StarHub Ltd’s Year in Review: Mobile’s Many Challenges

Last Friday, StarHub Ltd (SGX: CC3) reported its full year earnings for 2016.

During the year, StarHub earned $2.2 billion in Service revenue, a figure that was a touch lower than in 2015. Although Service revenue barely changed, it was a different story for the individual business segments. StarHub’s Service revenue has four components: Mobile, Pay TV, Enterprise Fixed, and Broadband.

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

A bird’s eye view

2017-02-03 Starhub Segment Revenue
Source: StarHub’s earnings presentation

StarHub’s Mobile revenue was down 2% year-on-year to $1.215 billion for 2016. The segment accounted for 55.0% and 50.7% of StarHub’s Service and total revenue, respectively. At such percentages, Mobile is by far the most important revenue segment for StarHub.

Unfortunately, the Mobile segment is under pressure from a few areas.

The age of disruption

2017-02-03 Starhub Mobile Subscribers
Source: StarHub’s earnings presentation

At the end of 2015, StarHub had 862,000 pre-paid subscribers and 1.33 billion post-paid subscribers in its Mobile business. At the end of 2016, the number of pre-paid subscribers was 920,000, representing a gain of 58,000 subscribers. Meanwhile the post-paid subscriber count increased by 62,000 to end at 1.39 billion.

These are solid gains in StarHub’s subscriber base, so why did Mobile revenue fall in 2016?

2017-02-03 Starhub Mobile ARPU
Source: StarHub’s earnings presentation

One reason would be the lower average revenue per user (ARPU) found in the Mobile business. StarHub’s post-paid ARPU dipped from $72 in the fourth quarter of 2015 to $70 in the fourth quarter of 2016. The ARPU figure had fluctuated between $69 and $71 during the year. Meanwhile, the pre-paid ARPU has shown a steady decline from $17 in the fourth quarter of 2015 to $15 in the fourth quarter of 2016.

In StarHub’s 2016 first quarter earnings presentation, the company’s chief commercial officer, Kevin Lim, commented on the company’s falling Mobile revenue:

“Declines in Mobile revenue, as we have explained, comes primarily from the usage revenue. So there is substitution in terms of roaming, voice roaming. So there has been lower voice roaming, lower IDD usages but our subscription revenues are still growing. It’s just the usage revenue that has come off.”

Lim’s words above pretty much sums up a big part of StarHub’s Mobile story for 2016. The downtrend in usage continued throughout the year. Alternatives such as Facebook’s Whatsapp, which offers messaging and voice call functionalities, could have led to lower usage of StarHub’s traditional voice and roaming services. In the fourth quarter of 2016, non-voice services accounted for about 65% of StarHub’s post-paid ARPU.

Data wars

Higher data usage has partly compensated for the fall in consumers’ usage of traditional mobile services. However, data packages was a hotly contested space in 2016. The three incumbents in Singapore’s telco scene, Singapore Telecommunications Limited (SGX: Z74)M1 Ltd (SGX: B2F) and StarHub, have been slugging it out by offering bigger data packages at competitive prices.

In StarHub’s 2016 third quarter earnings presentation, the company’s chief executive, Tan Tong Hai, said that bigger data plans equates to recurring revenue (which is good for StarHub). But, competition has been intense. Here’s Tan on the subject:

“In a way, if they buy this kind of data plans, it’s actually good for us because they are taking it on a recurring basis. So at this moment, of course, there’s pretty aggressive promotion, and we do see that and we have to be competitive.”

Competition does not appear to be letting up anytime soon. In fact, it may get tougher when the fourth telco – Australia’s TPG Telecom – makes its debut in 2018.

The other guy

The pending arrival of TPG Telecom may put further pressure on StarHub’s Mobile revenues. In May 2016, StarHub’s chief financial officer Dennis Chia expressed doubts on the ability of the fourth telco to provide better value:

“Whether you want to label it a price war or not – certainly it is an unpleasant term – the value-add is through accretive pricing at the onset. As the new kid on the block, it [referring to the fourth telco] will not be able to offer anything better in terms of network quality.”

Without better value, a price war could be the result.

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 come at the expense of the three incumbents (Singtel, StarHub, and M1).

The Australian telco sounded a confident note that it will be able to achieve that based on the value of the offerings it will provide. At the end of 2016, StarHub estimated that it has a 27.4% market share. If TPG Telecom is successful, the loss in mobile subscribers at StarHub could sting.

During StarHub’s 2016 first quarter earnings presentation, Tan said that StarHub’s Mobile segment has the highest profit margin among the other four business segments that make up the company’s Service revenue. This could be a key area to watch 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.