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M1 Ltd’s Latest Earnings: Running to Stand Still

Telecommunications services provider M1 Ltd  (SGX: B2F) reported its fiscal second-quarter earnings yesterday evening. The reporting period was for 1 April 2015 to 30 June 2015.

M1 is the smallest player within Singapore’s telco industry, sitting in third place behind Starhub Ltd  (SGX: CC3) and Singapore Telecommunications Limited  (SGX: Z74). M1’s business has four segments, namely, mobile services, fixed services, international services, and handset sales; the first three are collectively known as services revenue.

You can learn more about M1 here and look at its last quarter’s earnings here.

Financial highlights

Here’s a rundown of M1’s latest financial figures:

  1. Overall revenue in the second-quarter rose 15.5% year over year to $276.8 million. This was mainly driven by a 137% increase in handset sales.
  2. But, quarterly services revenue fell 2.3% compared to the second quarter last year.
  3. Subsequently, net profit only rose by 1.0% to $44.3 million, as much of the top-line growth came from handset sales, which inherently carries a lower profit margin than services revenue.
  4. Earnings per share (EPS) was flat at 4.7 cents, unchanged from the second-quarter last year.
  5. Cashflow from operations came in at $71.1 million for the second-quarter of 2015 with capital expenditures clocking in at $40.0 million. This gave M1 a positive free cash flow of $31.1 million. For context, M1’s cashflow from operations, capital expenditures, and free cashflow in the second-quarter of 2014 were S$55.2 million, S$28.2 million, and $27 million, respectively.
  6. As of 31 March 2015 30 June 2015, M1 had $33.0 million in cash and equivalents and $344.2 million in debt, giving rise to a net-debt (total borrowings minus total cash) position of S$311.2 million. M1’s balance sheet has weakened compared to end-2014, when it had a net-debt position of only S$279.2 million

In all, it’s a little troubling to see M1’s service revenue retreat 2.3% on the back of a 27% fall in its international call services revenue. The state of M1’s balance sheet is also something for investors to keep an eye on given the growing debt.

Finally, M1’s management declared an interim dividend of 7.0 cents per share, unchanged from the year before.

Operational highlights and a future outlook

Revenue from M1’s mobile services segment saw a slight 0.7% dip due to a 0.3% fall in the average revenue per user (ARPU). M1’s post-paid customer base increased by 13,000 from the preceding quarter while its pre-paid customer base saw a quarter on quarter increase of 1,000 new customers.

Average smartphone data usage increased from 2.8 GB per month in the second-quarter a year ago to 2.9 GB per month in the reporting quarter. But, M1’s data plans ARPU fell by 12.2% year over year due to bundling with fixed services.

The stalled top-line for M1’s mobile services means that the firm’s overall market share (including post-paid and pre-paid customers) had shrank from 24.1% in April 2014 to 23.1% a year later. M1 managed to maintain its churn rate (rate of customers leaving) at 1%, unchanged from the quarter before.

Compared to the same quarter a year ago, the reporting quarter saw a 16% increase in revenue for M1’s fixed services segment. Growth here came from the 21% year over year increase in fiber broadband subscribers to 114,000. The segment’s sales growth was also boosted by a 10.5% increase in ARPU compared to a year ago.

With its appointment as a key sub-contractor for Netlink Trust, M1’s management team feels that it is better placed to service its corporate customers. Moderate growth in net profit after tax is expected for the year.

Foolish summary

M1 last traded at $3.23 yesterday. At that price, M1’s valued at a price-to-earnings ratio of 16.8 (based on a trailing EPS of 19.2 cents per share) and has a trailing dividend yield of around 5.9%.

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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.