Melbourne IT looks to IT services for growth

ASX-listed Melbourne IT (MLB) is not expecting net profit growth until 2011, investors heard today.

The internet services company today reported an 8 percent year-on-year revenue increase to $200.1 million in 2009, after suffering a 20 percent drop in net profit during the first half of the year.

"There's no question that Melbourne IT's first half was disappointing, but we've definitely rebounded in the second half," said the company's managing director, Theo Hnarakis.

"The worst is behind us," he said. "However, due to our investments in IWS [integrated web services] and OSS [operational support services], net growth will be moderate in 2010."

Melbourne IT had a rocky start to 2009, with integration headaches and pressure from the global financial crisis, as well as service outages that contributed to 20 percent of customer churn.

Hnarakis attributed the company's recovery to tight cost control strategies such as renegotiating supplier contracts, not paying staff bonuses and increasing operational efficiencies.

It had also migrated from IBM storage products to EMC, which Hnarakis said improved service stability, provided 50 percent more storage and lowered power consumption for the same cost. Melbourne IT has now abandoned its investment in IBM storage.

Although Melbourne IT's earnings before tax decreased by one percent year-on-year to $23.4m in 2009, its net profit after tax rose four percent to $16.8 million because of the effect of its May 2008 acquisition of Verisign's Digital Brand Management Services (DMBS) on its tax structure.

The company also reported that its revenue from IT services was contributing a increasing portion of its overall revenue, signalling a shift from its traditional domain name registration business to IT service provision.

"We are being more aggressive with sales and marketing," Hnarakis said. "More of our resources are now focused on upselling key customers rather than on retaining customers by offering incentives."

"We are leveraging our relations with key customers to upsell from domain name management to brand management," he said.

Over the next three years, Melbourne IT planned to invest $18 million in its Integrated Web Services (IWS) business - which includes its back -end support systems - and an additional $7 million on its Operational Support Systems (OSS) and infrastructure.

Hnarakis expects a strong return on investment (ROI) from its OSS investment in 2011, and ROI from its IWS investment in 2012.

He also cited aggressive acquisition plans, and expected its DBMS division to be completely integrated by June 2010.

"We are very much in the embryonic stage of growth in our industry," he said. "We want to take advantage of the immaturity of the market ... and make sure we get as much market share as possible."