The impact of the 3G rollout on value added services has not been significant, and OnMobile CEO Arvind Rao feels that the deployments are still in a nascent stage – “The initial uptake looks good, but is still small in terms of numbers. The 3G revenues so far is largely from connectivity revenues in terms of dongles and mobile broadband. It is still a trickle in terms of actual users. Revenues that we anticipate seeing from Video on Demand and IVVR (video portal), which have already been deployed, will take a little time to materialize.”

And it appears that there’s a negative side to the 3G rollout for VAS as well – “Due to 3G service launches in the last 3-6 months, telecom operators have diverted a big chunk of their promotion capacity towards 3G services. So we have seen a decline in the promotional bandwidth allocated towards VAS, which has a temporary impact on our revenues and our business, we don’t see that as a structural change, and we anticipate that it will come back. VAS will continue to be a core part of the margin story on 3G.”

For Onmobile, Ringback tone revenue contribution is roughly 40-45%, and that of their Voice and applications portal business, is 30-35%, “on a full global basis”.

Indian Market Going Through Inflection

According to Rao, “In the short term, the (Indian) market is going through a bit of an inflection, for two reasons – everybody is taking for 3G VAS to take off. And it’s going to take a while, infrastructure put in, handsets put in, and end user prices drop to where it can be material. So I think 3G VAS can only take off only after 2-3 years in a material way. In the short term, I think that the existing 2G services will continue to dominate, but the key here is to get the operators to agree to reduce the prices to take penetration to the next level. That is the key issue apart from the promotion issue. While we are powering a big chunk of the Indian market with all these telecom operators, the end user pricing is determined by them, under their brand name. At some point we are hoping they will allow us to launch lower price services, or agree to reduce the price of the services in a segmented manner so that we don’t cannibalize our existing revenues. Until that happens, I don’t see penetration having a quantum increase. If we are 20-25% penetration in India, I don’t see that getting to 40-45% unless we see a new price point.”

Can Revenue Shares Increase?

“Prices can only go down, not up,” Rao added, saying that “Revenue shares, in all my history, I’ve never seen them go up. With scale, as our products become more mature, there is pressure for revenue shares to come down. None of our revenue growth is coming any assumption in terms of renegotiated higher revenue share. The growth that we are planning is largely from new services. Lets take Ringback Tones – it generates roughly Rs 25 ARPU for a telecom operator today. We believe that if you want to take RBT from 20-25% penetration to 45-50 penetration, you can’t do it at the same price point. So we are launching RBT Light, which is at a different price point, which is at Rs 10-15, and we believe you can get 10-15% market penetration using this price point.”

Latin America Deployment

Revenue from Latin America in last quarter was Rs 3 crore. The company said it has around 3 million active customers in Latin America now. OnMobile should have, by now, finished its deployment in Latin America (Rao mentioned March end as the previously estimated date for completion), but there’s been a slight delay. There’s “a slippage of one quarter” according to the company. They’re live in 6 countries, but the deployment in the region hasn’t been completed “due to logistical reasons, getting the hardware in, and connectivity to the Miami data center. 80-85% of the population of Latin America is covered by the services we are live with.” The company says that they’ve already achieved 1.5% penetration in Brazil, Latin America and Mexico, and importantly, “in Ringback Tones (RBT), we are seeing ARPUs that are 2-3 times of India RBT ARPUs.”

However, when MediaNama asked the company to share an overall ARPU for their business, so we can track operation performance quarter on quarter, they said that the ARPU varies by varies by market, by customer and product. “As the product mix changes,the ARPU will move around. While it makes sense at an aggregate level it makes sense, as the mix changes, the ARPU will move around. There are too many moving parts, then we’ll have to disclose ARPU by product line and region.”

“Total impact on P&L of Latin America (in terms of investment) was Rs. 65 crore,” CFO Rajesh Moorti said, and “previous year was Rs 45 crore. As the business scales and grows, we’re going to invest. However, we are not going to see large one time lumpy projects like Latin America. Most of the new investments are going to be for organic and incremental growth.

