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MELBOURNE IT LTD (ABN: 21 073 716 793) ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2008 MELBOURNE IT LTD ABN: 21 073 716 793 DIRECTORS Mr. R.J. Stewart (Chairman) Mr. T.J. Hnarakis (Managing Director) Mr. S.D. Jones Mr. T. Kiing Prof. I. Morrison Dr. M.C. Toner (resigned - May 2008) Ms. L. Turnbull Mr. A. Walsh (appointed - June 2008) MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER Mr. T.J. Hnarakis CHIEF OPERATING OFFICER Mr. A.C. Field COMPANY SECRETARY Mr. Ben Lehman (resigned - August 2008) Ms. Ashe-lee Jegathesan (appointed - August 2008) REGISTERED OFFICE Level Two 120 King Street Melbourne, Victoria, 3000 Tel: +61 3 8624 2400 SHARE REGISTER Link Market Services Limited Level Nine 333 Collins Street Melbourne, Victoria, 3000 Tel: +61 3 9615 9800 Fax: +61 3 9615 9900 AUDITORS Ernst & Young INTERNET ADDRESS http://www.melbourneit.com.au CONTENTS PAGE Directors Report 2 Directors Declaration 13 Independent Audit Report 14 Balance Sheet 16 Income Statement 17 Statement of Changes in Equity 18 Cash Flow Statement 19 Notes to the Financial Statements 20 1 MELBOURNE IT LTD DIRECTORS REPORT Your directors submit their report for the year ended 31 December 2008 Directors Managing Director Company Secretary Mr. Robert Stewart Mr. Theo Hnarakis Ms. Ashe-lee Jegathesan (appointed - August 2008) Mr. Simon Jones Mr. Ben Lehman (resigned - August 2008) Mr. Tom Kiing Prof. Iain Morrison Dr. Mark Toner (resigned - May 2008) Ms Lucy Turnbull Mr. Andrew Walsh (appointed - June 2008) Interests in the shares and options of the company As at the date of this report, the interests of the directors in the shares and options of the company and related bodies corporate were: Ordinary Options over Shares Ordinary Shares Mr. Robert Stewart 171,056 - Mr. Theo Hnarakis 687,505 750,000 Mr. Simon Jones 74,633 - Mr. Tom Kiing 5,638,642 - Prof. Iain Morrison 46,690 - Ms Lucy Turnbull 5,477,694 - Mr. Andrew Walsh (appointed - June 2008) 42,604 - PRINCIPAL ACTIVITIES The principal activities of the company during the year were: Melbourne IT Ltd Registration of .au and .nz domain names; Registration of other country code (ccTLD) domain names (eg. .us, .it, .de, .to .uk and .eu); Registration of generic Top Level Domain (gTLD) names (.com, .net, .org, .biz, .info, .name); Consulting and management services to large public and private enterprises through its Digital Brand Services Division ( DBS ) (formerly Corporate Brand Services Division ("CBS"); Refer 1 Other value added internet related products to SME s (Small and Medium Enterprises) and SOHO s (Small Office and Home Office) such as domain forwarding, web hosting, search engine optimisation (SEO) and web site development tools; Research and Development of registry related technologies; and Web application hosting, including Software and Services. 1 On the 1st of May 2008, Melbourne IT Ltd acquired the assets of VeriSign Inc.'s Digital Brand Management Services (DBMS) business. Effective 1st May 2008 the DBMS business was consolidated into the existing Corporate Brand Services (CBS) business of Melbourne IT Ltd, with the combined business renamed Digital Brand Services (DBS). WebCentral Group Ltd Web and application hosting including Software and Services; and Development and distribution of technologically advanced software and services. The software and services provided by WebCentral include web content and application delivery, advanced email and messaging solutions and rich media content management systems. For The Record Pty Ltd Supplier of rich media content management systems for courtrooms, hearing rooms, public meeting venues and law enforcement. EARNINGS PER SHARE 2008 2007 Basic earnings per share 20.87 cents 18.15 cents Diluted earnings per share 20.71 cents 17.71 cents RESULTS The profit after tax of the Melbourne IT Group for the year ended 31 December 2008 was $16.193 million (2007: $13.864 million). DIVIDENDS Cents $ 000 Final Dividends Recommended on ordinary shares 8.0 6,271 DIVIDENDS PAID IN THE YEAR Final Dividend 2007 on ordinary shares 7.0 5,380 Interim Dividend 2008 on ordinary shares 7.0 5,430 At the 24 February 2009 Board Meeting, the directors declared a final dividend of 8.0 cents per share, fully franked. The total amount of this final dividend is $6.271 million. This dividend has not been provided for at 31 December 2008. 2 MELBOURNE IT LTD DIRECTORS REPORT (continued) REVIEW AND RESULTS OF OPERATIONS Melbourne IT Ltd - Consolidated Group On 1st May 2008, Melbourne IT Ltd acquired the assets of Verisign Inc's global Digital Brand Mangement Services ('DBMS') business for $54.799 million plus acquisition costs of $1.925 million. For the Melbourne IT Ltd Consolidated Group ('Group') revenue for the year ended 31 December 2008 was $186.224 million (2007: $154.422 million), an increase of 20.6%. Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) for the year ended 31 December 2008 was $31.874 million (2007: $26.974 million), an increase of 18.2%. Earnings Before Interest and Tax ('EBIT') for the year ended 31 December 2008 was $23.738 million (2007: $20.123 million), an increase of 18.0%. Included within EBIT for the year ended 31 December 2008 is an amortisation charge totalling $1.068 million (2007: $0.424 million) relating to the amortisation of identifiable intangible assets following the acquisition of DBMS (May 2008), IDR Management Services Ltd (January 2007) and the WebCentral Group Pty Ltd (September 2006). Profit after Tax for the year ended 31 December 2008 was $16.193 million (2007: $13.864 million), an increase of 16.8%. Cash and cash equivalents was $28.382 million at 31 December 2008 (December 2007: $17.891 million). Positive Operating Cashflow for the year ended 31 December 2008 was $26.410 million (2007: $24.562 million) an increase of 7.5%. Included within the operating cashflow at 31 December 2008 is an interest expense totalling $1.870 million (2007: $0.389 million) of which $1.677 million related to borrowing costs associated with the acquisition of DBMS. Deferred Gross Margin (i.e.: income received in advance net of prepaid costs) was $28.546 million at 31 December 2008 (December 2007: $21.830 million) an increase of 30.8%. Total external debt was $79.629 million (US $55.0 million) at 31 December 2008 (31 December 2007: $nil), with net debt balances of $51.247 million (31 December 2007: $17.891 million net cash balance). Total external debt as at 31 December 2008 is higher than the $57.1 million reported at 30 June 2008 due to the changes in the USD exchange rate between 30 June 2008 and 31 December 2008. The value of the external debt in USD has remained unchanged during this period. On the 14th May 2008, Melbourne IT Ltd entered into a 50% joint venture, Advantate Pty Ltd, with Fairfax Digital Pty Ltd. For the year ended 31 December 2008, the Advantate Joint Venture contributed a loss of $1.374 million of which Melbourne IT's 50% share equalled $0.687 million loss, (pre-tax). At the 24th February 2009 Board Meeting, the directors declared a 8.0 cents fully franked final dividend on ordinary shares in respect of the year ended 31 December 2008 (year ended 31 December 2007: 7.0 cents). In accordance with accounting standards, the total amount of this final dividend of $6.271 million has not been provided for in the 31 December 2008 financial statements. Melbourne IT Ltd Group (excluding DBMS acquisition) For the Melbourne IT Ltd Consolidated Group (excluding DBMS) revenue for the year ended 31 December 2008 was $162.196 million (2007: $154.422 million) an increase of 5.0%. EBITDA for the year ended 31 December 2008 was $29.161 million (2007: $26.974 million), an increase of 8.1%. EBIT for the year ended 31 December 2008 was $22.174 million (2007: $20.123 million), an increase of 10.2%. Profit after Tax for the year ended 31 December 2008 was $16.306 million (2007: $13.864 million), an increase of 17.6%. Deferred Gross Margin (i.e.: income received in advance net of prepaid costs) was $23.894 million at 31 December 2008 (December 2007: $21.830 million) an increase of 9.5%. Positive Operating Cashflow for the year ended 31 December 2008 was $26.659 million (2007: $24.562 million) an increase of 8.5%. 3 MELBOURNE IT LTD DIRECTORS REPORT (continued) REVIEW AND RESULTS OF OPERATIONS Digital Brand Management Services ('DBMS') On the 1st May 2008, Melbourne IT Ltd Group acquired the assets of VeriSign, Inc. s global Digital Brand Management Services (DBMS) business for $54.779 million plus acquisition costs of $1.925 million. For the eight months ended 31 December 2008, revenue from the DBMS division was $24.028 million contributing $1.564 million in EBIT (inclusive of $2.9 million in planned integration costs). The DBMS division contributed $0.113 million in losses after interest and tax for the period. DBMS contributed $0.249 million in operating cash losses (inclusive of interest expense of $1.677 million) to the Melbourne IT Ltd Group during this period. Deferred Gross Margin (i.e.: income recorded in advance of prepaid costs) was $4.652 million at 31 December 2008 (December 2007: Nil). Summarised operating results are as follows: 31-Dec-08 31-Dec-07 $ 000 $ 000 Revenue Registration Revenue 76,689 74,386 Consulting Revenue 35,482 9,177 Hosting Revenue 58,372 54,836 Sundry Product Revenue 3,579 3,750 For The Record Revenue 8,903 10,617 Other Revenue 885 - Other Income (excluding Interest) 1,375 870 Total Revenue from continuing operations (excluding interest) 185,285 153,636 Total earnings before interest, tax and Joint Venture Interests 24,425 20,123 Share of loss in Advantate Pty Ltd before income tax expense - 50% Joint Venture (687) - Total Earnings Before Interest and Tax 23,738 20,123 Interest Income 939 786 Interest Expense (1,870) (389) Net Profit Before Tax 22,807 20,520 Tax Expense (6,614) (6,656) Net Profit After Tax 16,193 13,864 Cashflow from Operations 26,410 24,562 4 MELBOURNE IT LTD DIRECTORS REPORT (continued) RISK MANAGEMENT The Group takes a proactive approach to risk management and an active risk management plan is in place.