Cloud and dollar deliver Melbourne IT dour first half results

The strong Aussie dollar was a major culprit in Melbourne IT’s (ASX:MLB) disappointing results for its first half 2011 financial year with net profit after tax tumbling 29 per cent and revenue down 11 per cent.

The Web hosting and domain name registration company boasted $7 million in net profit and $98.1 million revenue in its last corresponding period. This time around, it was $4.9 million and $87.6 million, respectively.

Earnings before tax took a big hit, down 30 per cent from $10 million to $7 million.

With more than 50 per cent of its revenue deriving from Europe and the US, the strong Aussie dollar relative to the currencies in both areas pulled down Melbourne IT’s financial results.

There were also a number of other contributors to the disappointing results.

Commoditisation of the domain name industry and base hosting services, especially in the SMB space, was another factor as increased competition pushed margins down.

One of the biggest let downs was the lukewarm performance of Melbourne IT’s Enterprise Services division. The company banked on cloud computing and outsourcing trend but sales did not eventuate in the first half of 2011 with the division delivering just above break even results.

The unit earned $13.2 million in revenue and contributed $400,000 to the company’s earnings before interest and tax results. This was compared to $17.3 million and $1.6 million in the previous corresponding period.

Restructuring of business and the completion of a big one-off project with the Queensland Department of Education and Training also brought down the financial results.

But it’s not all doom and gloom. Though economic volatility worldwide and continuing pressure from foreign exchanges are still very real concerns for the company, which is looking forward to a rosier outlook for the rest of the financial year.

The introduction of .brand domain names is expected to open up a multi-billion dollar market and Melbourne IT wants a slice of that juicy pie.

In June, the Internet Corporation for Assigned Names and Numbers (ICANN) approved plans to expand domain name endings beyond the common ones such as .com or .net. As such, domain name endings can soon be customised to reflect various industries such as .music or .bank.

Melbourne IT CEO, Theo Hnarakis, said investments have already been made to develop the .brand business under the company’s Digital Brand Services (DBS) division. On top of that, the division added 121 new customers in the first half of 2011 financial year including Virgin Enterprise Limited, The Body Shop and Sony Computer Entertainment Australia.

The company is looking to develop value-added services such as contention management for customers and annuity-based services to grow revenue in this area.

Melbourne IT continues to hold high hopes for Enterprise Services, with a trend towards more annuity-based services changing the company’s revenue structure.

The division has also gone through a transformation.

“We had built the [Enterprise Services] model on basically an indirect channel through a lot of the telcos,” Hnarakis said. “Because of the growth in cloud-based services, we are seeing telcos bring some of those services in house so, as such, we have decided to build a more direct channel model and have now completed that restructure.”

Sales and management teams are now aligned with the direct channel. With IT services revenue now 61 per cent of the total services revenue, Melbourne IT is expecting this investment to pay off.

The company is also running an outsourcing pilot in the Philippines for low-end customer services and for its eBusiness Centre customer care. This will cut operational cost significantly for Melbourne IT.

More on Melbourne IT’s financial results to follow.

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