Here's what I got from the annual report: "Spirit is providing...

Here's what I got from the annual report:


"Spirit is providing unparalleled internet services to Australians and is well equipped to do so as we embark on the next era of the internet in the form of 5G. We are already deploying four of the five proposed technologies that will make up this new standard of internet delivery, well ahead of larger Telcos." (p. 11)

—So Spirit is exploring 5G deployment, a la TPG? Will 5G deployment also make it possible for Spirit to roll out their service nationwide? Let's hope so.

"The net increase in revenue over FY18 has been at a gross margin of 83%, boosting group margins from 63% in FY17 to 69% in FY18." (p. 12)

—Group margins are up by about 10% (year on year) - always a good thing.

"Net profit after tax increased by 22% to $570,605 delivering an Earnings per share of 0.26 cents per share." (p.12)

—That's great (in relative terms), but more on this later.

"While NBN resellers are subjected to an average marginal cost of $44 (targeting to increase to $52) when migrating customers to the NBN, Spirit’s decision to implement its own network has reduced this figure to less than $10." (p. 12)

—If you've been keeping up with the changes to the wholesale price of NBN, it seems that retailers are getting shafted. A few years ago, Spirit made a great strategic move with developing its own infrastructure (separate from the NBN). I'd love to get Bill Morrow into a room, and ask him what he thinks about Spirit's network and pricing structure.

"This year saw the industry recognise Spirit’s achievements across its business and technology. In November 2017 the company was given the accolade of Melbourne’s fastest internet provider by independent rating speed test provider Ookla. The unsolicited award was the result of statistically significant speed tests conducted on www.speedtest.net and shows that our network has the ability to beat the competition from larger players." (pp. 12-13)

—Is this now the second time (in 2 or 3 years) where Spirit has been recognised as the fastest ISP? (The first being from the PC Magazine awards a while back.)

	Column 1	Column 2	Column 3	Column 4
0		2018	2017	2016
1	Revenue and other income	16,299,985	11,539,129	8,855,488
2	Net profit/(loss) before tax	1,031,166	829,452	(2,858,066)
3	Net profit/(loss) after tax	570,605	468,392	(2,336,065)

—Revenue has jumped $5 million in a year, having almost doubled from 2016. That sounds promising (in isolation). But to put it another way, an extra $5 million in revenue has translated to only $100,000 more in net profit. That's a smallish return, and suggests an increase in operational costs—notwithstanding the lower network costs compared to the NBN. In 2017, the ratio of net profit to revenue was 0.04. In 2018, that shrunk to 0.035. Hopefully there's an upside. Earnings per share have also been fairly stagnant.

"During the year ended 30 June 2018 there are no individual customers which accounted for 5% or more of sales."

You can read this in two ways. On one hand, that shows a good spread and diversity of customers (no sudden contract cancellations to disrupt cash flow). On the other hand, a larger business customer improves business reputation and provides a lot more revenue. One good metric would be the average time customers stay on a contract (before churning to another company)—though ISPs tend not to share that data.

So overall, it seems like a reasonable report, but there needs to be a bigger upside over the long term. In other words, all of the recent investments by the company are one side of the coin—but the other side is whether the market responds to the improved product.

I believe that Uniti is looking to expand in Melbourne and Sydney in the near future. In Melbourne, Spirit presumably has a head start for residential apartments and businesses, but if Uniti gains market share for normal houses, then it might be an issue.

I didn't get too much from the report about expansion in Sydney, for example—but maybe that's where 5G kicks in later .

After a good rally earlier in the year, it seems the market has lost interest in Spirit more recently. Trading volumes have fallen, and momentum has slowed. A lot of seeds have been planted by the company, and while there are some green shoots, it seems that holders will need more patience. Existing debt levels still feel a tad higher than I'd like, but I'm not sure if others feel the same way.

So overall, I'd say that Spirit is somewhere in the middle, as far as its prospects for 2018/19. The stock has potential, but holders will need more patience.