M1 Ltd Guides to a Decline in Profit and Looks to a Digital Future

M1 Ltd (SGX: B2F) released its fiscal second-quarter earnings last Friday and guided to a single-digit decline in net profit after tax for the whole of 2016. This came as a bit of a surprise.

As a brief background, M1 is the smallest among the big trio of Singapore’s telecommunications industry, coming in behind Singapore Telecommunications Limited (SGX: Z74) and second-placed StarHub Ltd (SGX: CC3).

The telco makes its money through its four business segments: mobile services; fixed services; international services; and handset sales. The first three are collectively known as services revenue.

Hitting the reverse gear

In its first-quarter earnings, M1 had guided towards a “stable performance for the year [referring to 2016].” But in the second-quarter of 2016, the company’s guidance had become a single-digit decline in net profit after tax for the year, as mentioned earlier.

During M1’s conference call for the second-quarter earnings, its chief marketing officer Poopalasingam Subramaniam responded to a question from an analyst about the change in guidance:

“To answer to your question on the guidance for 2016, you can hear that earlier on when [chief commercial officer] Kok Chew mentioned we are investing in a portfolio of digital solutions. And all these investments, so the expenditure is incurred upfront. So meaningful contribution will only be upon achieving scale in service adoption over future years, as mentioned earlier.”

Here, Subramaniam was referring to an earlier statement made by his colleague, Lee Kok Chew. Lee was referring to the slide just below when he spoke about the challenges that M1’s business is facing.

2016-07-21 M1 Outlook
Source: M1’s earnings presentation

Lee said:

“Increasing adoption of OTT [over the top] services has impacted traditional telecoms revenue, but led to higher demand for data. We are investing in new technologies and capabilities and building up a portfolio of digital solutions to enhance our service proposition and cater to changing customer needs.”

On OTT services, Lee could be referring to services such as Facebook Inc’s Messenger and Whatsapp. Earlier this year, Facebook’s chief executive Mark Zuckerberg said that the two services are collectively hosting 60 billion messages a day, more than three times the 20 billion-peak generated by SMS.

Alternatives like these may have left a mark on M1’s business. In the second-quarter of 2016, M1 said that its mobile services revenue had declined due to lower roaming revenue.

On the flipside, Lee also noted that OTT services can benefit M1 due to higher data usage from users. Lee said that mobile data revenue was 53.6% of total service revenue. He had this to say as well:

“Well what we’re seeing is that with the faster network, with faster, better mobile devices, the consumption of data is likely to continue to grow, more so with all these bigger data bundles that will encourage all these data consumptions.”

But, it’s also hard to know how much upside there is for data consumption. Subramaniam noted:

“And with more data available to customers, doubling of data and upsized data, we do see that the trajectory is upwards, that it will grow. Exactly where it will land, I think it’s quite difficult for us to say right now. But we are seeing more customers using more data.

As I mentioned, we’ve seen more customers exceeding their data bundle and more and more customers are also taking up the upsized data plans. So we see this just going forward and growing.”

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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 owns shares in Facebook.