Mixed bag of results for telcos

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The end of results season in February uncovered an interesting trend for telecommunication (telco) players: different strategies gave way to different results.

Overall, the telco sector recorded a mixed bag of mixed fourth quarter of financial year 2016 (4QFY16) results, with Maxis Bhd (Maxis) emerging as the stronger player over its competitor Celcom Axiata Bhd (Celcom) and Digi.Com Bhd (Digi).

While Celcom’s parent company, Axiata Group Bhd (Axiata), ended the year with disappointing 4Q16 earnings, Affin Hwang Investment Bank Bhd (AffinHwang Capital) highlighted that Maxis held up pretty well operationally amidst shrinking sector revenue.

According to AffinHwang Capital, Maxis’ revenue market share – amongst the three celcos – ended at 39 per cent as at end 2016, the group’s second year of gain.

The growth in Maxis’ market share was, however, at the expense of Celcom and Digi’s shrinking revenue base.

“Combined revenue for the three celcos amounted to RM21.8 billion, down five per cent from 2015 and represents the third consecutive year of decline,” it said in its report earlier this week.

This can be largely attributed to non-listed fourth player, U Mobile Sdn Bhd (U Mobile), grabbing a recognisable chunk of market share.

 

Results round-up

Looking at the sector’s cellular subscriber base, AmInvestment Bank Bhd (AmInvestment Bank) said in a separate report that Digi remains the leading mobile subscriber.

“Since edging out Maxis with the largest mobile subscriber base in 2QFY16, Digi has retained the group’s pole position with 12.3 million users,” it said, adding that this translates to a market share of 34.8 per cent versus Maxis’ 33.7 per cent and Celcom’s 31.5 per cent.

“Its revenue has also grown to overtake Celcom by two per cent in 4QFY16; now the second largest after Maxis,” the research firm said.

Digi had in fact gained prepaid customers at Maxis and Celcom’s expense, it said.

Although mobile subscribers declined by 150,000 to 35.4 million in 4Q current year 2016 (4QCY16), Digi gained 50,000 subscribers in 4QCY16 while Maxis lost 120,000 and Celcom 80,000, largely in the prepaid segment which experienced a net attrition of 869,000 to 26.8 million.

Digi’s prepaid subscribers instead climbed 211,000, as both Maxis and Celcom removed inactive users from their database.

“This drove prepaid average revenue per user (ARPU) by RM0.67 per month quarter on quarter (q-o-q) to RM35.70 per month,” the research firm said.

“Amidst increasingly larger data quotas and improved features offered to customers, the postpaid segment rose at a faster pace by 201,000 q-o-q and 255,000 y-o-y to eight million while ARPU increased RM3 per month to RM88 per month.”

 

Prepping up on prepaid, postpaid

On the other hand, AllianceDBS Research Sdn Bhd (AllianceDBS Research) opined that Maxis was the better performer in the prepaid segment for 2016.

The research house explained that despite losing 574,000 subscribers, prepaid revenue did not fall much as Maxis managed to offset it with higher ARPU (from RM39 to RM42).

“DiGi defended its prepaid subscriber base well but it came at the expense of lower ARPU, which we think was also largely due to the weak migrant workers sub-segment.

“Celcom suffered a whopping 1.85 million subscriber loss while ARPU had remained stagnant,” the research house said.

As for the postpaid segment, AllianceDBS Research noted that Digi gained market share in the postpaid segment in 2016 albeit from a lower base, with a 10.6 per cent revenue growth versus flattish growth for peers.

This was mainly achieved through subscriber gains, which AllianceDBS Research believed was reflective of improving customers’ perception of Digi’s network quality from the group’s aggressive rollout of 4G LTE network.

“To our surprise, Maxis defended its premium subscribers of the postpaid market quite well in 2016 (ARPU of RM104 vs RM80 for DiGi and Celcom), despite the more aggressive and attractive pricing by peers,” the research house said.

Affin Hwang reckoned that the growth in the sector’s postpaid subscribers vis-à-vis the prepaid segment is being underpinned by growth in demand for data and hence better demand for packages that offer a larger data plan.

 

Competition remains key risk

Competition in the telco sector, particularly the mobile segment, was intense for a good part of 2016 but this eventually abated in the last two quarters.

AllianceDBS Research observed that the three mobile incumbents had not cut the pricing of their mobile plans since the research firm’s last review mid-December. It did not see any signs of them doing so in the near term.

