ARQ Group Limited (ASX:ARQ)

Martin Mercer
CEO
Market Cap (AUD): 65.95M
Sector: Information Technology
Last Trade (AUD): 0.54 +0 (+0%)
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1. About

ARQ Group (formerly Melbourne IT Group) is a publicly listed company with offices in Sydney, Melbourne, and Brisbane. ARQ helps organisations of all sizes to successfully do business online. Company’s complete portfolio of cloud-based technology services drives business effectiveness and profitability for many customers in Australia and around the world. The breadth of the Company’s offering extends from helping small businesses build an online presence through to managing the complex technology environments of large enterprises and governments - including Internet domain name services, critical web hosting, online brand protection and promotion, video content delivery, application development services, managed cloud and security services and much much more.

ARQ Group operates two businesses marketed under 7 brands:

Small and Medium Business

The Small and Medium Business Division (SMB) has over 450,000 direct customers, provides services to over 700,000 Australian businesses, and generates revenue over $90m. SMB operates under six brands: Melbourne IT, Netregistry, WME, WebCentral, TPP Wholesale, and Domainz.

Enterprise Services

The Enterprise Services Business (ES) is the leading end-to-end provider of digital solutions for the corporate and government market with revenues over $70M. ES offers mobile, data, analytics, cloud, security, managed services, and application development capabilities. It is based in Sydney, Melbourne, and Brisbane and operates under three brands, Melbourne IT, InfoReady and Outware Systems.

2. Business model

 

The Company operates the following divisions:[1]

 

Divisions

Revenue ($000)

% of total Revenue

% of Profit (before Int, Tax, Depn & Amort)

Profit drivers[2]

Small and Medium Business (SMB) Solution

$102,382

51.78%

N/A

Solutions revenue growth remained strong, bolstered by the acquisition of WME.

The realisation of strong operational efficiencies drove a substantial improvement in profitability, highlighted in reported EBITDA growth of 36%

Enterprise Services

$95,325

48.22%

N/A

2017 was a year of strong organic growth for Enterprise Services, with revenue up 35%, earnings up by 18% validating Group’s strategic focus on designing, building and managing the most impactful digital products that our customers take to market.

Revenue grew 35% to $95.3m, while EBIDTA grew 18% to $17.3m as more and more high-end government and corporate clients recognised the need to innovate in order to remain competitive

3. Strategy

 

Key strategies include:[3]

 

  • Continuing the integration of acquisitions to generate operational, financial and cultural benefits throughout the organisation
  • Development of a deep understanding of Group’s customers’ needs through the use of data analytics in order to provide managed marketing solutions that are tailored to their individual needs as they progress along their online journey
  • Reposition Group’s product and service portfolio for small to medium business owners to focus on selling digital marketing outcomes, rather than services for customers
  • Expand existing account management capability across high value Group’s customers to ensuring they are delivering tangible outcomes
  • Continued development of Enterprise Services managed services and new capabilities to offer clients a complete suite of digital services
  • Continued investment in innovation to bring together the latest digital technologies to develop leading digital products and services for Group’s customers
  • The implementation and upgrade of enterprise-grade support systems and shared services to support continued growth
  • The repositioning of Group’s brand in both the Enterprise and SMB market, and cementing position as an employer of choice in the Australian market

4. Markets

 

The Company operates in markets including:[4]

 

Industry (Australia)

Industry Revenue (2018)

Growth Rate (Annual 13-18)

Data Processing and Web Hosting Services

$2 billion

6.8%

Computer System Design Services

$51 billion

2.1%

5. Competition

 

Major competitors include:[5]

 

  •   Rightside Group Ltd (NASDAQ:NAME)
  •   Web.com Group Inc (NASDAQ:WEB)
  •   ClickonIT
  •   Discovery Communications Inc. (NASDAQ:DISCA)

6. History

 

1996[6]   

The University of Melbourne created Melbourne IT to work with the private sector on IT projects

Melbourne IT became the sole Australian domain name registrar for the .au domain

Professor Peter Gerrand appointed CEO

 

1999   

Melbourne IT was accredited by ICANN as a registrar for .com, .net and .org domains

Melbourne IT listed on the Australian Stock Exchange (ASX) with a ticker symbol of MLB

 

2000   

Adrian Kloeden appointed CEO

 

2001   

Melbourne IT named in the Deloitte Technology Fast 50

 

2002   

Melbourne IT named in the Deloitte Technology Fast 500

Theo Hnarakis appointed CEO

 

2003   

Melbourne IT acquired Domainz, New Zealand's largest and most experienced domain name registrar

More than 2.3 million domain names under management

 

2004   

Melbourne IT acquired European digital brand protection company, Cogent IPC

 

2005   

Melbourne IT won an Australian Human Resources Institute (AHRI) Award for Excellence

Company had more than 3.8 million domain names under management

 