The company expects higher EBITDA contribution from Latin America. Typically, in terms of deployments, “the first year is the year of investments, and only costs. Year two is when you have investment and cost, and beyond that, the margins ramp up dramatically. In year four and five, we expect the contribution margins from these newly developed markets to be 55-60% contribution margin (direct revenue minus directly attributable cost).”

Dilithium

The company says they’ve signed up with several Indian operators, and “the rollout of that technology will be material for us. We have expanded to China with Dilithium. It’s an entry vehicle for us, we have an office and people on the ground.” OnMobile CTO Mouli Raman said that they have “sold software stack to 3 of the largest handset manufacters, to enable 3G on handsets. Before buying Dilithium, it had sold the gateway to two large operators, and we have revived the relationship in China now.”

Dilthium still operates on a CAPEX licenses model, and “there is cyclicality in terms of large telecom operators placing the bulk of the orders in the fourth calendar quarter. In some of the emerging markets, India in particular, we’ve managed to move them from a licensing to a revenue share model, to remove the cyclicality and for some of the upside going forward.”

Incremental Capital Expenditure (CAPEX) for 3G?

Whenever you put in CAPEX on our standard revenue share model, you don’t put in a very large system. You typically put in a small system, and then put in incremental capacity. By deploying our 3G dilithium infrastructure and technology into 2-3-4 large Indian operators we are not going to be taking on material CAPEX that will make a material difference.

Stake Sale Rumor

“That is a complete rumor. We’ve spent 11 years building this company, and I see huge upside with market growth and customer demand. As a material shareholder myself, there is no way that we are going to walk from this thing. After putting in so much sweat and effort, we are going to take this to its full potential.”

(in addition, in response to a question – You are not willing to sell stake, but what about OnMobile Systems Inc, people who are going to hold 30-34% stake?)

“It (OnMobile Systems Inc) is a US company, in which the original venture capitalists had invested and they will look at some time. They are financial investors, and even if they exit, it has no impact on the company. It would be different if 30-35% was owned by Nokia, Ericsson or IBM, as strategic investors, and they were selling, then there would be a reason for concern. The way I see it – if the venture capitalists and the holding company does exit, it frees up a significant block of shares to bring in a value added strategic investor without dilution. From my standpoint, it’s a great opportunity. When they’re ready to exit, I’m going to work with them to make sure that their shares are smoothly swapped out with one or two very large strategic investors who can help us take this company to the next level. When we do due diligence with people who one to come in, unless we can see the scope and flexibility, we are not going to agree to it. No byside large strategic investor is going to come into a company where management is not agreeable to the entry.

Also, if you look at these large giants, they’re actually looking for companies that are fast moving, innovative, coming out with new products and opening up new frontiers. Why would they want to change the model?”

Dependency on telecom operators that were given licenses in 2008, given that there are rumors of cancellation?

“We don’t believe that any license cancelling will have material impact on us, or any impact. We are working with some new entrants, but whoever we are working with, they are not in the news, and the revenue impact is fairly insignificant.

Plans to raise further funds, maybe a parallel listing on NASDAQ? (ED: We’ve heard rumors)

“As of today, we don’t forsee any need for funds. We don’t really have debt, compared to our ability to carry debt. If at all we require any additional capital, we would steer towards debt or equity. The only thing that would trigger a requirement for significant funds would be material M&A or a project that is in similar scale, size and scope as the Latin American project, and as of today, we don’t have visibility on either of those two.”

Status of the Mobile Marketing JV (Kabuza) with Madison

We are in the ramp up mode, and in the process of hiring a team, and the process of launching the first two customers.

Update: had incorrectly mentioned OnMobile’s Mobile Marketing JV with Madision as Kabuka (from Kabuki). Corrected to Kabuza