Celcom did launch a new prepaid plan in the period, it said, but it was more of a tweak to the allocation of data quota in terms of more base quota than freebies.

“We echo the view of incumbents that price competition in 2016 had been value destructive for the industry, especially in terms of data monetisation,” it said.

“However, without a clear leader taking the first steps towards normalisation — such as removing data freebies for example — we just do not see any uplift to ARPU when the current data quota given is way higher than the average data usage per subscriber.”

That said, other researchers such as AffinHwang Capital affirmed that competition remains a near term key risk.

 

Celcom’s strive for connectivity

To maintain its competitiveness in the industry, Celcom’s chief executive officer Michael Kuehner told BizHive Weekly that Celcom has always delivered the most efficient and high quality services to its customers.

He stressed that Celcom places strong focus on customer experience, digitisation of its products and services, technology transformation and cost innovation, to meet the current and future challenges of the industry.

Additionally, Celcom is deploying the latest technology by leveraging on strong partnerships with the finest suppliers globally.

“Moving forward, advanced technologies such as cloud architecture, network function virtualisation and software defined network among others, shall be key focus areas that will enable Celcom to remain ahead of the curve.

“The adoption of these technologies will help improve time to market, network resilience and the overall cost efficiency.

“Apart from investments in technology infrastructure, Celcom will stay focused on continuous innovation and improvement,” he said in an exclusive.

Kuehner pointed out that within the digital telecommunications ecosystem, it is important to embrace digitisation in all aspects as consumers are at the heart of digital transformation.

“Celcom is advancing towards becoming a digital company through the digitisation of its products and services, to meet the changing consumer behaviours and empower communities.

“Over the past year, we have consistently positioned our customers’ needs and their digital experiences as well the products and services which are in demand, as priority.”

Aside from providing customers with the best plans in the market, Celcom has enabled Internet connectivity within the education sector, enhanced its customer’s experience for entertainment and lifestyle through online commerce, OTT, games, video, music, and assisted local entrepreneurs to develop their businesses.

Celcom has further provided its customers with the convenience and digitised customer service through its Blue Cube Online portal for the purchase of devices and content, as well as the recent digital self-service portal for device-related issues and management.

For the past year, Celcom’s strategic collaborations had primarily been with government agencies, universities and technology companies to offer seamless and a strong network, domestic roaming and empower smart communities.

“It also included entrepreneurship programmes, digital learning opportunities and telcopreneurship (student training in Celcom) agreement in schools and universities, as well as Bumiputera entrepreneurship start-up schemes.

“Aside from this, we have also introduced a digital self-service portal for our customers on device management.

“Celcom had also diversified digitally to offer more to its customers in categories such as music and sports,” Kuehner said.

Such examples include Celcom partnering with Yonder Music in showcasing a Datuk Siti Nurhaliza concert; the Badminton Association of Malaysia to sponsor the Celcom Axiata Malaysia Open 2016 and held customer and partner appreciation days such as the Blue Cube Weekend, SME Day and Celcom Business Solutions Day.

U Mobile’s aggressive bites

In addition, there is the aggressive U Mobile which recently tweaked its prepaid plan slightly with free unlimited data for social media, AllianceDBS Research says.

“Apart from that, the company is also having a limited time promotion for its RM30 to RM50 monthly internet passes with three-fold data quota,” the research house said.

Nonetheless, without a response from the incumbents, the research house believed the impact will be relatively well-contained.

 

Witnessing webe’s rise

On another note, Telekom Malaysia Bhd (TM) recently launched its very own digital mobility service provider, webe, an indicator that rivarly may heat up again in the near future.

TM’s webe was launched in September 2016, an important milestone for the company as it marked the group’s entrance into the mobility space.

“Its converged suite of quad play service offerings is now finally complete, comprising fixed (telephony and broadband), mobility, content, WiFi and smart services all under one roof,” the group said.

“We will continue to leverage on the strategic investments made earlier in webe and TM Business Solutions to realise our Convergence and Go Digital aspirations as we move beyond connectivity services into new value added digital services.”

According to an analysis from JF Apex Securities Bhd (JF Apex), webe has so far achieved 61 per cent of coverage nationwide.

AllianceDBS Research noted that four months after webe’s official launch in September 2016,TM briefly hinted that the group had penetrated two per cent of its fixedline household customers (circa 52,000 households),

This translated to about 104,000 subscribers assuming average of two lines per household.

“The management targets to increase penetration rate to eight per cent to 10 per cent by end-2017,” JF Apex said.

