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Arq Group reveals new structure amid disappointing financial forecast

Arq Group reveals new structure amid disappointing financial forecast

Lays out enterprise turn around plan

Credit: Arq Group

Arq Group has revealed a new organisational structure that has seen a flattening and broadening of its leadership team with two senior executives departing the business.

The company is currently tracking 12 months into its 18 month business transformation program, which kicked off as it rebranded the business from Melbourne IT to Arq Group in May last year. This saw the consolidation of 10 brands down to two -- Arq Group that focuses on digital services in the mid-market sector, and Netregistry, a provider of online solutions for small businesses.

Arq Group CEO, Martin Mercer said the organisational redesign was consistent with its strategy of moving to two brands, and bringing them closer to customers, improving execution and creating a scalable model to support growth. 

As a result the company has revised its underlying EBITDA from core operations down to a range of $15.5 million to $18.5 million. This is due to the performance of the enterprise business, execution issues experienced in the Melbourne market and unexpected delays in turning on revenue from new contracts. 

Mercer expressed disappointment and frustration in the forecast results, but was confident the changes it was making within its enterprise sector, will help turn that around, considering how the SMB sector has begun to see growth.

“This is a temporary challenge, and a recovery plan is already in effect. Last year, our SMB division fell short on earnings, but is now exceeding expectations as a result of cost improvements from productivity initiatives and growth in new solutions revenue,” Mercer said. “We’re confident enterprise will see a similar return to growth. 

“The organisational changes implemented today will support future growth. Our recovery plan for Enterprise is also well advanced and, we’re seeing improvements in Melbourne. We also expect the revenue from delayed contracts to come on stream in the Q3. Together with the ongoing recovery in SMB, the group is expecting a stronger H2 FY19 performance. Arq has a lot to look forward to.” 

Some of the new strategy for the enterprise team includes a new sales leader in Melbourne along with efforts of rebuilding the sales team, since forecasting a 15 per cent year-on-year decline in the enterprise business. Despite this, the Sydney market is growing strongly at a forecast rate of 40 per cent year-on-year growth. Arq also has offices in Brisbane and Auckland.

“We knew we had some problems in Melbourne in sales and turning on new opportunities, but I don’t resile from the fact it will have an impact on the first half of FY19 and into the second half,” Mercer told investors. 

Within its enterprise business, underlying EBITDA is forecast to be in the range of $12 million to $14.5 million, but in contrast the SMB sector has seen an uptick and is expected to contribute between $9.7 million to $10.7 million. 

“We’re now seeing consistent growth in new solutions, revenue, with productivity improvements delivering more than we expected,” he said. 

In August, Arq Group lost a large customer at the same time it announced it would progressively turn off services during the final quarter of FY19, which will contribute $4.3 million to $4.8 million EBITDA in FY19.

Cost reduction initiatives were also underway set to save the company $4.1 million in 2019, with annualised savings of $7.8 million. 

As a result of selling its TPP reseller business to CentralNic for $24.4 million in May, Arq will also be reducing its net debt to $50.3 million. 

In February, Arq Group has reported a 118 per cent net loss after tax down to $2.3 million in the red with EBITDA falling 39 per cent to $19.5 million for the full 2018 financial year, ending 31 December.

Revenue rose eight per cent to $213 million and underlying EBITDA was down three per cent to $37.6 million. 

The company also revealed it was in negotiations to sell half of its indirect SMB business and will reinvest proceeds from the sale towards its digital service strategy. 

The indirect business involves about 11,000 channel partners, to whom Arq sells domain and hosting services. It currently contributes $25.6 million revenue and $13 million in EBITDA.

The other half of its indirect SMB business is made up of one customer, who has indicated they will be reducing their spend, Arq Group told its shareholders.

Its indirect SMB business has been in systemic decline since 2015 when it contributed $47.5 million to revenue at the time.

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