

     Yeah a lot of them had that ‘shrill’ feeling to them which I normally associate with chickens running around with their heads cut off ;)

3. Danny
   Posted 05/09/2011 at 4:50 am | Permalink | Reply

   The headline annoyed me the most, it either ‘bullshit” or “crap”, I only know one other person who uses “bullcrap” and he’s a wanker…. please don’t make me put you in the same catagory. :)

   On Topic
   I don’t see node going anywhere except up.

   • Renai LeMay
     Posted 05/09/2011 at 6:55 am | Permalink | Reply

     Hmm I think ‘bullcrap’ is fairly acceptable Australian speech :) Or at least I have always used it!

     • Marcus
       Posted 05/09/2011 at 7:02 am | Permalink | Reply

       really?
       Bullcrap is acceptable but “appalling” isn’t?

       Man you have seriously inconsistent standards.

4. Duideka
   Posted 05/09/2011 at 4:56 am | Permalink | Reply

   I’m not sure if the financials are reflecting the real situation, you seem to suggest that today would be experiencing the same growth as before, remember it was only a month ago Internode did the unspeakable and increased prices for many of their plans and slashed quota on some, this has generated one hell of a shitstorm on WP and many other ISP’s are jumping up the list on WP’s ‘Our Customers Use’ rankings, many of the grandfathered plans (EG: EasyBB) have also moved from near top place to not being listed at all.

   With that said, I personally would be with Internode if I could get access to a Optus or Agile DSLAM, their Reach plans are terrible – if Internode was to fire all of their helpdesk staff and off-shore them, I’d still be want to choose them – my reasoning behind Internode being a high choice is their network.

   I don’t get the idea that only Australian support is good, there are useless people in Australia just like there are useless people in India, or whereever – with that said, off-shoring support does not have to be a downgrade – there is a wrong way to off-shore support (Vodafone as a example) and then a right way (Exetel) – Exetel’s support staff might be in Sri Lanka, but they all have qualifications and know their stuff.

   So overall I do agree Internode is NOT up shit creek, but only because if it came to it they can easily make changes to make their business far more profitable, Australian support staff are not cheap. Wether or not the ‘node fans would be okay with Internode off-shoring their support (even if they only hired very qualified people) is a different question.

   • Renai LeMay
     Posted 05/09/2011 at 6:56 am | Permalink | Reply

     I don’t like it when companies offshore their support, and I’ll be the first to line up to slam Internode if they do this. As for their recent plan changes, sure, these changes affected a lot of geeks on Whirlpool, but I’d question to what extent the broader population of Internode customers really noticed etc. Certainly, I don’t think those changes would have had much impact on Internode’s overall revenues.

5. Duideka
   Posted 05/09/2011 at 4:56 am | Permalink | Reply

   I’m not sure if the financials are reflecting the real situation, you seem to suggest that today would be experiencing the same growth as before, remember it was only a month ago Internode did the unspeakable and increased prices for many of their plans and slashed quota on some, this has generated one hell of a shitstorm on WP and many other ISP’s are jumping up the list on WP’s ‘Our Customers Use’ rankings, many of the grandfathered plans (EG: EasyBB) have also moved from near top place to not being listed at all.

   With that said, I personally would be with Internode if I could get access to a Optus or Agile DSLAM, their Reach plans are terrible – if Internode was to fire all of their helpdesk staff and off-shore them, I’d still be want to choose them – my reasoning behind Internode being a high choice is their network.

   I don’t get the idea that only Australian support is good, there are useless people in Australia just like there are useless people in India, or whereever – with that said, off-shoring support does not have to be a downgrade – there is a wrong way to off-shore support (Vodafone as a example) and then a right way (Exetel) – Exetel’s support staff might be in Sri Lanka, but they all have qualifications and know their stuff.

   So overall I do agree Internode is NOT up shit creek, but only because if it came to it they can easily make changes to make their business far more profitable, Australian support staff are not cheap. Wether or not the ‘node fans would be okay with Internode off-shoring their support (even if they only hired very qualified people) is a different question.

