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Monday, September 03, 2007

Brightview - A small ISP examined

Brightview plc owned the small ISP which included Madasafish, Global Internet and operated several virtual ISPs for John Lewis & Waitrose. The ISP was sold to BT on 31st July for £17.23m. Brightview plc this morning released its annual accounts for the year ending 30th June 2007 and these accounts provide a little insight into the P&L of a small ISP.

Revenue and the customer base has been steadily increasing with broadband customers growing from 40.5k (Jun 2006) to 50.5k (Dec 2006) to 61.2k (Jun 2007) and revenues £11.0m (12m Jun 2006) compared to £13.9m (12m Jun 2007). The growth in broadband customers is ahead of the growth in total revenues and this is primarily because of a decline is dial-up revenues from £4.0m (12m Jun 2006) to £2.5m (12m Jun 2007).

This phenomenon of at least some of the growth in broadband being offset by a decline in dialup revenues will be a growing feature of the accounts of the three ISPs with the largest dialup bases (BT, AOL and Orange). It is made even worse by the fact that the margin of dialup is typically much higher than that on broadband.

The Brightview accounts highlight the effect of this margin mix quite clearly: overall EBITDA fell from £2.1m in 2006 to £1.3m in 2007. A few notes on this EBITDA figure: it is before central or plc costs, before equipment depreciation, goodwill amoritisation arising from the purchase of the ISP and after broadband SAC amortisation. SAC amortisation is quite interesting for Brightview because they depreciate over 24-months and not the length of contract which would involve a much higher charge. In 2007 SAC amortisation was £1.4k compared to SAC capitalised of £1.4m in 2006 these figures were £0.9m for SAC amortisation compared to £1.5m SAC capitalised.

It should be remembered that Brightview spent very little on marketing – most of the customer acquisition came through recommendations. Capitalised Broadband SAC of £1,391k for 20.7k only works out at £67 sac/customers and most of that would have been paid to BT Wholesale. Brightview consistently won awards for the quality of its customer service and probably the churn rate was a lot lower than other resellers.

Brightview was a 100% BT ipstream reseller for its broadband services and as such had very few tangible fixed assets (around £0.4m); most of assets were intangible in the form of either capitalised SAC or the amount remaining for the original purchase of the ISP by the plc (£7.8m).

Therefore, Brightview faced an unenviable decision:
  • continue as is, probably facing declining profits in the future as dial-up customers transfer to a lower margin broadband product which currently is under severe pricing pressure from the unbundlers;
  • invest in local unbundling – Brightview was always a national ISP and probably doesn’t have the local scale of a Newnet or Zen to unbundled a few exchanges; or
  • sell-up.
Obviously, they chose the sell-up option and achieved what appears to be a reasonable price. BT protects its wholesale revenues and gets effectively a months customer growth at BT retail. The rough purchase metrics by BT were £265/customer and 12.2x EBITDA – obviously depending upon the final £1m adjustment calculations for working capital and July net adds.