All 3 telcos have reported their financial results for the quarter ending Dec 2016. Both M1 and Starhub reported a significant drop in net profit of 27.1% and 33.2% respectively while Singtel reported a slight 1.8% rise in net profit. Starhub even dropped a bombshell by announcing that dividends for 2017 will be cut by 20% to 16 cents. Can telcos stop the decline in profits, or will profits continue to decline? As M1 is closest to a pure mobile telco company, this analysis is carried out using M1's results.
Fig. 1 below shows the overall service revenue and costs excluding handset sales, which are very volatile. As shown below, the service revenue is fairly stable, hovering around $200M per quarter in FY2015 and FY2016. Service costs, however, are on the rise, especially in the last 2 quarters, leading to a decline in quarterly profits.
|Fig. 1: M1's Service Revenue & Cost|
Fig. 2 below shows the breakdown of the service revenue. The bulk of the revenue comes from mobile services, which constitute 79% of the total service revenue. The rest of the service revenue comes from IDD calls and fixed services (i.e. fibre broadband).
|Fig. 2: Breakdown of Service Revenue|
As shown in the figure above, mobile services revenue is on the decline, which explains why the telco profits are declining. Some of the reasons for the decline are discussed in Impact of SIM-Only Plans on Telcos and Impact of Data Upsize Plans on Telcos. Since this business segment has the largest impact on telco profitability, I will come back again to discuss the trends affecting this segment.
IDD revenue is on the decline, which is not surprising given the popularity of over-the-top (OTT) services such as Whatsapp, which allows any Whatsapp user to make a phone call to fellow Whatsapp users anywhere in the world using WiFi or mobile data instead of voice. Very likely, this downward trend in IDD revenue will continue.
On the other hand, revenue from fixed services is growing strongly as more people subscribe to fibre broadband. In the short term, this segment is still expected to grow, but perhaps not as strongly as before as it faces many competition from other telcos as well as broadband service providers like MyRepublic. Already, M1 has to bundle mobile broadband and home digital voice to improve its offering among the competition.
Fig. 3 below shows some of M1's largest cost components necessary to earn the service revenue discussed above.
|Fig. 3: M1 Service Costs (Extracts)|
As shown in Fig. 3, depreciation and amortisation costs, which is the largest cost component, is on the rise, as M1 continues to invest in building its network. In fact, in the latest financial results, M1 reported that the estimated capital expenditure (capex) for FY2017 is around $170M. For FY2016, the capex was $141.2M, excluding a spectrum rights payment of $64.1M. Depreciation is definitely on the rise moving forward.
The next largest cost component, staff cost, is fairly stable. In my opinion, this cost component is unlikely to rise, because TPG, the fourth telco, would likely not have any physical stores and would rely on third-party dealers to sell its services. The 3 current telcos, which have their own physical stores and sales staff, would be under pressure to contain staff cost.
The third largest cost component, facilities expenses, is also on the rise. I am not sure if facilities refer to physical stores or telco network facilities. If it is referring to physical stores, this cost will be contained for the same reason as discussed above for staff cost. However, if it is referring to telco network facilities, this cost will be on the rise in tandem with capex. To be conservative, I assume that it is referring to telco network facilities and will continue to rise.
The last major cost component, fixed services cost, is rising as well. However, this is of no concern, as the rise is in tandem with the rising revenue from fixed services shown in Fig. 2. Deducting the cost of $11.2M from the revenue of $27.2M, this segment earned a gross profit (excluding all sales-related costs like staff costs, rental leases, etc.) of $16.0M for 4Q2016. This is a rise from $10.8M in 1Q2015.
Based on the discussion so far, service costs are likely to continue rising due to expansion of the network infrastructure. Thus, if M1 is unable to halt the decline in service revenue in its main mobile services segment, it is likely face declining profits and dividends, even before the fourth telco opens for business.
2 of the factors affecting the mobile services revenue have been discussed in previous blog posts, namely, Impact of SIM-Only Plans on Telcos and Impact of Data Upsize Plans on Telcos. Both these factors are negative on revenue and profitability. The impact of SIM-only plans will be spread out over 2 years, as subscribers can only switch from regular plans to SIM-only plans when their contracts expire, and the typical contract period is 2 years. On the other hand, the impact of data upsize plans is fairly immediate, as subscribers need not wait for their contracts to expire before subscribing to the upsize plans. Having said that, when comparing results on a year-on-year (YOY) basis, it will take 1 more year for the effect to fully disappear from the financial statements.
Although there are headwinds from SIM-only plans and data upsize plans, there are, nevertheless, silver linings. As previously discussed in Impact of Data Upsize Plans on Telcos, the larger data allowance is encouraging subscribers to use more data, as shown in Fig. 4 below (note: M1 changed the way it measures the percentage of subscribers who exceed their original data allowance in FY2016. The figures for 2015 and 2016 are not directly comparable).
|Fig. 4: M1's Subscriber Data Usage|
Perhaps as a result of the introduction of SIM-only plans, the number of post-paid subscribers has also jumped. The blue line in Fig. 5 below shows the YOY growth in number of post-paid subscribers, which jumped from 1.8% in 2Q2015 to 3.0% in 3Q2015, the quarter when M1 introduced SIM-only plans. The growth has continued to rise and recently stablised at around 4.5%. This rise in post-paid subscribers will counteract the fall in revenue due to conversion from regular plans to SIM-only plans by existing subscribers and data upsize plans.
|Fig. 5: Trends in Post-Paid Customer Revenue|
Also on the rise is the percentage of post-paid subscribers on tiered data plans (see red line in Fig. 5 above). Prior to the introduction of tiered data plans (and smartphones), some subscribers had very large data allowances under their very old mobile subscription plans. Tiered data plans cap the mobile data allowance according to the monthly price plans and subscribers have to pay more for having more data.
In conclusion, there are both headwinds and tailwinds for the mobile services operations.
Finally, please note that although all 3 telcos have mobile services operations, Starhub has other business segments and Singtel has overseas operations and investments.
P.S. I am vested in M1 and Singtel.
See related blog posts:
Hi Chin Wai,ReplyDelete
You have vested in M1 and Singtel, but not Starhub. Is there any reason to this?
Hi W Y, It's because I have some concerns over its other business segments. I'll share more in a few weeks' time.Delete
Hi Chin Wai,ReplyDelete
How are you. Hope all has been great. Wow, did not realise that both Starhub and M1 have stock prices that are 5y low.
Singtel is still doing relatively well.
Seems like its getting more and more difficult to find a category of stock with stable dividends less unaffected by the market changes.
Thks. I'm doing fine. Still managed to blog once a week.
Yes, not easy to find stable stocks these days.