The demand for internet bandwidth seems almost insatiable as more and more internet enabled devices and streaming services such as Netflix drives demand in the consumer space whilst the increasing use of cloud services, such as software as a service and infrastructure as a service, is driving demand in the commercial sector. High speed connectivity is a must have and despite the promise of the NBN, slow roll-out, inconsistent performance and high prices have led to considerable frustration. Demand for high speed connectivity is only going to increase as 5G mobile technology is launched over the next few years potentially turning the internet of things (IoT) into a reality. The idea of the IoT is that almost everything can be controlled and managed across the internet, including home automation, self-driving vehicles and so on.

Point-to-point wireless microwave technology is now a well-established platform for delivering reliable high-speed internet services and there are some 40 wireless internet providers around Australia, although most are small.

The technology is quick and easy to install and is ideal for filling gaps in the market, especially in dense and moderately dense areas. Spirit Telecom’s average capital cost per building is a little over $7,000 which is very costs effective when spread over multiple clients in the buildings.

With less 600 buildings connected to Spirit’s network there is still enormous growth opportunities from expanding its market presence. To support accelerated growth the company recently restructured its internal management to provide sharper focus on both its network management and sales and marketing activities.

Sales and marketing are focussed on expanding the number of points of presence and the client take-up rate at those sites whilst network management needs to ensure that the infrastructure is capable managing demand and projected growth.

Recently the company won a Victorian government tender to supply superfast wireless coverage in Horsham, a town of about 17,000 in the wheat belt about 300km north west of Melbourne. The government will pay for the infrastructure and it is up to Spirit to build its business from the commercial sector. This project has limited financial risk for Spirit and will be a test bed for the economics of building its infrastructure in small and mid-sized towns where NBN is typically satellite delivered.

The most likely expansion path is into Sydney and Brisbane, where there is a small presence, and eventually towards a national footprint. In part, this could be achieved through direct investment but given the company’s history, acquisitions are likely to play an important part in the company’s strategy to build scale.

A greater geographic presence will open up many opportunities enabling the company to develop a broader range of products with the ability to more effectively target particular market segments.

Revenue doubled to $16 million between FY 2016 and FY 2018 whilst EBITDA grew from -$2 million to positive $2.6 million over the same period. Scale enabled the company to breakthrough to sustainable profitability. This was achieved from strong underlying business growth, especially from commercial clients, and the from the acquisition of Without Wires but was partially offset by the rapid decline in revenue from low margin legacy services (the original reseller business). Operating cash flow has been positive for two years but is exceeded by the capital costs of network roll-out.

The company has funded its growth with new capital (nearly $7 million raised in FY 2018) and debt which stood at $4.8 million as at 30 June 2018. Cash balances of $4.6 million were held as at 30 June 2018.

The company is relatively capital intensive with plant and equipment, mostly network related, of about $6.4 million as at 30 June 2018. Inasmuch as acquisitions have been a feature of the company’s growth path it is not surprising, however, that intangibles, mostly goodwill on acquisition, of about $9 million represented about 40% of total assets.

I like that Spirit is on a high growth trajectory which appears to be sustainable and that it has broken through to profitability. The challenge for the company will be to expand its geographic presence and in particular to build a solid east coast network, which will better position it in the corporate market. The company is still a minnow in the telco sector and a build out of this scale would transform it and represent a quantum leap in size.  The company has successfully integrated acquisitions as part of its growth strategy and we assume it will seek more acquisitions as it goes forward.

The company is likely to have an ongoing funding requirement with network related capex exceeding operating cash flow surpluses. Any acquisitions would add to this requirement.  Nonetheless, the company is currently well funded with a relatively modest level of debt which is offset by cash reserves and appears to have the financial resources to drive its growth strategies.