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