smoke and mirrors

IIN describes its half year result as strong, but by my reckoning it was decidedly weak! There was a fair amount of spin in the manner in which these results have been presented.

What's interesting is that IIN have placed a spin on these results by comparing them to a previous corresponding period ( Dec 2009) despite the fact that it was not a fair comparison as they acquired Netspace 30 April 2010 and AAPT 30 Sept 2010. They have also added back one off acquisition costs (that's fair in my view). Have had a look at the IIN half year, together with the 2010 full year. It is perhaps more enlightening when you compare H2 2010 to H1 2011, i.e. to the previous 6 month period. Despite the previous 6 month period only having 2 months of Netspace and none of AAPT, it records the same 6 monthly result. Thus by my calcs this business has only treaded water despite the sizeable acquisitions. I also note that they have increased their trade creditors from $50+ million to $100+ million over the 6 months - this to me is a worrying sign.

Their presentation doesn't give you a good feel for where they are winning and losing the subs ( tho I'm guessing they are losing Netspace and AAPT subs). I am also not sure that I believe the ARPU stats, appears to have increased over the period - this cannot be right, and I rather see the very small, 1%, increase in broadband customers againgst the backdrop of increasing competition and vastly cheaper broadband plans. lets not forget that these plans tend to be 12-24 months thus over this time they will experience revenue decline as their book is progressively repriced. Unlike TPG these guys have always relied on acquisitions for their growth. There always comes an end to those gains and I fear it is getting close. be interesting to see TPG's results in due course.

However despite this they have committed to their FY 2011 EBITDA guidance. This suggests to me that this, if achieved, will come from extracting more cost synergies, not through increasing revenue. That's all well and fine, but what next year, and the year after? Acquisition prospects are becoming fewer and smaller relative to IIN, thus hard to leverage earnings growth. let's not forget that this market, ISP's, have in effect moved from participating in a growing market, of increasing broadband penetration, to one of a mature market with intense competition for market share - aka TLS aggressive push. Unless their customer base suddenly embraces their other content offerings, then i don't like their long term prospects.

Today's trades have been interesting and somewhat muted, tomorrow's trades will be determined by whether the analysts see thru the spin or believe the guidance, and what instos do having read considered research.

This sector has been great over past 3 years, time for us to move onto to greener pastures.

Good luck

relaxan