John Linton
....with the major exception of TPG of course.
The recent 'audited' numbers contained in the TPG/SPT merger document (I commented on some weeks ago) and now some 'unaudited' numbers provided by iiNet/Westnet here:
http://www.asx.com.au/asxpdf/20080508/pdf/3190vk9f41823r.pdf
present some interesting insights into two hitherto private, and therefore undisclosed, information about the larger end of the ISP operations in Australia.
I won't comment again on the TPG numbers other to again express my admiration for a private company that makes a better NP percentage than Telstra in the Australian communications business and then sells it's business for a quarter of a billion Australian dollars.
What I found interesting about the figures disclosed in the Westnet/iinet report was that it showed that my assessment of 15 months ago that Westnet had to be losing money up to the time of its large, across the board, ADSL price rises last year was correct. as shown on page 3:
Loss in FY06 of $A4.9 million on revenue of $A69.5 million
Loss in FY07 of $A800,000 on revenue of $A100.7 million
According to iinet's 2007 annual report they had accumulated losses in ongoing operations of around $A45 million. It is also very interesting when you look at the audited balance sheet of a company like iinet and notice that on revenues of over $A200 million there is the slimmest of margins between current assets and current liabilities ($A2 million and that includes "prepayments" of over $A8 million) and only $A15 million in cash with relatively high amounts of accounts receivable for a company where the majority of revenue, I assume, is cash in advance.
I seem to recall that PeopleTelecom reported a million dollar loss on a revenue of $A100 million in FY07.
It's a bit depressing to read these reports and realise that, effectively, for a significant number of ISPs there is no 'economy of scale' in terms of reaching some size produces enough purchase power savings to 'guarantee' profitability on an ongoing basis - though by significantly hiking their prices in Feb/Mar 2007 Westnet seems to have fixed their disclosable profit issues - big time - and achieved an exit strategy of handsome proportions. ($A20 exit bonus million each for 14 years work is almost merchant banker like in annual income).
So is the moral of these stories to operate your ISP business on the basis that you get a suitable 'wage' but make no profit and rely on a golden handshake if you manage to sell your ISP to someone when you're able to derive the most benefit from such a transaction?
It seems to be as if iiNet racks up $A45 million in 'book' losses over its trading history (and countless millions of losses for the people who owned shares over that time) while becoming the "third largest ISP in Australia" - what's the point of it all?
TPG disproved the rule by making money for the whole of its existence and hitting the jackpot as an exit strategy. Incidentally, you have to wonder why David Teoh got a quarter of a billion dollars for TPG while the owners of Westnet (roughly comparable size) 'only' got $A80 million? My guess would be David Teoh's superior negotiating ability coupled with SPT's ability to pay compared to iinet's ability to pay.
Amost every other/every other ISP (except presumably Internode and, as I know for a fact - Exetel) seems to lose money before going out of business or being swallowed up by another more optimistic provider who belongs to the 'triumph of hope over experience' school of management.
Scary scenario.
I think, on balance, I'm going to decide to be pleased that a tiny company like Exetel made more money than Westnet and iinet (and PeopleTelecom, AAPT, etc, etc) put together over the past four years and that we still get the opportunity of making decisions on our own future - assuming there is one in this very obviously difficult industry/set of marketplaces.