news Diversified Australian hosting and digital services group Melbourne IT today revealed it would conduct a review into the future of its various divisions which may result in selling some of them off, in the wake of disappointing flat revenue growth over the past six months.
Melbourne IT is best known for its domain name, web and application hosting services, but it has also expanded into a variety of other fields over the past few years, ranging into enterprise and government IT services, online solutions for small business and even digital recording solutions. However, not all of those businesses are performing well and some are currently heading south.
For the six months ended 30 June this year, for example, Melbourne IT recently revealed that it had experienced flat revenue growth up only 2.5 percent to $89.8 million, with earnings before interest and taxation only up four percent to $7 million. While its Digital Brand Services (incorporating its domain name business) unit experienced revenue in that period up 19 percent year on year to $29.6 million, its enterprises services division only experienced revenue growth of five percent, and its small business and partner division saw sinking revenues down 8 percent to $42.6 million. Its ForTheRecord digital recording business saw revenue for that period up 13 percent to $3.6 million.
In a statement issued to the Australian Stock Exchange this morning, Melbourne IT said it was experiencing “disappointing trading results”. In addition, the company said “a number of new opportunities that were expected to come through in the second half of 2012 are delayed and are now not expected to materialise until 2013.”
The company added: “Aggressive competitor activity especially on pricing is contributing to declining results in its SMB eBusiness Solutions (SMB) segment. The ForTheRecord (FTR) division has been impacted by significant reductions and ‘holds’ in US Federal and State Government spending. FTR’s profitability is generally determined by a small number of large transactions each year.”
“The Enterprise Services (ES) division is expected to perform better than last year. However, Queensland Government budget cuts and general tightening of business spending are impacting the hosting segment, delaying some anticipated projects. The Digital Brand Services (DBS) division also continues to perform strongly, but the delays in ICANN’s rollout of its new gTLD program and the correlating changes to the new naming system until 2013 have curtailed its growth expectations in 2012 to more modest levels.”
Consequently, Melbourne IT noted that its full year 2012 earnings were likely to sink about 10 percent compared with the previous year. Consequently, the company’s board has undertaken a review of its corporate structure and its portfolio of businesses.
“This review has highlighted that the value of Melbourne IT’s businesses is not being adequately recognised by the market today and that significant value may be unlocked for Melbourne IT shareholders by pursuing possible different ownership alternatives in relation to these businesses,” the company said. “The Board therefore proposes to hold further discussions with a number of parties, primarily large offshore organisations, who have previously indicated interest in potentially acquiring one or more divisions of our Company.”
The company has appointed Lazard and King & Wood Mallesons as its financial and legal advisers with respect to the strategic review.
Hmm. Personally, I find it hard to really think about which “large offshore corporations” could be interested in buying some of Melbourne IT’s assets. However, I suspect the main item to be flogged off here will be the company’s ForTheRecord subsidiary, which has some intellectual property in the form of software recording for situations such as law courts. Much of the rest of Melbourne IT’s businesses are in the form of web infrastructure or IT services, which are hard to sell as they can’t be easily scaled for an internatonal market.
In general, Melbourne IT has never really been a big growth business; this kind of ‘strategic review’ is really more about tinkering around the outside than addressing the company’s core strategy. Melbourne IT still makes most of its money from its hosting and domain name business (especially around small businesses), and this isn’t likely to change any time soon. I would personally like to see the company go more into application and software as a service hosting and private cloud solutions. There’s a reason why global companies such as Rackspace and Amazon are currently setting up major operations in Australia, with their own dedicated infrastructure. That reason is that Melbourne IT hasn’t made it easy enough for its customers to make the transition into full cloud computing environments; and there are plenty of major organisations and individuals who are trying to make this transition right now.