iiNet acquisitions boost EBITDA forecast

AAPT, Netspace buys expected to contribute $25 million to full-year earnings

Perth-based internet service provider (ISP) iiNet (ASX:IIN) has forecast its acquisition activity in 2010 to contribute up to $25 million to the company’s earnings before interest, tax, depreciation and amortisation (EBITDA) during the 2011 financial year.

The ISP reported an increase in revenues of 45 per cent for the first half of the financial year, to $329.7 million and EBITDA increaes of 25 per cent to $46.8 million over the period. Net profit after tax also increased by 16 per cent to $17.2 million during the six months to 31 December 2010.

Its subscriber base also grew by 7000 users to 650,000 as a result of organic growth and acquisitions, leading to a total 1.3 million of core services.

In a financial report to the ASX, iiNet attributed much of its growth to its purchases of Netspace for $40 million March last year and its $60 million acquisition of AAPT’s consumer division from Telecom NZ in July. Though the providers had little impact on the half-yearly financials, iiNet expects the companies to contribute $10 million and $15 million to the full-year EBITDA, respectively.

Full-year EBITDA is forecast at $106 million.

“Although it’s early days, we are starting to see the benefits from the acquisitions flow through into earnings,” iiNet chief executive, Michael Malone, said in a statement.

The AAPT acquisition came as poorer news to Telecom NZ, which this month reported the sale had a $5.33 million impact on its EBITDA.

iiNet also reported progressing integration of the two companies, with two-thirds of Netspace’s on-net customer migrated to iiNet’s own network to date. Billing systems migration commenced this year.

iiNet has also begun to retrain customer call centre staff in Manila gained as a result of the AAPT acquisition and back-office integration of 60 staff and other systems was also complete. Integration of billing systems, network and user ports were expected to be underway during the next financial year.

Though seeking to be “acquirer of choice” in a dwindling ISP sector, iiNet’s chief financial officer, David Buckingman, told Computerworld Australia that it wouldn’t seek to purchase all small providers.

“We’re generally opportunistic when it comes to M&A,” he said. “We have the financial capability and skill-set to take advantage when opportunities present themselves.”

“The acquisition of very small ISPs is not a cost effective method of acquiring customers for us – we think that most private owners have unrealistic price expectations.”

In its financial report, iiNet also indicated it had spent $6.5 million in legal costs fighting the Australian Federation Against Copyright Theft (AFACT) in the Federal Court to date, of which $500,000 had spent during the appeal hearing by AFACT in August last year. Some $2 million has been recouped through insurance.

A final decision on the case is yet to be made.

In a statement, Malone indicated the National Broadband Network had become the ISP’s main target for future growth.

“iiNet is well placed to respond to the challenges that lie ahead as the industry evolves given our position as the leading challenger brand, with a growing product suite, and market leading customer service levels,” he said.

Follow James Hutchinson on Twitter: @j_hutch

Follow Computerworld Australia on Twitter: @ComputerworldAU

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