6. Anonymous
   Posted 05/09/2011 at 5:03 am | Permalink | Reply

   I just always assumed that management shakeups = Doom for the business involved…

7. Anonymous
   Posted 05/09/2011 at 5:03 am | Permalink | Reply

   I just always assumed that management shakeups = Doom for the business involved…

8. Anonymous
   Posted 05/09/2011 at 5:03 am | Permalink | Reply

   I just always assumed that management shakeups = Doom for the business involved…

   • Michael Wyres
     Posted 05/09/2011 at 5:58 am | Permalink | Reply

     Not necessarily…behaviour like this can also come about due to forward projections looking dim, and the company taking preemptive action. I’ve also seen stuff like this going on just before acquisitions – either buying, or being bought.

     Or none of the above may be true.

     • Anonymous
       Posted 05/09/2011 at 6:11 am | Permalink | Reply

       But I distinctly remember NBNco had a management shakeup a few weeks ago. Not long after they went bankrupt and now Telstra will be laying the rest of the fibre for that FTTH project I’ve been hearing so much about.

       • Renai LeMay
         Posted 05/09/2011 at 6:58 am | Permalink | Reply

         lol

       • Pepe
         Posted 05/09/2011 at 7:02 am | Permalink | Reply

         you are just being playful now hubertcumberdale256.

         you know full well that telstra will in fact be doing the much more affordable, for the hurting taxpayer, fttn, with nbnco now going belly up and keeping the telstra hands wrapped tightly around the neck of australia communications.

         because we have good enough broadband to last us forever or longer and we don’t want our tax dollars wasted on others in some socialist conspiracy, just so you can download porn and play wow.

         just wait till 2013 and you’ll see. god bless america and tony.

       • Dbremner
         Posted 05/09/2011 at 7:36 am | Permalink | Reply

         Hubert, go put that on Wikipedia, that will make it true.

9. Dbremner
   Posted 05/09/2011 at 5:57 am | Permalink | Reply

   Part of the liabilities would be holiday pay and long service leave owed. At even 4 weeks and employee that would be well over 2 million. Add 4 weeks of long service (5 year employ) and theirs at total of 5. IT people can store up a lot of holidays (never a good time for holidays). My last position I had 6 months owed between holidays and long service.

   • Dbremner
     Posted 05/09/2011 at 5:58 am | Permalink | Reply

     “theirs” <- "there's". I hate I did that.

     • Renai LeMay
       Posted 05/09/2011 at 6:58 am | Permalink | Reply

       True — looking at Internode’s books, a substantial portion of their revenues goes straight into employee expenses.

10. Brendan
    Posted 05/09/2011 at 6:03 am | Permalink | Reply

    So, in the same week we have one post asking if Internode is about to die, the very next, “no, that’s bullcrap”. That’s some epic fence sitting, Renai. ;)

    On a more serious note, I’ll reiterate the point that companies re-align periodically. The sky isn’t falling. It’s only really grabbed the headlines due to the profiles of the folks leaving.

    Internode has been at an apparent “imminent failure” point so often, they could run a highly profitable sweepstake.

    And yet. They are still operating. Irrespective of armchair quater-backing, no less.

    • Renai LeMay
      Posted 05/09/2011 at 6:52 am | Permalink | Reply

      Um … I never asked if Internode was about to die. In fact, if you read the comments under this article:

      http://delimiter.com.au/2011/09/02/tech-management-bloodbath-hits-internode/

      You’ll see that I actually defended the company’s performance and future growth prospects, as I did today.

      • Brendan
        Posted 05/09/2011 at 7:47 am | Permalink | Reply

        You’ll have to forgive me, but, when I see “bloodbath” used in the (sensationalist) headline — with the first sentence of opinion “It looks like all is not well in the land of Internode.” — one has to question what you’re ACTUALLY saying.

        Then there’s the half-finished comment about Mark Newton leaving. :)

        Fast-forward to today, where we have the equally subtle “up shit creek? bullcrap” commentary where we find out that actually, everything isn’t as bad as the previous headline made out.

        So we have a salacious headline that both does and doesn’t match the original content, then a tangental commentary that basically cancels out the first.

        This is the sort of silliness I’d expect from The Australian, Renai. Not someone who can probably do a bit better. ;)

      • Brendan
        Posted 05/09/2011 at 7:47 am | Permalink | Reply

        You’ll have to forgive me, but, when I see “bloodbath” used in the (sensationalist) headline — with the first sentence of opinion “It looks like all is not well in the land of Internode.” — one has to question what you’re ACTUALLY saying.

