Dividend Policy Report to Council 04/07/03
INTERNETNZ DIVIDEND REQUIREMENTS V1.1
Council has been asked by NZRS to formulate a dividend policy for the next three years (04/05 to 06/07), so that our requirements can be incorporated into their business planning.
Setting a dividend policy upfront will minimise the chance of forcing large fluctuations in the domain name fee every year. Previously Domainz made such large profits that no dividend policy was asked for, or needed, as it was clear there would always be sufficient funds available to meet any reasonable request. However it is intended that NZRS retain only enough earnings to cover future capital requirements and a modest level of contingency. Therefore any changes in InternetNZ's dividend needs are likely to be directly reflected in the level of the domain name fee.
In broad terms Council needs to decide what broad level of expenditure it wishes to undertake in the next three years, and then how much of that expenditure should be met by dividend as opposed to drawing down current reserves. Specific details of expenditures are not needed at this stage, as they will be identified as part of the business planning cycle annually.
A review of past income and expenditure plus the current year budget is below:
| 96/97 | 97/98 | 98/99 | 99/00 | 00/01 | 01/02 | 02/03 | 03/04 | |
| Actual | Actual | Actual | Actual | Actual | Actual | Actual | Actual | |
| .nz Fees | 60,000 | 120,000 | 145,000 | 115,562 | 160,736 | 154,407 | 737,500 | 838,400 |
| Dividends | 60,000 | 275,683 | 867,432 | 1,500,000 | - | |||
| Membership | 18,412 | 13,566 | 18,718 | 10,200 | 16,491 | 7,167 | 14,503 | 20,000 |
| Other Income | 3,653 | 13,061 | 10,373 | 683 | 12,736 | 20,538 | 218,818 | 50,482 |
| INCOME | 82,065 | 146,627 | 174,091 | 182,445 | 465,646 | 1,049,544 | 2,470,871 | 908,882 |
| .nz expenditure | 376,477 | 483,947 | 815,700 | |||||
| Other expenditure | 431,909 | 593,351 | 631,950 | |||||
| EXPENDITURE | 57,219 | 121,710 | 197,214 | 143,540 | 388,806 | 808,386 | 1,077,298 | 1,447,650 |
| SURPLUS | 24,846 | 24,917 | -23,123 | 38,905 | 76,840 | 241,158 | 1,393,573 | -538,768 |
Up until 2001 there was no real separation of .nz expenditure
and non .nz expenditure. .nz expenditure is now managed by the DNC
Office and funded by way of management fee from the Registry.
Other expenditure is meant to cover all the other work of the society. In reality it does cover some significant indirect .nz related costs as the Council and society staff do still spend quite a bit of time on .nz issues and working with DNC staff.
The 2003/04 budget has budgeted non .nz expenditure of $581,950 (excluding costs of sale of Domainz). Very roughly this can be categorised as:
Staffing $225,000
Office Expenses $144,700
Council Expenses $73,000
Activities $139,250
This is not entirely a fair reflection as much of the staffing cost goes towards supporting activities. Many worthwhile activities show no visible external cost such as representation to Government, as they are done primarily by staff and volunteers. Others such as a Code of Practice Summit cost both staff/volunteer time and also considerable external costs.
It should also be noted that office expenses include technical support for the InternetNZ networks, websites, e-voting system etc.
For planning purposes it is assumed that no changes are planned to our core level of support and operations and that staffing, office and council expenses will remain constant, allowing for say 5% cost increase each year. Council may want to revisit previous decisions on staffing levels, but assuming it doesn't, this gives us:
| 2004/05 | 2005/06 | 2006/07 | |
| Core Expenditure | $464,835 | $488,077 | $512,481 |
| With scenarios of $50,000, $100,000, $150,000, $200,000, $250,000 and $300,000 expenditure per annum on activities we have approx possible total expenditure levels | |||
$50,000 |
$515,000 |
$540,000 | $560,000 |
| $100,000 | $565,000 | $590,000 | $610,000 |
| $150,000 | $615,000 | $640,000 | $660,000 |
| $200,000 | $665,000 | $690,000 | $710,000 |
| $250,000 | $715,000 | $740,000 | $760,000 |
| $300,000 | $765,000 | $790,000 | $810,000 |
Examples of activities which have or may need specific funding beyond staff and volunteer involvement include:
Internet Code of Practice
Political Liaison/Representation
Next Generation Internet
NZNOG Support
Outreach Projects like Netsafe
Technical Projects
Ipv6
Summits
Cyberlaw
Anti-Spam Campaign
Educational Campaigns
The ongoing strategic and business planning will identify these areas in more detail and it is hoped a draft strategic and business plan will be available to Council for consideration at its August Council Meeting when it will also vote on its dividend requirements.
