Notes from OnMobile Global’s conference call today, following the announcement of their Q1-FY14 results:

On Buyback

“I firmly believe that a decision on the buyback should be looked at after examining the organic and inorganic needs of the business. It doesn’t mean that I’m not looking at other shareholder actions. I also wish to clarify that the company has strengthened its internal control measures besides rolling out several corporate governance initiatives after years incidents.” – Tony Haight

A shareholder (a fund) on the call, once again, made a case for a buyback, saying: “At the current rate of Rs 21, we (OnMobile) are at Rs 240 crore of market cap, and the cash is Rs 180 crores. We really strongly feel that there could be a policy where incremental cashflows, after even paying for Livewire, be used first for a buyback. Even a small amount of Rs 25-50 crore, would be good enough to restructure the capital structure. Secondly, there can be a payout policy of 40-50%, and that can, in addition to the buyback, because buyback I think very very strongly, has to be done at this level, that is my recommendation…”

In response, Haight said that Onmobile has set up teams for new products and services, because the products and services now will be different from those being sold in 2 years, and those in 4 years. “We will make decisions on buybacks according to these following general rules: Expand the business profitably in new areas where we see opportunities exist. If we don’t have any of those, or the opportunities are not sufficient to use up the case, and we start to accumulate cash beyond a safe and reasonable amount, we will consider shareholder actions, but those include both an increased dividend and a buyback scheme. We will make those decisions as we progress through an operating plan, and see how things are working out. We are aggressively pursuaing expanding this business dramatically, globally. That takes capital.”

The shareholder responded that the valuation has to be considered in all the decisions, and he wouldn’t have said this if Onmobile was Rs 1000-1500 crores in valuations. “We are answerable to our investors, on a timeframe which is longer, and we have been holding for longer. Even if it is Rs 20-25 crore this year, and the same next year, it will be good for existing shareholders, and it would attract new shareholders. You will appreciate that some large institutional shareholders have moved out of our stock, and also you have seen the erosion in stock price. You have to consider these factors.” He added that not just investors, including the employees of the company agree, and urged Haight to think of this. “You have a huge amount of cash, and all your business plans can go on. Also between buybacks and dividends, this is the best time a capital structure could be handled. This time, if we don’t have to service that equity for next 10-20 years, if we do the buyback today…”

International business

The MTN Deal

The MTN deal was closed after months of hectic negotiations and discussions. Coupled with the recent acquisition of LiveWire, it gives us a presence in key markets across the grow. We’re poised to witness a dramatic scale up of the company,” Tony Haight, Chairman of Onmobile said.

MTN has RBT in 21 countries, ARPU of $3-12 in various countries, and RBT penetration is 10-25% across 21 countries. This is one of the largest RBT properties in the world today. “There was intense competition for this business, and after a rigorous process, MTN chose us.” OnMobile will replace the existing RBT platforms across geographies, and the deployment will start now, and will take two years to complete. In LatAm it took two years to deploy. The capex will be incurred over the next 12-24 months. Even with the MTN deal, OnMobile doesn’t expect CapEx to be over Rs 60 crore.

“Of the 21 (MTN) countries, we are live in 7 countries, so will have to establish operations in 14 countries. There is no upfront free and no minimum guarantee. We will get revenue shares, and it’s a five year contract. The number of RBT users that we serve will increase significantly, by about 50-60%, and it should bring us $80-100 million in the next five years from RBT alone. We will provide more and more services to MTN, but that isn’t included in the projections.”

Because the MTN deal is a classic revenue share model for an RBT business. At an operating margin level, we should be 20% or thereabouts. The revenue potential is between $80-120 million. Capex will be in line with typical RBT deployment in the rest of the world, in the region of 7-8% of the revenue of the deal.

– Latin America: Revenues from Latin America were up 50% year on year and 8% quarter on quarter. In Bangladesh, have gone live with the largest operator in Bangladesh, for RBT.
– Africa: revenue was up 28% year on year and 9% quarter on quarter. RBT continues to grow in Africa, Football service is starting to see traction. In six months, we’ve reached 1 million users for football services. Services beyond RBT are starting to gain traction.
– Europe: there was a decent growth of 12.5% year on year and 3% quarter on quarter. This is riding on the converged VAS project from Telefonica to run their content VAS services including data. We won two large contracts in Spain and went live with one of them, an RBT deployment with another large operator in Spain. The content VAS services in Europe are showing good results. “Nobody is showing growth in Europe.”

LiveWire Acquisition

“In the coming quarter, Livewire results will be integrated with ours. Integration is on and their revenues will be added to our Q2 results. In the North American market, we have seen a penetration of 5% in a very large postpaid operator, and 10% in a prepaid operator. The market has potential. The LiveWire customers today are at a much lower penetration. We will focus on improving penetration, and once we see positive results, we will go to larger operators. That is when we can go to confidence to larger operators like AT&T. Operators are looking for more revenues and margins, and the customers of LiveWire are committed to making this successful. The penetration at LiveWire is at 1% or so, and it has recently deployed platforms in a managed services model. Earlier it was a platform model. That is why we are optimistic about growth opportunities. Our internal plans are to reach the levels that the market has already seen (i.e. 5-10%).”

Raman said that OnMobile is looking at $40-50 million annual run rate from the North American continent over the next five years.

RBT will continue to be a dominant contributor in Telefonica and Latin America. OnMobile will roll out more services and they should contribute 30-40% of revenues.

Government Pilot In Karnataka 

“We had run the pilot, and it had a decent rate. The conversion of that pilot into a contract: we couldn’t participate because of a technical reason. We are in touch with other central governments. We could not submit the tender in time, because of some technical issues in using the online system.”

Music download service & Seeding Services Other Than RBT

“The uptake of the music service has been decent, but it is early days, and we can give a better update over the next few quarters. What we are seeing that operators are keen – in the US we are seeing opportunities where operators are looking to bundle music services along with their core plans. In Europe, we are seeing operators keen on increasing revenue margins, and looking to outsource their branded content services. Because of our success in Spain, we believe that it is possible for us to capture too. RBT still has a lot of potential in Latin America and Africa, and we are rolling out music services, soccer, dating, music download and mradio on voice, and in India, we are looking at going beyond music and RBT. We are also looking at non operator businesses, and take the current services beyond the operator and the market.

Investments and incubation

OnMobile used to run an incubator program, which Ver Se graduated from and If there are interesting opportunities, we will look at them. If with a small amount of money we can support companies at an early stage and they become success, we are open to it. We are not doing this in a formal manner. We are being more opportunistic.