Notes from Airtel’s earnings conference call for Q2-FY18
1. The impact of low data tariffs/below cost pricing: Has “fuelled a surge in the industry’s voice and data traffic indicating latency of demand.” Multi-simming has declined, and unlimited voice bundles have started “squeezing out ‘second sim’ operators.”
“Smaller operators with weak financials and networks are facing faster churn thereby accelerating their need for exit opportunities and faster industry consolidation.”
“…value players by and large have been melting down much faster. So if you look at our performance, you will find it substantially better than the smaller players.They have really been hit very hard on account of this competitive intensity and Tata Teleservices and Telenor are no different in that scenario. So as time goes on, there will be revenue decline.”
Increased data demand requires higher investments, which cash strapped operators cannot afford.
“If you look at Q2, we have done about 780 billion megabytes on the network compared to 470 billion megabytes in the prior quarter. So, we are seeing massive growth in data throughputs and data demand. And so a lot of capex is really going behind investing in our radio networks, which is primarily 4G and investing in transmission and fiber backhaul, which again is required for heavy data throughputs. So if pricing continues to remain low, this capex will be required in order to deliver a better customer experience. I think the good news from our perspective is we have the spectrum. So the bulk of the heavy lifting has been done, now it is modular investments that are required as data throughput grows. So we will keep putting these modular investments in rolling out more base stations, more transmission electronics and more backhaul.”
2. Prices will have to rise: Airtel believes that data growth will be led by growth in smartphone penetration, which will reach 500 million by 2020. To justify investments in infrastructure, operators will “increase ARPUs especially from such customers.” Indian consumers spend 1% of GDP on telecom services, which will have to increase “to enable the industry to lead the next billion consumers connected into the digital economy.”
“We have always said that the current level of pricing or the value that is being given to customers is unsustainable. And that is what led to some adjustment in the value that the new entrant [Jio] was actually delivering. I would say as we go forward, some of this value will need to be pulled back and that will impact ARPU positively. But in the short term, the competitive intensity continues unabated”
3. Airtel’s ARPU has been impacted by GST, seasonal impact (2nd quarter is usually the worst for telecom operators) and some “down trading, because of this capped ARPU pricing that we have today in the market.”
So I would say it is a combination of all 3 factors.
4. Postpaid is a focus segment: Airtel’s priority is “to grab and retain high ARPU customers. Postpaid customers is a strong focus segment for us.” The data rollover plan, where postpaid customers can roll over unused data to the next billing cycle, subject to a 200 GB cap, is a move to do this, as is the plan to allow postpaid users up to 20% savings by creating customised family plans, with shared data benefits.
- Airtel’s TV app has close to 20mn app downloads.
- Wynk Music app had around 70mn customers as of September 2017.
6. Merger with Tata Tele: will help “further bolster the spectrum foot-print with the addition of 178.5 MHz spectrum.” CCI approval hasn’t come through, and Airtel has only signed a term sheet. The company declined to disclose the terms of the deal.
“Suffice it to say that we get access to the customers, the spectral assets of Tata Teleservices and certain other assets that they have on the ground.”
“Having said that, if you look at our spectrum assets, we have pretty much everywhere
now with sub-gigahertz band across most circles. There are some gaps in a few Western circles and a few other circles. With the Tata acquisition, we do get access to some of that spectrum and we have to decide what to do with it. Mid-band we are in a very, very good shape, the 1800 band and the 2100 band, that is a large chunk of spectrum in many circles. We have two to three carriers; some of them have four and five carriers between 1800 and 2100. And then of course the 2300 we have a good slug of spectrum, 30 megahertz in most circles and 10 megahertz, 20 megahertz in a few circles. So, I would say spectrum-wise we are in very good shape.”
7. Acquisition of Tikona: Tikona is now a wholly owned Airtel subsidiary. “The transaction involving trading of spectrum in Rajasthan is however yet to be approved by DOT.”
8. Merger with Telenor: The transaction is expected to be completed by Q4 2018. CCI approvals have come through and National Company Law Tribunal approval is pending. After that, DoT approvals.
9. On Aircel: “Firstly, Aircel is a sub – scale operator, as you know. They have strong presence in three circles; Jammu Kashmir, Northeast Assam and Tamil Nadu. The rest of the places they are really sub-scale and this business has now become a business where substantial investments are required. So, I am not sure that they have the financial wherewithal to make those investments. So, our sense is like we always said value players would continue to lose market share.”
10. Interconnection Usage Charges impact: “the India net IUC revenue impact is 4% of consolidated EBITDA”
11. Bundling is the future:
“If I were to be looking at this market, let us say, two years from now, my sense is 75% to 80% of customers will be in the bundle. The market is decisively moving in that direction. And the advantage from our perspective is that it leads to significant SIM consolidation.”
[on the bundle with Karbonn for the A40 Indian phone, which gives cashbacks to customers over 36 months]:
“… our initial feedback has been very strong. We have had modest stock in the market, but all of that stock is now out. So we are out of stock. They are ordering more inventories, as we speak, and hopefully that should bolster over the coming weeks
12. Impact of switch to VoLTE on margins (and the cost of a call):
“On VoLTE, I am not sure there is any impact on margin, because we’ve always maintained that VoLTE has nothing to do with cost. Finally the cost of carrying a minute or a call is a function of the energy on the site, electricity, diesel, rental that you pay for those towers and all the operational cost that runs in the business.”