InternetNZ's level of expenditure and hence dividend needs will have a large impact on the level of the domain name fee which is currently $24+ GST a year.
The NZRS Company Plan (page x) shows the following budgeted income and expenditure. Please note that the budgets for 2003/04 to 2005/06 are used as the dividend for the year is normally paid after the end of each financial year.
| 2003/04 | 2004/05 | 2005/06 | |
| Registry Fees | $3,112,000 | $3,270,000 | $3,414,000 |
DNC Fees |
$818,400 | $818,400 | $818,400 |
| Registry IT Costs | $898,172 | $1,064,052 | $886,144 |
| Overheads | $567,466 | $605,403 | $569,282 |
| Depreciation | $364,395 | $225,743 | $419,668 |
Pre-Tax Profit |
$472,294 | $583,689 | $743,364 |
Post-Tax Profit |
$316,437 | $391,072 | $498,053 |
Dividend (75% of Post-Tax Profit) |
$240,000 | $290,000 | $370,000 |
The Registry Company and DNC budgets are fairly conservative and it is hoped will come in below budget. For example provision has been made for a total review of the SRS in 2004/05 with contingency for implementation of a new system in 2005/06. However, being prudent we cannot plan on more optimistic scenarios this far out.
If InternetNZ needs dividends greater than, or less than, the amounts budgeted above, then it is likely this will lead to a change in the domain name fee of $24 a year or $2 a month, all other factors staying equal.
Every $100,000 change in the dividend will have this effect on the NZRS budget, as shown below:
Dividend +/- $100,000
Post-Tax Profit +/- $133,000 (Dividend divided by 75%)
Pre-Tax Profit +/- $200,000 (Post Tax Profit divided by 67% to allow for 33% tax)
Registry Fees +/- $200,000
Meaning that every $100,000 change in dividend actually requires a $200,000 change in fees income.
For each year of 2003/04 to 2005/06 the average number of domain names predicted for that year is:
| 2004/05 | 2005/06 | |
| Domains | 136,25 | 142,250 |
| Change per $100,000 Div | $1.47 | $1.41 |
| So some scenarios for domain name fees based on dividends are: |
2004/05 | 2005/06 |
| $200,000 | $22.68 | $21.61 |
| $300,000 | $24.15 | $23.02 |
| $400,000 | $25.61 | $24.42 |
| $500,000 | $27.08 | $25.83 |
| $600,000 | $28.55 | $27.23 |
| $700,000 | $30.02 | $28.64 |
| $800,000 | $31.49 | $30.05 |
It is important to note that selecting a dividend level will not automatically mean a fee at the above level will be set. Actual fee setting will take place on an annual basis involving NZRS, NZOC and Council towards the last quarter of each calendar year. The above table shows probable effects if no other variables change. NZRS will be doing a budget reforecast in October (by which time it will need our dividend policy) and NZOC will be reviewing the DNC fee can be reduced. So the above table is probably a "worst case" scenario.
Council should not feel that it has to set a dividend level to exactly match that of desired expenditure. There are three other primary options for funding:
1) Membership Fees and Grants for specific activities
While it is unlikely membership fees will ever be a significant component of income, there has been some grants in recent times from Industry NZ for specific activities such as NGI.
2) Reduction in current reserves
It is estimated that at the end of this financial year, INZ will have cash reserves of around $600,000. INZ could choose to reduce these reserves to a lower level over time.
3) Sale of Domainz
By the time of the August Council Meeting, the Council will know how much it expects to get from the sale of Domainz. These proceeds can be either invested to provide greater interest income or also used to fund activities over the next three years.
Council is not required to make any decision at the July meeting, except to approve this paper for consultation with members leading to a Council decision in August. It will be useful to discuss this paper though and perhaps ascertain if any scenarios are more likely to gain support than others. Ultimately a decision will be needed on what level of dividend from NZRS is needed from their 2003/04, 2004/05 and 2005/06 years. This process will be repeated three yearly for each three year period.
