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What Investors Should Know About Starhub Ltd’s Latest Earnings

Starhub Ltd. (SGX:CC3) reported in its third quarter earnings on 5 November 2014. The reporting period was for 1 July 2014 to 30 September 2014. Starhub is Singapore’s second largest telecommunications outfit, withM1 Ltd (SGX:B2F) and Singapore Telecommunications Limited (SGX: Z74) being the third and first, respectively. You can read about Starhub’s previous quarter’s earnings here.

Financial highlights

The company has four business segments – namely Mobile, Pay TV, Fixed Network, and Broadband – which are collectively referred to as services revenue. Handset sales come on top of services revenue – and together both makes up Starhub’s total revenue.

The Mobile services segment provides mobile networks with 4G, 3G, and 2G services. Next up, the Pay TV services consists of island-wide HDTV, Internet TV, and on-demand services. On the Fixed Network side, Starhub offers a wide range of data, voice, and wholesale services to corporations. Finally, the Broadband services segment covers a broad range of home and business broadband plans along with media rich services like internet protocol television (IPTV).

For the third quarter of 2014, Starhub’s revenue rose by 2.3% compared to the same quarter last year. The growth in its top-line was driven by a large 73.5% increase in handset sales which was offset by a 17.4% plunge in broadband revenue on a year-on-year comparison Services revenue as a whole came it at $552.7 million, which is some $3.4 million lower compared to the third quarter last year.

For a better look at Starhub’s revenue drivers, here’s a breakdown of each segment’s contribution to the company’s total revenue for the third quarter: Mobile services has a 52.5% share, while Pay TV and Broadband contribute 16.5% and 8.3% respectively. Fixed Network services revenue takes up a nice chunk at 16% while handset sales makes up the remaining 6.7%.

Cost of goods sold was higher due to higher subsidies for the iPhone, but was offset by higher income from government grants. The net effect was a 5% increase on net income for Starhub on a year-on-year comparison to $99 million. As a result, earnings per share rose from 5.5 cents in the third quarter last year to 5.6 cents.

Moving on, cash flow from operations dipped 3.6% from $198 million a year ago to about $191 million. With capital expenditure of $73 million in the third quarter of 2014, Starhub managed to generate free cash flow of $118 million for the third quarter of 2014. The company ended the quarter with $300 million in cash and equivalents on its balance sheet together with approximately $687.5 million in debt.

Operational highlights

The big jump in handset sales was driven by the introduction of the new iPhone models. This increase is expected to continue into the fourth quarter. Mobile revenue rose slightly due to an 8.9% increase in post-paid services customers; the monthly churn rate (rate of customers leaving) for that group of customers remained a low 0.9%. Starhub ended the quarter with a 27.1% market share in mobile users (according to the Infocomm Authority of Singapore – IDA).

The number of Pay TV customers also rose slightly, leading to a 2% higher revenue for this business segment. Starhub has a 41.6% penetration rate in Singapore for its Pay TV services, and maintained a low 0.9% monthly churn rate as well.

On the Fixed Network side, revenue rose by 2.7% due to a higher take up rate of its  enterprise solutions. On the flipside, its broadband services suffered from competition – most likely from M1. The number of broadband users actually rose by 3.5%, but it came at the cost of lower average revenue per user. The reason for the decline was that Starhub offered more promotional service bundles and retention programs.

As of 30 September 2014, Starhub had outstanding capital expenditure commitments totalling about $273 million, which includes a $120 million commitment for 4G spectrum rights.

The board maintained an interim dividend of 5 cents per share for the quarter, which was unchanged from the prior year. This will be paid out on 28 November 2014. It is also committed to an annual dividend payout of 20 cent per share for 2014.

The Chief Executive Officer at Starhub, Tan Tong Hai added commentary on the current quarter’s results:

“For the quarter, we are pleased to see continued revenue growth in our Mobile, Pay TV and Fixed Network services. In spite of the intense competition in the residential Broadband environment, we grew our fibre broadband market share and lowered our churn rate.

As our 4G customer base grows we continue to invest in upgrading our our LTE-Advanced network to serve them better. We are also please to be the first local operator to support simultaneous high-speed 4G data connectivity and crystal-clear VoLTE calls on the new iPhones. The surfing experience continues overseas, as we offer our customers the widest 4G data roaming coverage.”

A quick look ahead

On the outlook for the next quarter, the management team expects much the same. Growth is expected to come from Mobile services and Fixed Network services. Margins though might be pressured from higher subsidies for the new iPhone models.

Pay TV is expected to grow moderately, driven by better content and packaging. Meanwhile, the intense competition in Broadband services is expected to continue.

Foolish summary

At its closing price yesterday of $4.16, Starhub traded at 20 times trailing earnings with a dividend yield of 4.8%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.