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M1 Ltd’s Latest Earnings: Are Changing Customer Tastes Sending Services Revenue and Profits Down?

Telecommunications services provider M1 Ltd  (SGX: B2F) reported its third-quarter earnings yesterday. The reporting period was for 1 July 2016 to 30 September 2016.

As a quick background, 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 service revenue.

You can learn more about M1 here and look at the results from the company’s last quarter here.

Financial highlights

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

  1. Third quarter revenue fell 10.3% year-on-year to $249.1 million. Handset sales was down by over 28%, contributing to the lower total revenue.
  2. Services revenue came in at $197 million for the reporting quarter, down 4.4% year-on-year.
  3. Net profit fell 23.4% year-on-year to $41 million. Operating expenses had declined by only 6.8%, which is less than the drop in revenue.
  4. Consequently, M1’s earnings per share (EPS) was 3.7 cents, down 22.8% from the 4.8 cents recorded in the third-quarter last year.
  5. Cash flow from operations came in at $97.8 million for 2016’s third-quarter. Capital expenditure was $26.7 million. This gives M1 positive free cash flow of over $71 million for the quarter. This is an improvement from the free cash flow of $51.6 million recorded during the same period last year ($78 million in cash flow from operations and $26.4 million in capex).
  6. As of 30 September 2016, M1 had $9.7 million in cash and equivalents and $401.3 million in debt. This gave M1 a net debt position of about $391.6 million. This is higher compared to the third-quarter of 2015, when M1 had a net-debt position of $325 million.

M1’s service revenue was unchanged for the first two quarters of 2016. But, the third-quarter saw services revenue slip by 4.4%. Investors may want to keep an eye on changes in M1’s service revenue as it is considered to be a source of recurring revenue.

There was an improvement in free cash flow this quarter by M1. But, the company’s net debt position also increased by $76.3 million over the last 12 months. M1 had shelled out $64.1 million for the purchase of spectrum rights during the reporting quarter.

Operational highlights and a future outlook

M1’s mobile service revenue declined by 6.6% year-on-year for the third quarter. To be sure, the telco’s post-paid customer base had increased by 52,000 year-on-year and 10,000 quarter-on-quarter. Meanwhile, the telco’s pre-paid customer base also increased by 51,000 from the previous year and 4,000 from the previous quarter.

However, the mobile service revenue segment’s average revenue per user (ARPU) for  post-paid customers had fallen by 7.7% year on year while the pre-paid side saw its ARPU collapse by 17.8%.

M1’s overall market share (including post-paid and pre-paid) was 23.7% as of July 2016, a slight increase from the 23.5% seen in April. M1 also managed keep its churn rate (rate of customers leaving) at 0.9%, a touch lower than the same quarter a year ago.

Elsewhere, the fixed services segment saw a 22.7% year-on-year increase in revenue. The rise in sales was helped along by an increase of 32,000 in its fibre customer base compared to the same quarter a year ago. ARPU, though, fell by 3.4% year-on-year.

International call services revenue continued its decline, clocking a fall of nearly 13% in the third quarter.

Karen Kooi, M1’s Chief Executive, added her thoughts:

“The needs and behaviour of our consumers and corporates are changing rapidly. We will continue to make network investments to provide our customers with a superior and all-encompassing experience while also tapping into new growth areas in data analytics, IoT [internet of things] and other solutions.”

M1 also updated its outlook. In the previous quarter, M1 said that it expected a single digit decline in net profit for 2016. This quarter, M1 said that the decline in net profit (after tax) for 2016 is expected to be around the year-to-date range. In the first nine months of 2016, M1’s net profit is down by 12.6% from the same period in 2015.

At their closing price of $2.33 each on Tuesday, M1’s shares traded at a price-to-earnings ratio of 13.5 and has a trailing dividend yield of around 6.6%.

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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.