        Then there’s the half-finished comment about Mark Newton leaving. :)

        Fast-forward to today, where we have the equally subtle “up shit creek? bullcrap” commentary where we find out that actually, everything isn’t as bad as the previous headline made out.

        So we have a salacious headline that both does and doesn’t match the original content, then a tangental commentary that basically cancels out the first.

        This is the sort of silliness I’d expect from The Australian, Renai. Not someone who can probably do a bit better. ;)

        • Renai LeMay
          Posted 05/09/2011 at 8:15 am | Permalink | Reply

          *shrugs* as a journalist I’ve always had a tabloid bent. In fact, I never said Delimiter was the Guardian. As far as I’m concerned it has always been much closer to The Register.

      • Brendan
        Posted 05/09/2011 at 7:47 am | Permalink | Reply

        You’ll have to forgive me, but, when I see “bloodbath” used in the (sensationalist) headline — with the first sentence of opinion “It looks like all is not well in the land of Internode.” — one has to question what you’re ACTUALLY saying.

        Then there’s the half-finished comment about Mark Newton leaving. :)

        Fast-forward to today, where we have the equally subtle “up shit creek? bullcrap” commentary where we find out that actually, everything isn’t as bad as the previous headline made out.

        So we have a salacious headline that both does and doesn’t match the original content, then a tangental commentary that basically cancels out the first.

        This is the sort of silliness I’d expect from The Australian, Renai. Not someone who can probably do a bit better. ;)

11. alain
    Posted 05/09/2011 at 7:06 am | Permalink | Reply

    “the fibre rollout will flood the market with customers who have previously been locked into Telstra or Optus HFC cable connections and unable to easily churn.”

    So all the BigPond and Optus HFC customers are going to churn to Internode and iiNet NBN are they? – err yeah ok, they wish I guess.

    • Renai LeMay
      Posted 05/09/2011 at 7:33 am | Permalink | Reply

      I am assuming that a lot of Optus and Telstra HFC customers will churn to the likes of iiNet and Internode, yes.

      • Terry Green
        Posted 05/09/2011 at 1:47 pm | Permalink | Reply

        If I was Internode that’s not something I would be relying on, like most consumers I’ll go with whoever offers me the most value, and when I do get NBN available will probably stay with iiNet as I’m with them now and they have provided a good service (both from a reliability and when I raise a fault point of view).

        Don’t forget too it will be possible to have connections to multiple ISPs just by using a different port on the NBN box, so we may end up in situations where consumers have connection to X SP because they provide the best internet connection value, and a cheaper connection to Y SP to get the value add.

        It’s going to be interesting times ahead.

        • alain
          Posted 06/09/2011 at 12:07 am | Permalink | Reply

          You have a good point about value, if I was a BigPond or Optus HFC customer and I had notification from the company that as of xxx date the HFC will no be available for BB I am sure that notification would contain details of NBN plans the customer could move to.

          If the likes of iiNet and Internode offered much better value than BigPond or Optus the customer would be enticed to move, but I don’t see the big two giving away their HFC customer base as easily as that.

          I am sure the Optus and BigPond HFC customer will be given deals they cannot refuse.

12. Brett Haydon
    Posted 05/09/2011 at 7:49 am | Permalink | Reply

    Pre-NBN, ISPs like Internode had a business case undercutting Telstra, picking niche geographic areas and perhaps most importantly in providing superior customer service dealing with the inherent ADSL problems.

    That strategy means nothing post NBN.

    The ISP’s that will be left standing will have to answer one of the following, if they aren’t going to be forced to sell.

    Do they offer mobile?
    Do they own backhaul?
    Do they offer content?
    Are they a low cost reseller operating on the slimmest of margins?
    Are they primarily a reseller of other services?

    I posit we’re more likely to see Woolworths re-selling internet in 5 years time than Internode. You can see Hackett is struggling with these issues, dressing it as concern for smaller operators.

