Divested on StarHub as their Management skills are not as strong as before.

Divested

I've divested StarHub before their 3Q16 results announcement after considering various points and thought it'll be a good time to do so before their announcement.

Weak outlook on Mobile

Mobile segment outlook is very weak, and especially so for StarHub and M1. This is affirmed by their 3Q announcement vis a vis Singtel's announcement.

Pricing pressure from the impending 4th Telco arrival has took a toll on M1 and StarHub.

Defensive Mode

StarHub's management has been on a defensive mode with regards to their earnings call.

They attributed their fall in Mobile earnings to 

1. IDD and International Roaming calls (as usual) 
2. Not pricing pressure from their data upsize point of view. 

An analyst even questioned on their need for such aggressive move on the data front, given that the fall in voice revenue is larger than the data upside.

Management's response was that their move was not aggressive. They even attempted to assured investors by saying that what they're seeing is that consumers are not downgrading their plans but instead, increasing their subscription to the Plus 3 option due to increase in data consumption.

Now, these are all nice to hear. But it's essentially useless if their revenue does not show otherwise.

Singtel, meanwhile, has managed to stabilised their Mobile revenue despite falling voice revenue with strong data growth. They've put their money where their mouth is.

Weak PayTV vs Singtel

StarHub's and Singtel's PayTV subscribers are lowering quarter on quarter. However, the similarity stops here.

Singtel has managed to increase their revenue while StarHub's PayTV revenue is falling together with its smaller subscribers' base.

In response to analysts' question, StarHub is again on the defensive mode saying

1. Working hard on content
2. StarHub Go is there
3. Netflix and other illegal options are there all along

Again, these are nice to hear until your revenue shows otherwise.

Meanwhile, Singtel has somehow managed to increase their PayTV revenue even when excluding BPL subscriptions. 

Also, I remember them saying this on their previous earning calls in response to analysts

1. Cutting the cord in other countries will not be seen on the same scale here
2. StarHub has local contents that prevents consumers from cutting cords (as the OTT options do not have significant asian content)
3. Netflix via VPN is already available long before, together with illegal setup box, and StarHub has been unfazed.
4. StarHub Go will address the OTT options

Yet now, look at their PayTV segment. They must be eating their words.

Meanwhile, Singtel:

1. Partnered with Netflix
2. Has VIU, CAST to countered the OTT options
3. BPL is really helping their revenue (although their profitability on BPL remains questionable).

Hubbing (their Trump Card) is weakening as well

Even their Hubbing households (which Management has been trumpeting forever, is falling for the second or third quarter).

No competitive advantage left

In summary, why i decided to divest before their 3Q announcement

1. Unable to stem the falling of their PayTV business (unlike Singtel)
2. Unable to manage their Mobile revenue fall (unlike Singtel)
3. Enterprise growth seemed to have stalled
4. Price points are not the cheapest (vs M1), yet not the most expensive (for investor's benefit).

When you're neither here nor there, and have no clear competitive advantage, I'm not comfortable being your long-term shareholder as I've no confidence in your management skills. 

For now, I'm still closely monitoring M1, and will divest if need be. At least now, they're the "cheapest" in the market.

StarHub's conference call sheds light on their PayTV business

StarHub is one of the few companies who conducts a conference call after their quarterly earnings announcement.

I didn't realise the significance of such calls until I've sat through them.

Financial Highlights 3Q 2015

• Total Revenue up 2% (helped by sale of handsets)
• Service (what I deem core/recurring) revenue up 1%
• EBITDA up 4% helped by controlled (marketing, staff costs)
• Hubbing scorecard continues to be good (uptick in multi-hubbing)

My favourite part of such earnings call is always the Q&A. So here's what I found interesting this time:

Rationalising expenditures
Marketing and promotion expenses were down quarter on quarter due to tapping of data analytics which enabled StarHub to manage their spend and rationalise such costs. I think we can expect their marketing costs to be kept low following the positive impacts of their data analytics.

Netflix!!!

• Expectedly, they were bombarded by questions surrounding Netflix. 
• Expectedly, StarHub cannot comment too much as discussions are still carrying on with Netflix.
• Netflix partnered with Softbank in Japan. Under the deal, Softbank will allow customers to sign up Netflix via their sales channel. Payment for Netflix will also be consolidated with their existing Softbank bills. Softbank also pre-installs Netflix app onto smartphones (I'd assume this excludes iPhones).
• They're really quite tight-lipped on Netflix. But I got a feeling they're rather positive on the development with Netflix on the partnership and this might put StarHub in a better position.

