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M1 Ltd’s Year in Review: Mobile Woes Drive Changes

M1 Ltd (SGX: B2F) reported its full year earnings for 2016 in late January 2017.

For 2016, M1 reported $805.5 million in Service revenue, a figure that was 2% lower than in 2015. M1 derives its Service revenue from three business segments: Mobile services, Fixed services, and International call services.

Let’s take a closer look at the Mobile services business segment.

A bird’s eye view

2017-02-07 M1 Revenue Segments
Source: M1’s earnings presentation

M1’s Mobile services revenue was down 6% to $640 million in 2016. The segment accounted for almost 80% of M1’s Service revenue and 60% of total revenue. With such numbers, M1’s business hangs on the health of its Mobile services segment.

Unfortunately, the segment has been under pressure from a few areas.

The age of disruption

2017-02-08 M1 Mobile Subscribers
Source: M1’s earnings presentation

At the end of 2015, M1 recorded 733,000 pre-paid subscribers and 1.2 million post-paid subscribers in its Mobile services business. A year later, the number of pre-paid subscribers had increased by 39,000 to reach 772,000. Meanwhile,  post-paid subscribers climbed by 52,000 to 1.25 million.

For perspective, one of M1’s local rivals, StarHub Ltd (SGX: CC3), ended 2016 with 920,000 pre-paid subscribers and 1.39 million post-paid subscribers.

We can see that there were solid gains in M1’s subscriber base in 2016. So, why was Mobile services revenue lower in the year?

2017-02-08 M1 Postpaid
Source: M1’s earnings presentation

Turns out, M1’s average revenue per user (ARPU) fell by 6% from $61.60 in the fourth quarter of 2015 to $57.10 in the fourth quarter of 2016. The ARPU figure has fluctuated between $56.50 to $59.90 during the year.

2017-02-08 M1 Pre-paid
Source: M1’s earnings presentation

Meanwhile, the ARPU for the pre-paid sub-segment has shown a steady decline from $14.00 in the fourth quarter of 2015 to just $11.50 in the fourth quarter of 2016. This represents a hefty 18% drop.

During M1’s 2016 third quarter earnings presentation, the company’s chief commercial officer, Lee Kok Chew, said:

“Traditional telecom revenues continued to be impacted by OTT services.”

Lee could be referring to OTT (over-the-top) services such as Facebook’s Whatapp that offers voice calls and messaging functions. Such services may one day replace M1’s offerings. But, there could be a silver lining. Lee also 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.”

Data and new technologies may be the future, but it’s also not a given.

Data wars

Higher data usage has partly compensated for the fall in consumers’ usage of traditional mobile services. But, data packages was a hotly contested space in 2016. The three incumbents, Singapore Telecommunications Limited (SGX: Z74), M1, and StarHub, have been slugging it out.

Poopalasingam Subramaniam, M1’s chief marketing officer, said this about the competitive pressure in the data package market during the company’s 2016 third quarter earnings presentation:

“I think you can see that the data offerings in the market today are more attractive than maybe about six months ago. And that’s the state of data pricing today.”

At the moment, Singapore’s telco space has a mobile virtual network operator (MVNO) in Circles.Life, which entered the market in the middle of 2016. Circles.Life does not own any network infrastructure (hence the MVNO description) but instead, rents it from M1. The appearance of Circles.Life adds to the competitive pressures faced by M1 and the other incumbents.

But, the battle may become even tougher when the fourth telco – Australia’s TPG Telecom – makes its debut in Singapore next year.

The other guy

The pending arrival of TPG Telecom may put further pressure on M1’s Mobile services business. But, both StarHub and Singtel have expressed doubts on the ability of TPG Telecom to provide better value.

Without better value, a price war could be the result. With almost 80% of M1’s Service revenue coming from Mobile services, M1 could have the most to lose if a price war breaks out.

TPG Telecom has signalled that it intends to win market share of between 5% and 6% within a short period after it launches its services in Singapore in 2018. This will likely come more at the expense of the three incumbents (that is, Singtel, StarHub, and M1) rather than Circles.Life, since the latter’s new. The Australian telco has sounded a confident note that it will be able to achieve its aims based on the value of the offerings it will provide.

At the end of October 2016, M1 had a mobile market share of 23.7%.

A whole new world

With pressure coming from a few fronts, M1 could be looking to move beyond its core Mobile services business. In M1’s 2016 second quarter earnings presentation, Lee said:

“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.”

This would include building a platform for the internet of things (IoT), cyber security, and smart metering. It’s still early days for M1’s new digital portfolio. During the fourth quarter earnings presentation, Lee said that some of the new revenue will appear in 2017. There were no details beyond that.

We will have to observe how M1’s business evolves in 2017 and beyond.

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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.