2006   

Melbourne IT acquired the Webcentral Group which include Australia’s largest web hosting company, Web Central, and the world’s leading provider of digital recording services for justice and public safety venues, For The Record

Melbourne IT won an Australian Human Resources Institute (AHRI) Award for Excellence

 

2007   

Melbourne IT acquired UK corporate domain management specialists, IDR Management Services

Melbourne IT's WebCentral brand received the 2007 Microsoft Asia Pacific Hosting Partner of the Year award

 

2008   

Melbourne IT acquired VeriSign Inc's Digital Brand Management Services (DBMS) division

Melbourne IT and Fairfax Digital launch Advantage, a joint venture company providing search engine marketing services to SMEs

Melbourne IT's WebCentral brand received the 2008 Microsoft Australia Hosting Services Partner of the Year award

Melbourne IT won VMware’s Virtualization Champion of the Year Award

 

2010   

Advantage became wholly-owned subsidiary of Melbourne IT

VeriSign honoured Melbourne IT as a "Domain Pioneer" at .com 25th Anniversary

 

2013    

Melbourne IT divested Digital Brand Services Division to Corporation Service Company for A$152.5 million

Melbourne IT divested FTR to Record Holdings for A$6.3 million

 

2014   

MIT acquired Netregistry

Martin Mercer appointed as CEO

Melbourne IT announced Tiger Pistol alliance

Melbourne IT achieved Amazon Web Services (AWS) Premier Consulting Partner Certification

 

2015   

Melbourne IT wins 2015 ASX Award for Best Investor Relations by a Company in the S&P/ASX              

Melbourne IT acquired a majority shareholding in Outware Systems Pty Ltd

Melbourne IT acquired Uber Global

Melbourne IT & 2nd Watch announced cloud partnership

 

2016   

Melbourne IT acquired additional 24.9% shareholding in Outware Systems Pty Ltd

Melbourne IT sold its International Domain Name Registration business

Melbourne IT successfully completed 15M capital raise

InfoReady Pty Ltd becomes a wholly owned subsidiary of Melbourne IT

 

2017  

Acquired WME (Web Marketing Experts)

Melbourne IT accelerated 100% acquisition of Outware

7. Team

 

Board of Directors[7]

 

Larry Bloch – Non-Executive Director Member, HRRNC

Andrew Macpherson – Acting Chair of the Board and Non-Executive Director Member, ARMC & HRRNC

Simon Martin – Non-Executive Director Member, ARMC & HRRNC

Martin Mercer – Chief Executive Officer, Director

Naseema Sparks – Non-Executive Director

 

Management Team

 

Fraser Bearsley – Chief Financial Officer, Company Secretary

Brett Fenton – Chief Technology Officer

Emma Hunt – Managing Director, SMB

Martin Mercer – Chief Executive Officer, Director

Amy Rixon – Chief Brand, People & Culture Officer

Peter Wright – Managing Director, Enterprise


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8. Financials

 

2018 Full Year Results Presentation

 

Financial Year 2016/2017 (ended 31 December)[8]

 

Divisions

Revenue ($’000)

% Change

Profit (before Int, Tax, Depn & Amort) ($’000)

% Change

SMB Solution

$102,382

4.68%

N/A

N/A

Enterprise Services

$95,325

35.48%

N/A

N/A

Total

$197,707

17.56%

$31,944

13.25%

9. Risk

 

Major risks include:[9]

 

Melbourne IT’s ability to achieve its strategic objectives and secure its future financial prospects may be impacted by the following key risks:

  • Competition – the online business world is rapidly evolving with a heightened environment of change characterised by disruptive technologies. Melbourne IT remains abreast of the competitive landscape by investing in new products and customer experience. The acquisitions of Netregistry and Uber Global assist in risk mitigation with access to a larger customer pool, increased skill sets, funds available for market investment and product enhancements.
  • Markets – a material proportion of Melbourne IT revenue is derived from the performance of its reseller channel and ES professional services revenue from Corporate and Government customers. These revenue streams can be difficult to predict. Melbourne IT works closely with its customers to understand their challenges in order to mitigate these risks.
  • Regulatory – Melbourne IT business operates in highly regulated global markets. Success can be impacted by changes to the regulatory environment. Melbourne IT plays an active role in consulting with regulators on changes which could impact its business.

 

Interest rate risk

The Group's exposure to market interest rates is related primarily to the Group's short-term deposits held and drawdowns on available financing facilities.

 

Credit risks

Credit risk arises from the financial assets of the Group, which comprise of cash and cash equivalents, trade and other receivables and derivative instruments. The Group's exposure to credit risk arises from potential default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments.

 

Foreign currency  risk

The Group conducts some amount of its business in US dollars ('USD') and is therefore exposed to movements in the AUD/USD dollar exchange rate.

 

Liquidity risk

Liquidity risk is managed via the regular review of forecasted cash inflows and outflows, with any surplus funds being placed in short term deposits to maximise interest revenue.