A question from Rupayan Chatterjee towards the end of OnMobile Global’s conference call was like a breath of fresh air – since OnMobile owns the voice recognition business Telisma, why doesn’t it look at a product that can provide mobile commerce on voice: “add a Flipkart on voice recognition, where a guy can ask for a book, and you allow for a transaction, and the book is delivered.” Responding, OnMobile CEO Arvind Rao pointed out that the company has music search (adding for good measure that “We are the largest deployer for music search in India today”), and the game plan is exactly this. “We started with music, and will move to the next category.”

But from OnMobile’s top management’s comment on its conference call, it appears that it really doesn’t want to be an independent digital service provider. I asked the company on the call about any plans to reduce its dependency on telecom operators, and Rao had this to say:

“Our core bread and butter is the telecom operators worldwide. There’s a big debate in the world about whether telecom operators are going to die. We believe they have very strong last mile advantages, and they’re missing a managed services pioneer like us. On the other hand, because of acquisition of Dilithium, which is being used by the likes of Yahoo, and we’re working a couple of cable companies in North America and Media companies. These are not a material part of our business, but five years from now, could that be a material part – 5-10% – more than likely will be yes. But the core bread and butter remains with the telcos. While we have debated it internally, we have still chosen to stick to our core business strategy of being a white labeled service provider.

Sanjay Uppal, President at OnMobile, added that their technology and infrastructure is being used for the mobile Internet today: “In our cloud offering, there are providers who use our technology to offer a multi-screen technology. That multi-screen will cross the mobile screen, the tablet screen and in some cases the TV screen. From perspective, we are in the Mobile Internet (space). From a branding standpoint, our strategy is to be a white labeled provider, whether for mobile operators, cable companies, and value added content providers like Yahoo.”

One caller said that with substantive revenues being taken up by telecom operators, isn’t it a gap in their strategy to not look at the smartphone platforms and access customers directly? In response, Rao pointed towards RingBack Tones (the company’s major source of revenue and customers) saying that “these are platforms inside the operators network, and there is no other way technically of providing this service and going direct to consumer. Unless there is a new definition of the telecom industry, thre is no way that an Apple, a Nokia Ovi or a Google can actually offer a service like RingBack Tones. We’re trying to work with that, but also work with others for powering their services. Should we go B2C? So far, we have chosen to be white labeled. B2C requires a different set of skills, and capital and marketing to build out a brand. It is not clear to me that the leverage we get from an operators installed base can actually be replicated with a B2C strategy, but it will require a huge amount of capital.”

Our take on this: if going to multiple markets is OnMobile’s Plan B (Rao said on the call that the plan to grow the business internationally to reduce dependency in India to around 33%), perhaps going direct to customers through apps should be Plan C. Remember that the unique users that OnMobile claims are, technically, customers of the telecom operator, which means that if a telecom operator decides to switch (like Reliance Communications did last year), the impact is significant. That said, the company could very well look to power voice based search for external vendors and look to close the loop with m-commerce integration with banks for credit and debit cards.

Notes from the conference call:

Revenue Expectations: A full year estimate (not a guidance) – “We should be able to meet or exceed revenue growth of 20%, with the margins on a percentage basis being the same or better than last year. This is with a guarded estimate based on what is going to happen to the Indian business, because there are warning indicators which we are cautious about low quality of subscribers and the TRAI issue, and we’re planning in advance for that, and how fast we can hunt and close new customer deals, and how fast we can farm the customers we have already signed. The revenue mix is that the ratio of Indian to International is 60%, but in a year or two, should be down to 40-45%. We see far greater potential in terms of higher profitablility and growth rates, we see far greater potential in the international markets, and we’re executing with parallel teams so that we dont compromise the international opportunity.

Impact of hike in prices by telcos? “Doesn’t impact us materially, and we hope that the telcos will be stronger as a result, and their interest in marketing on VAS goes up. In India, the P2P call and SMs rates have dropped, but VAS rates have stayed flat. It’s the most shocking price indicator that I can see, and is a testament to the price inelasticity, as well as the market demand for VAS that the operators have not dropped VAS rates.”