    • Sparky
      Posted 05/09/2011 at 8:24 am | Permalink | Reply

      Let me propose another idea. What if in five years Woolies are reselling Internode? The thinking here is along the lines of Internode, being owned by a single shareholder could easily align or sell itself to someone like Woolies or Vodafone. Why would Woolies want to start from scratch in an industry they know nothing about (and that is tough as nails) from the start? Wouldn’t it make better sense to strike a deal with the largest small guys left? After all, Internode would be easy to deal with, not needing any shareholder board meetings…

      • Brett Haydon
        Posted 05/09/2011 at 11:03 pm | Permalink | Reply

        Woolies would resell one of the wholesalers if they were to enter the market. They would be like Dodo but with someone else providing the customer service etc. Internode as far as I know isn’t becoming a wholesaler. They would need to own a fair bit of backhaul for that.

    • Anonymous
      Posted 20/09/2011 at 7:13 pm | Permalink | Reply

      Ergh, the NBN is not a prepackaged service any nobody can resell. It’s a connection from the home to the exchange, just like copper. ISPs need to have equipment at each exchange, just like DSLAMs, and backhaul from there to their network.

      There is room for differentiation within NBN ISPs just like there is for ISPs with their own ADSL2+ infrastructure. Some will be congested, some will provide the fastest downloads possible. The quality of other services will matter more with the NBN, with multiple service ports ISPs and other telcos can offer whole new services separate to the Internet service. The opportunities for bundling skyrocket.

13. Brendan
    Posted 05/09/2011 at 8:03 am | Permalink | Reply

    NBN removes the need to “migrate” physical services; it’s a modern equivalent to the good (bad?) old days of fast-churn ADSL1, where a single carrier wholesaled to many retailers.

    The difference this time around, is that instead of competing infrastructure, the competition occurs at a higher level, without the Retail conflict-of-interest effects on pricing.

    This means people can be highly mobile and change providers without the same infrastructure connectivity impacts ($$) or inherent inter-supplier delays.

    Does this mean there will be a flood of users from HFC on day one? Unlikely. Telstra doesn’t typically cannibalise it’s own client base (wholesale users not-withstanding). Having said that, as the NBN deployment ramps up, it’s inevitable that competitive forces will entice users to change.

14. Sparky
    Posted 05/09/2011 at 8:26 am | Permalink | Reply

    Oh, and Renei, you should really find a new picture of Simon Hackett. I’m getting bored with this one.

    • Adam Ferrari
      Posted 05/09/2011 at 8:42 am | Permalink | Reply

      I concur :)

      • Terry Green
        Posted 05/09/2011 at 9:01 am | Permalink | Reply

        http://web.mac.com/simon_hackett/Site/Welcome.html .. the header pic or similar would be cool :)

    • Renai LeMay
      Posted 05/09/2011 at 9:37 am | Permalink | Reply

      I do have a few pics of him, but that one is the best. However, you’re right, I should mix it up a little. Gotten a bit lazy ;)

15. Bob.H
    Posted 05/09/2011 at 9:26 am | Permalink | Reply

    Renai you might like to have a look at the figures for assets and liabilities for 2010 in your table as I think you have them reversed. If not internode is insolvent.

    • Renai LeMay
      Posted 05/09/2011 at 9:36 am | Permalink | Reply

      They’re not reversed. But they only refer to current assets and liabilities. With respect to this kind of situation, Wikipedia states:

      A business may be ‘cash flow insolvent’ but ‘balance sheet solvent’ if it holds illiquid assets, particularly against short term debt that it cannot immediately realize if called upon to do so. Conversely, a business can have negative net assets showing on its balance sheet but still be cash flow solvent if ongoing revenue is able to meet debt obligations, and thus avoid default – for instance, if it holds long term debt. Many large companies operate permanently in this state.

      http://en.wikipedia.org/wiki/Insolvency

16. alain
    Posted 05/09/2011 at 11:47 pm | Permalink | Reply

    You need look further than the financials of a company, in the cut throat world of poaching customers off each other and ISP buyouts mainly by iiNet you need to look at ISP market share.

    Is Internode gaining customers or is it losing to the likes of better value TPG and others and not getting BigPond customers so easily anymore from the ‘churn gravy train’ since BigPond decided that bleeding customers to competitors at end of contract was not smart policy and started offering better value.