Growth driver: Fixed Services

• StarHub, apparently, is aggressively pursuing growth in their Fixed services (serving mainly the corporate customers). 
• StarHub has been building their own fibre networks (apart from NGN) as they've deemed owning their own networks to be crucial in getting corporate customers and also retaining them. (According to them, better quality than NGN it seems.
• This fibre network also helps strengthen their mobile segment to "better backhaul"
• Management seems bullish about this segment and has coined it their new "growth driver".
• StarHub aims to be the alternative provider for the Smart Nation vision. They do not think relying on 1 provider (Singtel) is the way forward and they're really building the foundation for the long-term now.
• Has already overtaken PayTV in terms of revenue contribution (2nd largest now, after Mobile)

What about your flat revenue for the past 3 years?

Ouch, that hurts. Yet, StarHub seemed to have handled this well and provided some insights:

Overall, yes it looks flat, but underlying they see growths in the right segments

Mobile

• Post-paid mobile customer base has been growing. StarHub views this as something that provides them with long-term loyalty. 
• Offset by lower pre-paid sales due to less foreign workers.
• New SIM-only plan hopes to bring some prepaid customers over.

PayTV and more Netflix!!

• Resilient numbers for quite a while despite having OTT being present. (vs a drop in PayTV revenue in other countries like US)
• AppleTV/Netflix is available for a while now (via VPN) and StarHub managed to keep their PayTV services resilient.
• Attributed to wide content: Asian and Sports content that isn't available from OTT. Netflix alone is able to substituted the English content in places like US. 
• Singapore being a multi-racial country, has customers that has different needs. That's currently what's defending the PayTV business.

63% of mobile customers are on tiered plans, ONLY

And they can't seemed to get that percentage to move up for a while now. StarHub alluded that it's tough and they will continue to do all they can to entice customers over to the tiered plans.

Chairman provided a further insight on StarHub's plan for the challenges

Challenges:

• Regulatory policies (looks at IDA hehe)
• Wifi substitution (very true, I've been seamlessly connected to Wireless @ SGX and CapitaLand Mall Wifi as well)
• Facebook/Google/Apple by passing mobile operator (very possible. Even had rumours of Apple creating their own SIM card and Google rolling out its own Wifi network)
• OTT players (Global and more localised ones)

Their strategy:

• Move from Household Hubbing to Personalised Hubbings (through data analytics)
• Engage more on Enterprise segment given the small market share

I'm quite interested in their "new" Hubbing strategy and how it pans out. Good to know management is actively looking to prepare for the challenges ahead. This is especially when a lot of those may eventually come true, sooner rather than later.

Should you be worried about Starhub's Q1 result?

Starhub released its Q1 results today and here's a snapshot:

Service Revenue: down 0.6%

Total Revenue: up 8.1%

Operating profit: down 15.0%

FCF: from positive $104.6m to negative $46.3m

Service revenue dipped 0.6%

Service revenue dipped 0.6% mainly due to the continued price competition in the Broadband. ARPU decreased from $39 to $33. However, we see that the dip seemed to have stabilised and moving forward we shouldn't see much decrease in the ARPU.

Total revenue up by 8.1%

Total revenue ticked up by 8.1% mainly helped by increased sale of handsets (iPhone + Samsung I guess) which contributed to an additional $49.9m of sales. This, however, is cyclical and dependant on the handsets dished out by the makers. 

Operating profit dropped 15.0%

Operating profit decreased by 15% largely due to the lower margins on the sale of handsets (change of mix of products). Correspondingly, EBITDA margin decreased from 32.6% to 30.0%.

What's encouraging is that their other operating expenses have been kept controlled and decreased by 2% (including staff costs).

Negative FCF

I'm actually taken aback by their negative FCF this quarter. A quick look at it and the large difference came from the drop in cash from operating activities. I'll be watching their FCF for the future quarters carefully.

Improved "stickiness"

They've continued to improve their Hubbing strategy for who-knows how many quarters. I view this as a positive sign in the long term as this helps in keeping their customers. This is evident in their low churn rate at about 1% for all their segments.

What's next? Is it doomsday?

The short answer is no, for me.

They're actively targeting the SMEs for NGNBN services. Commercial segment tend to have higher margins and lower churn rates. Whether they're gonna be successful, is unknown. But at least we know management is trying their best.

Monetisation of mobile data. We noted Singtel had 61% of their postpaid customers on tiered plan, and reckon Starhub's data shouldn't be too far off. There's still room for data monetisation and its a space to watch.

Hubbing/Homehub packages are already casted wide and afar, presumably to defend their customer base and to prevent any new entrants from causing significant damage to their market share.

Dividend expected to maintain at 20 cents and EBIDTA margin to resume to 32% for the full year.

Let's hope both comes true!!

So, am I worried about their results and ready to divest? Nope. Long term wise, this business is still going to do fine.