Can Starhub Ltd’s Business Still Grow?

Telecommunications firm StarHub Ltd (SGX: CC3) reported its 2016 first-quarter earnings recently. During the earnings briefing, StarHub’s management faced some tough questions from analysts.

There were questions about the subscriber losses in the company’s Pay TV segment. Questions were also raised on the company’s lack of revenue growth. One analyst said that Starhub had showed hardly any services revenue growth for the past three to four years.

The analyst may have a point.

StarHub’s recurring revenue comes from its services revenue. The services revenue is made up of four components, namely mobile services, pay TV services, broadband services, and enterprise fixed services. As a whole, StarHub’s services revenue had been largely unchanged in the past four years.

Tan Tong Hai, StarHub’s chief executive, gave his take:

“If you look at when I first joined, it was the content piece, the TV piece and in spite of the loss of the EPL [English Premier League] content, you saw how we have cushioned and managed it. Now our pay TV is actually back to where we were before.

Then subsequently the year, two years ago was our broadband challenge, where we had to adjust our broadband prices to bring broadband to be more competitive. But now you can see that broadband is back on the growth path, this is our fifth consecutive quarter of growth.

Of course, this quarter, what you are seeing is the challenges faced in terms of roaming revenue and this is not a problem faced by StarHub alone; this is faced by all operators across the world. Yet this quarter, we have registered our growth in our EBITDA [earnings before interest, taxes, depreciation and amortization], as well as our net profit.”

In essence, while the overall top-line may look unchanged over the past four years, the four major segments have been shifting. The graph below summarizes the different business segments:

Starhub business segment
Source: StarHub’s earnings presentation

From 2012 to 2015, StarHub’s largest segment – mobile services – saw its revenue inch up by just 1.2%. Enterprise fixed services did better, growing 7.6% over the same timeframe. As Tan noted, the pay TV segment revenue suffered a dip in 2013, but is slowly moving back up to where it was four years ago.

Elsewhere, the broadband services segment recorded sales which are almost 20% lower compared to four years ago. But Tan also noted that this segment is on the rise, logging in growth in the past five quarters.

Let’s not forget the profit picture: StarHub’s net profit had stepped up from $359 million in 2012 to $372 million in 2015. Here’s Tan on StarHub’s bottom-line:

“So we have all these different businesses and the way I run it is that overall I want to make sure that of course we want to grow revenue, but if there are certain challenges we make sure that the other lines of business grow to make up for the drop. So that’s how we’ve been doing it. Then we’re looking at the bottom line; how do we increase the overall margin.

Over the last few years while you may not see the revenue growth and mix have changed, we have actually, if you look at this quarter, the enterprise content is actually our second largest contribution, slightly ahead of the TV. In terms of margin wise, enterprise fixed gives us a really good margin, almost the same level as mobile. So by focusing on these few areas we are able to make sure that we at least cushion some of the challenges and be able to grow our other line business.

Bottom line is still very important, so that’s how we’ve been seeing – managing this business. It is basically very focused on the EBITDA margin and generating cash flow. So I’m happy to note that we have sufficient diversity in our different line business to be able to allow us to run this business well.”

In essence, the growth in the enterprise fixed segment could have benefitted StarHub’s overall margins. This could be important, because the challenges will likely continue to come for StarHub.

In the recent quarter, mobile services and pay TV sales both dipped by 2.4% and 1.2% respectively. StarHub has also indicated that pay TV sales might continue to trend downwards over the next two quarters. Investors may want to continue watching how StarhHb balances the growth of its four major segments and ultimately, the underlying profits and cash flows.

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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.