 

Narrowing the digital divide in Sarawak

Much work is needed to narrow Sarawak’s ever-present digital divide between the rural and urban areas. Stakeholders such as Celcom have played their parts in partaking in telecommunication infrastructure projects, thus promoting greater coverage across the state.

In fact, Celcom first became a Universal Service Provider (USP) in Sabah and Sarawak in 2004 by providing payphones and basic residential lines at underserved areas.

USP is an initiative funded by the Malaysian Communications and Multimedia Commission (MCMC) to bridge the digital divide between rural and urban areas.

“Celcom’s contribution in bridging the digital divide has since expanded to include more telecommunication infrastructure projects,” Kuehner said.

In Sarawak, Celcom has installed 141 T3 sites; upgraded 37 2G sites to 3G and installed 60 units of small cell coverage at selected Long Houses.

Celcom is now in the midst of upgrading 143 2G sites to LTE and implementing eight new LTE sites as well.  In addition, the group has four Pusat Internet 1Malaysia (PI1M) and 116 WiFi Komuniti in Sarawak.

As for Sabah, Celcom has installed 70 T3 sites; upgraded 99 2G sites to 3G; installed 40 units of Small Cell coverage at selected rural areas.

Soon, Celcom will upgrade 60 2G sites to LTE and roll out 19 new LTE sites in Sabah.

Additionally, the group has 82 PI1M and 560 WiFi Komuniti in Sabah.

“With these USP initiatives funded by MCMC, telecommunication infrastructure and coverage across Borneo will be greatly enhanced,” he enthused.

Investment-wise, Celcom has in 2016, invested more than RM1 billion nationwide for its network infrastructure, and approximately 83 per cent was utilised for 3G and 4G coverage initiatives.

“We operate in an exciting market that requires constant focus on the ability to accelerate. At present, we are aggressively engaged in executing our growth strategy, which of course includes Sabah and Sarawak.

“We are working towards delivering focused business results for the long term and will implement targeted digitised marketing initiatives to drive data consumption, to the benefit of our customers,” Kuehner affirmed.

 

‘Difficult transition period in 2017’

Mobile players have been projected by analysts to have a difficult transition period this year, but that the mobile market will stabilise in the first half of 2017 (1H17).

AllianceDBS Research believed that growth will be hard to come by for the mobile players in 2017 as data pricing has fallen substantially after severe price competition in 2016.

“Essentially, the generous data quota and freebies offered by mobile players are way above the current average data usage per subscriber, hence limiting ARPU growth even when data consumption is rapidly rising.

“Worse still, this could accelerate the substitution of voice and SMS to data, where the former two are still substantial at 48 to 60 per cent of mobile revenue,” it said.

That said, AllianceDBS Research opined that the mobile market will stabilise in 1H17 in view that all the four mobile players should be focusing on adjusting their networks to be ready for the new spectrum assignment starting July 2017.

The research house expected 2H17 to be action-packed after U Mobile and Digi start to use the new spectrum, while Celcom must do something to regain lost ground after its grace period.

“TM’s webe could also be an issue for the mobile players if it manages to gain a lot of subscribers,” the research house said.

AllianceDBS Research also pointed out that last but not least, spectrum allocation for the expiring 2100 megahertz (MHz), 2300MHz, and 2600MHz is on everyone’s lookout but could still present surprises as the possible approach that the regulator, MCMC will take is unknown.

Meanwhile, telco sector earnings were expected by Affin Hwang to rebound by a sharp 12 per cent in 2017E after the 24 per cent decline in 2016.

“Earnings growth should be led by a recovery in Axiata’s earnings,” the research firm said. “A large part of this growth should be underpinned by an absence of accelerated depreciation charges in 2016.”

Operationally, Affin Hwang forecasted a marginal improvement in Axiata’s operating margins to 38.7 per cent from 37.2 per cent.

Affin Hwang highlighted that excluding Axiata, sector earnings are projected to grow at a more realistic one per cent.

“This is also consistent with the guidance by celcos of flattish revenue and EBITDA levels for 2017E,” it said.

However, the research firm did not foresee sector earnings returning to the RM7 billion range of 2013 to 2015 levels over the near term, dragged by enhanced competition within the celco space and operational losses at webe for TM.

Celcom: Capitalising on changing consumer behaviours

Celcom’s chief executive officer Michael Kuehner observed that the proliferation of smartphone or smart devices, increased adoption of over-the-top (OTT) and Internet has changed consumer behaviours and the services they consume.

“Their voice and SMS demands are now superseded by data needs and usage,” he said.

