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">melbourne it has told the ASX it is looking to sell some of its underperforming assets to “unlock shareholder value."
In a statement to the ASX, Melbourne IT said it is “in process of pursuing possible ownership alternatives for its current portfolio of businesses following a review of its corporate structure”. It has updated its profit guidance based on operating performance to-date in the second half of 2012, just a few months after announcing a solid first half performance. Looks like things have become pretty ugly, pretty quickly.
“Melbourne IT is experiencing disappointing trading results and 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,” said the statement.
The company blames “aggressive competitor activity, especially on pricing” to poor results in its SMB eBusiness Solutions segment. “The ForTheRecord (FTR) division has been impacted by significant reductions and holds on US government spending. FTR’s profitability is generally determined by a small number of large transactions each year.”
FTR is a digital recording, court reporting and content management system. It provides only around 5% of the company’s revenue, but its performance has turned very sour. It was founded in Perth in 1993 and became part of Melbourne IT’s portfolio in 2006 when it acquired WebCentral. FTR was also a drag on WebCentral’s business. Melbourn IT said in 2007 it was thnking of divesting the FTR business, but decided not to. It probably now wishes it had.
FTR does most of its business in the USA, where it has an office in Phoenix, Arizona. At its 2012 investor presentation in August Melbourne IT said it expected a strong second half for FTR, “with major contracts in the pipeline,” but these have obviously not eventuated.
There are problems at Melbourne IT beyond FTR. The ASX statement also said the Enterprise Services division is expected to perform better than last year, “but the Queensland Government budget cuts and general tightening of business spending are impacting the hosting segment, delaying some anticipated projects.
“The Digital Brand Services 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.”
As a result of this, Melbourne IT’s full year earnings are likely to be lower than last year, by approximately 10%, primarily due to the ongoing volatility in the FTR division. The full year 2012 EBIT from the combined core businesses expected to be broadly in line with 2011 results. Consolidated net profit after tax will be close to 2011.
All of which means the company is looking at what it might be able to sell to bring in some cash to make u for the shortfall in operating revenues. “After the end of the year, the board will, as part of its standard end of year processes, review the goodwill value of the FTR division and potentially this could lead to an impairment to this value in the final accounts.
“Management has also been monitoring closely the performance of the transformation rollout and while the cost of the project remains within the forecast provided in August 2012, expected completion is now likely to occur late in 2013. Although some cost saving benefits will accrue through 2013, the full benefits from this transformation rollout will only be achieved from 2014.” The transformation project is a rebuilding of the company’s core systems, around the Oracle ERP suite.
“Notwithstanding the board’s view on growth and the continued opportunities for the business, the board has undertaken a review of the corporate structure of Melbourne IT and the portfolio of businesses it owns. 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 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 the company. Our belief is that by undertaking a formal strategic review, shareholders will benefit from unlocking the intrinsic value of our businesses, customers will benefit from more focused execution and operations, and staff will benefit through increased investment specific to the needs of each business division and its customers.”
Melbourne IT has appointed investment bank Lazard as its financial advisers as it seeks a buyer for FTR or other of its assets. Founded in 1996, Melbourne IT has revenues of $180 million and 700 employees. Its stock price has fallen by a third in the last two months with rumours of the sorts of problems that are now out in the open.
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