Analyzing Telecommunication Companies May 2, 2017
With all the on-going news on take-overs, new entrant and upcoming release of results for the telco sector, I thought it will be good to share on a few points to look out for while analyzing telco companies.
Telecoms’ performance are usually judged on the following:
1) Ability to retain and grow their customer base
2) Ability to generate revenue from customer base
3) Ability to contain costs to improve profit margin
1) Ability to retain and grow customer base
Higher subscriber base means higher revenue growth potential. Investors generally look at the growth in subscriber numbers to understand if the company is doing well against its competitors. A strong growth in subscriber numbers usually mean that the company is offering attractive services as compared to its competitors. Flattening growth are usually a tell-tale sign that the company is not doing enough or their subscriber base may have reached saturation point.
This rate measures the stickiness or stability of the customer base. Usually displayed on the results statements in percentage form, it shows the amount of subscribers who left the service during the period. The higher the churn rate, the more pressure there is on the company to add new subscribers to generate revenue or to improve profit margin.
2) Ability to generate revenue from customer base
Average Revenue Per User (ARPU)
Measuring the average monthly revenue generated from each subscriber, ARPU is a classic key indicator used in the analysis of a company’s revenue generation and growth at the per unit level, which can help investors to identify which products are high or low revenue-generators.
3) Ability in containing costs to improve profit margin
Earning before interest, tax, depreciation and amortization (EBITDA)
EBITDA allows investors to analyse whether the core operating business is actually generating profit by taking out the effect of capital expenditure (CAPEX), interest payments and depreciations. As telecommunication companies typically have large capital expenditures or depreciations, EBITDA is a convenient metric for comparing the profitability of companies that have different capital investment outlay.
Case Study (Extracted from 1Q17 financial results for M1)
From the 1Q2017 quarterly results from M1 above, we can see that M1 has grown their customer base by 6.6% YoY. On the surface, this seems like a fantastic rate of growth! However, when we take a closer look at the EBITDA (-5.1% QoQ) and ARPU (which reflected a decline in almost all segments), it tells a different story! This means that even though M1 successfully grew their subscriber base, their ability to generate revenue from each user and overall profit margin have actually decreased. This may be attributed to higher operating expenses and costs in attracting new users.
In conclusion, when analysing Telecommunication Company, investors should not solely look at the growth in subscribers. They should combine it together with ARPU and EBITDA to get a more complete picture of the overall health of the company.
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About the author
Chong Kai Xiang (Kai)
Raffles City Dealing Team
Chong Kai Xiang (Kai) is an Equities Dealer in the Raffles City Dealing Team, and currently provides dealing services to over 35,000 trading accounts.
Kai frequently conducts seminars to enrich his clients' trading and financial knowledge. Apart from this, Kai also provides weekly market updates to his clients to keep them informed and up to date on their stock holdings.
Kai holds a Bachelor Degree of Finance from the SIM University – UniSIM and was awarded the CFA Singapore Gold Award and CFP® Certification Achievement Award in 2015.