3G: 3G networks are far from ready to handle high volume 3G calls, leave alone 3G VAS. While we have implemented our 3G infrastructure video gateways in most of the Indian operators, the service uptake has been small, which we had expected. We did not have large expectations of 3G service revenue contribution to our topline. The number of users and usage on IVVR and 3G are very low today, and we don’t see them contributing to us in a material manner in 1-2 years.

TRAI subscription guidelines: OnMobile, the rest of the MVAS industry and the telecom operators are in discussions with TRAI. “Some of the measures recommended are impractical and difficult to implement. We have gone to TRAI saying that we respect the objectives and are suggesting alternate ways to achieve the objectives. If implemented the way it is written in the paper, there will be a material impact on us and the telcos. For every rupee we make, the telcos make 5-6 rupees, so it impacts both, and the telcos even more. We have the efforts of the COAI and Telecom operators making case to the TRAI, to achieve the same objectives, which are smoother, easier to implement, user friendly, and which do not slow down the pace of growth of this (VAS) sunrise industry in India. It has not been implemented, and operators have asked for time.

Impact of directives from Airtel and Tata Docomo on subscription services: there was an impact in the first month, and there has been a marginal impact, but we have worked to counter it with promotions and newer features.

Telefonica Rollout: “has been a material drag on our earnings and margins, and results are now kicking in. We’re live in 7 countries, covering 85% of the total subscriber base, and had 4.5 million active users, up 50% QoQ, and ARPUs are 2-3 times India. As of today, Latin America is contributing Rs 4 crore a month to OnMobile, which is a Rs 50 crore a year run rate today. We see this run rate going up to Rs 140-150 crore a year within the next two years. It is panning out and showing fruitful contribution. Next quarter, on a cash basis, our entire Latin America project on a cash basis will break even. The corollary to this project is that as a result of early results, Telefonica has given its entire Spain RBT project, which was being done in-house. The delay in Telefonica deployment (six countries left) may be done in the next six to nine months, because of a complicated infrastructure technology back-haul issue (from Telefonica’s side). All those six countries (left) are small and sub-scale, and the revenue impact from them will not be material. Revenue from Telefonica so far: Rs 3 crore in the quarter ended March 31st, Rs 3 crore in June, Rs 3.5 crore in July and is a run rate of Rs 4 crore in August 2011.

Vodafone: Live with Vodafone in 6 countries.

North America: “have signed two large customers in North America, for a suite of connected applications and mobile social networking products, and not RBT. These projects will take time to deploy and start generating revenue, but once they start, they get to cashflow break even in a very short time. We are live in North America with one telco where 50% of their users are using our phone sync and phone backup, and we’re expanding that.”

Egypt? After the turmoil, it has recovered. The current performance on a monthly basis in Egypt is back to the levels that it was before the turmoil. All the features we were planning to launch have been pushed back, but should be business as usual from now on.

Trailing Quarter Results: On the call, Rao suggested that investors look at the company on a trailing four quarters basis, not quarter on quarter. So, we made a chart:

Dilithium: have gotten four large operators to sign up for 3G deployments for video, but the revenue impact of this year will not be material, because of the number of people with compatible handsets, and the rollout of 3G services themselves. The other part of Dilithium was the rollout of infrastructure – video gateways and content adapters. The Dilithium video platform is like a real-estate slot. The key is to get them deployed, such that whenever the market demand materializes for 3G services, Dilithium will benefit.Dilithium’s contribution to topline is limited, and will pick up when 3G picks up.

OnMobile OnCloud: going to connect all operators in Europe on OnMobile OnCloud in the European continent. The way it works: “if we’re launching ringbacktones in 15 countries in africa, we would normally put in a complete system, which includes a content management system. In the African market, the content in the CMS is 80-90% the same, and instead of replicating that, we’ve distributed tone players and some platforms inside the operators firewall, and the common stuff is in the cloud, so that there are cost synergies to us, and if we want to launch a new customer, instead of doing it in 3 months, we can do it in 2 months.”

Content Strategy: “There is no shift in the strategy of the company. Several of our services are based on content, sourced and paid for by the operator or us from a local player or a regional disk jockey. The managing of the sourcing, thinking it through and where are the best players, how to increase the partnership between content companies and OnMobile, is what Atul has been brought in for. In India, we could substantially improve the revenues for any content company. To initiate the contact with the music company, sign the contract on mutually good terms and create a partnership approach from a licensing approach, is what Atul is here to do.”