How to make a profit – it’s easier than you think

Bevan Slattery and Stephen Baxter started telco infrastructure company PIPE Networks on a limited budget, but have been solidly profitable from day one. AMANDA GOME details the PIPE profit plan.

In 2001 in the middle of the dot-com crash, when telecommunications companies had gone from being market darlings to market disasters, two young entrepreneurs decided to set up telecommunications infrastructure company, PIPE Networks.

By 2005, it was a market darling. When the company listed on the Australian Stock Exchange, shares skipped from 40 cents in May 2005 to about $4.54.

Now PIPE is causing the telecommunications industry to sit up and take notice with the announcement yesterday that it has enough keystone customers to build a $200 million Sydney to Guam undersea cable that is expected to be finished by the second quarter of 2009.

The approach of signing up customers before committing to a project is not new to entrepreneurs Bevan Slattery (pictured) and Stephen Baxter. The 36-year-olds have focused on their company making a profit from day one.

Amanda Gome talks to Bevan Slattery about his strategy, philosophy on profit and the next stage of growth. Bevan is happy to answer your questions. Send them to feedback@smartcompany.com.au and he will answer you on this page.

Amanda Gome: Your industry is littered with companies that borrowed big and then crashed spectacularly. What is your philosophy on profit?

Bevan Slattery: To charge at least what it takes to recover costs. It is not rocket science and you might think it sounds obvious, but our industry is littered with examples of people who did big deals with big numbers and then they hope the contracts are going to happen.

We sit down with interested parties and we know what the systems are going to cost and what we can recover comfortably after covering our costs. It is the founding philosophy of the company, to be profitable every year of operations. We made this part of our founding statements and it is in our annual reports and in our prospectus.

We can build the infrastructure, get the contracts to break even on sales, and then beyond that we get a fairly good margin. (Primus, Internode, iiNet, Telikom, PNG and VSNL are among those already signed up.)

Our net profit after tax was $4.5 million last year. This year it will be $7 to $7.4 million on revenue of $34 million.

You are serial entrepreneurs; both of you have run successful businesses before. You co-founded iseek and sold it to a US company N2H2 for $25 million in 2000. (Baxter helped start ISP company, SE net which was sold to Ozmail in 1999.) What did you make from that?

Look it was the dot-com boom and then the market dived. So I ended up with more than $1 million. I learnt a lot from that, but what has really driven the philosophy is not having much.

So where did the profit ethos come from?

Our wives. Both our wives told us we could only have $50,000 each for the new business (PIPE Networks). Neither of us could put our houses on the line so we were very focused on making a profit from day one.

Apparently when you started you bought a lot of office fittings at a liquidator’s auction. Do you watch every cent?

We do try and minimalise our costs. On the other hand we celebrate our successes and have a good time. We had a party recently where we took all 60 staff away for two days to Santuary Cove. In December we went to the Sheraton Mirage and had the band Diesel play. We have a strong ethic; work hard, play hard. It is more that we keep everyone focused on the fact that every deal we do has to make money.

But if you want to do something big on limited means you have to be very focused on costs and do very good deals that make money.

You both separately own 18% of a business valued at $200 million. Not bad for two blokes in their mid 30s. But you are young and probably working horrendous hours. Do you want to sell?

No. I had a year off after selling iseek. I got bored. I bought a house on the water and fished from my pontoon for five months. My mother in law was dying and I could spend a lot of time with my wife, and fishing and pottering around the house. But then I got bored and I picked up the phone to Steve and we decided to start PIPE Networks.

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You listed after just three years to raise $3.5 million. Why not just get private equity?

We needed the money to lay the fibre optic cable networks in Melbourne and Sydney. It was easier to list than get private equity. It was less onerous on management. Private equity investors want to come in and control everything. We thought we had a good story for the market. Although we were only three years old we had been profitable since day one.

In retrospect would you do it again?

Yes. Being a listed company is not as onerous as people make out. Being a listed company you have to perform, but we are used to that.

You have just announced that the $200 million Project Runaway will go ahead. What is it?

It involves building a major undersea fibre optic cable link between Sydney and Guam. The cable will connect to an international data network junction. It will provide an internet link for some domestic internet service providers and international carriers who provide services to Australia. About 12 major cable systems run through Guam to the US and Asia, so we can tap into those.

And the benefits to consumers?

It means they get more internet for their dollar. They get a lot more downloads for the same cost as they are paying now, which is great as they are downloading more video and music from overseas.

How are you doing this at a cheaper cost to the incumbents?

The gang of four (Telstra, Optus, Verizon and Telecom NZ) haven’t changed their pricing structure but the costs associated with building fibre optics has dropped. The Australian dollar is also higher so we can offer a lot more bandwidth for the same amount of money. Also we own the infrastructure so we are not held to ransom by someone else’s ineffective models.

Do you need more money? It sounds expensive.

We have no immediate requirements but at some stage we might, from either shareholders or through strategic investments from third parties. But we have cash in the bank and a debt facility that is untouched.

So what is your biggest obstacle going forward?

People. We need good people. We have eight positions vacant including management positions, technical roles and sales roles.