“Therefore, we have taken the opportunity to launch data-led products and services data.”

Celcom expected growth in data usage to continue and the operator will continue to focus on delivering superior network quality and customer experience to support these evolving consumer behaviours.

As with other operators, Celcom introduced several new products and services over the past year to cater to this demand.

Kuehner highlighted in an email interview with The BizHive Weekly that these included Celcom postpaid and prepaid products such as Xpax Turbo, New FIRST Gold, FIRST Gold Plus, FIRST Platinum plans, and the Celcom Passport which offers data, calls and SMS for between one and seven days when on roaming.

Celcom’s most recent product, the All New Xpax offers customers the choice of four new simplified and affordable internet plans, and the Internet quota can be used for anything, on any day, whether on 3G or 4G networks with no quota splits.

“The plans include the daily plan at RM3 (1GB), the weekly plan at RM10 (2GB) and the monthly internet plans at RM30 (5GB) and RM50 (10GB).

“All Xpax Internet Plans include FREE unlimited music with Yonder Music,” Kuehner enthused, adding that there are simplified Add-ons with Unlimited Calls, Late Night Quota, and Youtube from as low as RM1.

In Affin Hwang’s view, postpaid packages that offer shared plans (especially amongst family members and hence a cheaper second or third line) are also encouraging better take-up for this segment.

“The postpaid segment nevertheless is still a small fraction (23 per cent) of overall sub base,” the research firm said.

As there is increased competitive pressures in the industry, Celcom’s near term revenue focus is on stabilising its market share and return to growth.

Kuehner stressed that Celcom will emphasise on delivering excellence in customer experience, supported by a strong network capability.

“There will be continued focus on our network modernisation programme to deliver the best data network and video experience.

“We will also simplify our processes and the way we work, combined with the digitalisation of our core.

“Additionally, we are delayering our organisation structure to become more agile,” Kuehner said.

Celcom saw an improvement in the service revenue for the third quarter and a recovery in its postpaid segment, despite operational challenges.

Celcom also remained positive on regaining market confidence with a stronger performance.

“Our new leadership team is already implementing the company’s turnaround plans and will ensure that the company embraces digitisation and a performance-driven culture.

“The team is part of an organisational refresh under the group-wide cost optimisation plan,” he added.

Moving forward, Celcom is geared towards a progressive opening for the year, and shall unveil its latest products and services soon.

 

Maxis: Mark-up in strength and service

Meanwhile, Maxis projected in the latest quarterly report that the group expected service revenue, absolute EBITDA and base capital expenditure for the financial year ending December 31, 2017 to remain at similar levels to financial year 2016.

Maxis disclosed that to stay competitive, the group will continue to enhance and strengthen its customers’ propositions whilst focusing on providing the best connectivity.

“2016 was a challenging yet good year for us. Despite the intense price competition in the market, we performed well by focusing on offering our customers uniquely attractive value propositions.

“Our customers now enjoy a combination of lots of data at affordable prices on the best network, and we’re proud to record an all-time high customer satisfaction.

“All in all, 2016 was a year of good progress with positive momentum heading into 2017,” Maxis cheif executive officer Morten Lundal said.

 

Digi: Drive for further digitisation

Digi is also optimistic on the group’s outlook for 2017 despite the fact that challenging market conditions persists.

According to Digi in its 4Q16 management discussion and analysis, the stronger internet and digital services positioning and robust infrastructure capability in 2016 will pave a favourable head start for Digi into 2017 to pursue innovations amid customers’ evolving needs in digital life.

“As the year ahead holds new opportunities and similar challenges as 2016, Digi will continue to drive resilient performance and sustainable returns in 2017,” Digi said.

“The key priorities in 2017 will focus on relentlessly growing postpaid and Malaysian prepaid opportunities while defending core service revenue streams.”

Digi revealed that the group will also continue to drive stronger 4G+ adoption and usage with better monetisation, new digital revenue opportunities beyond the immediate future, digitisation of core business and operational efficiencies innovations

“Digi’s persistent focus on products and service innovations, retail experience reforms, digitisation of core business for future growth will set a strong foundation to enable Digi to capitalise on new growth opportunities and run faster in 2017,” the group said.

Digi went on to add that the group aspires to turn in stronger performance than industry with improved efficiencies and service revenue and earnings before interest, tax, depreciation and amortisation (EBITDA) margin at around 2016 level alongside with capital expenditure (capex) at 11 per cent to 13 per cent of service revenue.