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Edited Transcript of 19PS.L earnings conference call or presentation 19-Mar-20 11:00am GMT

Full Year 2019 Kcell AO Earnings Call

Almaty Mar 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Kcell AO earnings conference call or presentation Thursday, March 19, 2020 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Irina Shol

Kcell Joint Stock Company - Head of IR

* Kaspars Kukelis

Kcell Joint Stock Company - CEO & Chairman of the Management Board

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Conference Call Participants

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* Dan Robin Gardiner

Edison Investment Research Limited - Director

* Ivan Kim

Xtellus Capital Partners, Inc., Research Division - Equities Analyst

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Presentation

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Operator [1]

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Good day. And welcome to the Kcell Final Year 2019 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Irina Shol. Please go ahead, madam.

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Irina Shol, Kcell Joint Stock Company - Head of IR [2]

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Thank you, operator. Ladies and gentlemen, thank you for dialing in to discuss Kcell's fourth quarter and full year 2019 results. As usual, during today's call, we will go through the highlights of our business and financial performance for the reporting period using our presentation slides, which I hope you have in front of you. If not, please visit our IR section of website.

Participants in the call today, our Chief Executive Officer, Kaspars Kukelis; and myself, Irina Shol, Head of Investor Relations.

Following the presentation, there will be a Q&A session. I will now hand over to Kaspars Kukelis. Kaspars, please go ahead.

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Kaspars Kukelis, Kcell Joint Stock Company - CEO & Chairman of the Management Board [3]

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Thank you, Irina. Ladies and gentlemen, before we go to the 2019 overview, I'd like to say a few words regarding the current situation.

As you all know, there is a challenging situation regarding the coronavirus situation, which is developing in the country. Now the 2 main cities, Almaty and Astana, are in -- basically locked, and we are switching to some specific operating mode in this regard.

The second thing that has coincided in time and makes things even more challenging is the oil price and as a consequence of that, local currency exchange rate, which has been affected in the significant double digits over the course of the past few weeks. And we are still observing the situation and development. So now we're not sure about where we are today, which is somewhere about KZT 450 per USD 1 in Kazakh tenge. We see different rates, I think, ranging from KZT 450 something to KZT 470 something. And it hasn't stabilized yet. So we are observing where the situation is heading us. However, I would like to say that first of all, we are operating in this market for many years. When it comes to this exchange rate situation, we are pretty much used to that, even though that we probably don't like it. But we have an action plan that has been already implemented and working on some other, I would say, probably painful but necessary measures that need immediate introduction in our modus operandi. And the situation with the wireless is probably less familiar to us. However, we are working intensively, 24/7, and keeping on adding the necessary measures on a daily basis as the situation is developing. And at least as of now, we haven't faced any incidents within our employees and within our commercial footprint. So I hope that the plan that has been activated already would help us to navigate through this situation safely and at the same time, with a very minimum impact on our commercial result. However, due to these 2 important things going on now, we are definitely postponing any guidance on 2020, at least until the end of Q1. So once we'll come back to you with the Q1 results, that will be the nearest possible date when we might be able to give any guidance to 2020. However, even prior to that, that is not referenced because none of us know how long will it take to stabilize the situation with the virus and how long it will take for the country and for the other commodity also to find some new equilibrium. We definitely don't know whether this [sub-30] will be back, that equilibrium, or whether actually, it would bounce back to some more reasonable levels. So that too was basically the intro part that I had to deliver, and I think, I'd say, it's time to go to the 2019 results that are very good.

So let's start with Slide #2. As you can see here that 2019 has marked a clear turnaround for Kcell after several years of decline. For fourth quarter, and our total revenue has increased by 11.1% year-on-year, with service revenue remaining on the positive trend, 5.8% up year-on-year. And our B2B segment being important contributor to our success in 2019 with 13.6% growth. Revenue from handset sales increased by 49% year-on-year, following the launch for our online stores and ourselves on the KASE platform. However, I need to mention here that what makes this result even more impressive is that we need to take note that the average price per handset or the average value of the deals have been going down in the markets and also in our business case. So in order to grow by 49% in the volume of our handset sales, we actually have to grow more in the actual contract. And when we look from our business perspective, then the decreasing value of the contract is basically another good sign because we are deploying less of working capital in order to close one deal, and we are basically managing to bring in more of the service content because basically, our ultimate goal is not to push the hardware to the market, but to establish a long-term relationship with clients. So this means that per every million tenge utilized for this direction of our sales, we are basically engaging more and more customers in the -- in a fruitful long-term relationship.

Also we can see here that we have delivered 12.7% year-on-year increase in ARPU, which was driven by several things, most notably by the higher number of subscribers now opting for our bundled offers. That's one important direction. Second important direction is that basically, we were accepting the situation of certain number of very low-value customers to leave and not replacing them by a similar number of another wave of very low-value customers. So we are more focused on the value acquisition. So that we allowed the base to shrink a bit, but we are looking for the quality and for the real subscribers and for a sustainable business model here.

So as a result of our tight fiscal discipline and substantial cost optimization measures that have been taken in 2019 as well as higher revenues, our EBITDA, excluding nonrecurring items grew by 8.6% year-on-year with our EBITDA margin of 36.6%. And as I already mentioned, the subscriber base, the freeze, that was basically a conscious decision to go for that, and further take improvement in ARPU and stop wasting money basically on the useless customer acquisition cost.

So let's switch to Slides 6 to 9. So as I said, 2019 was a quick turnaround point for the company, and we saw the first improvement in our key financial indicators in 5 years. Our total revenue increased 4.6% year-on-year. Our service revenue increased even more, 4.8%. And our ARPU in our annual results increased by 15.5%. So you can see that we have been consistent as well quarter-on-quarter basis as well as total year 2019, excluding probably the first quarter when effectively the company was just taking over after the transaction basically Q2 to Q4. I would say we're pretty consistent in this regard. So this revenue -- this level of revenue growth aligned also with a strong cost control maximizations brought significant increase in EBITDA, which grew by 24.7% year-on-year, excluding nonrecurring expenses by 13.8% year-on-year, excluding the effect of IFRS 16 standard that was introduced this year. In our case, our net income increased by 18.6%. And even though that the net income was negatively affected by the KZT 14.5 billion penalty due to the termination of network sharing agreement with KaR-Tel, it was actually positively affected by -- to a certain extent, offset by the reversal of tax accrual in the amount of KZT 5.8 billion that we succeeded to go through court dispute well within our [stated revenues] average.

We have observed robust revenue growth also in the B2B segment, which reported 16.2% year-on-year increase, handset sales continue to grow, rising 3.6% year-on-year also supported, as already mentioned, by our online stores and by the KASE platform. We see strong financial and operational opportunities in further network and infrastructure sharing initiatives and also have launched our first convergent product with Kazakhtelecom, which is still in the early development phase. However, it's important for us because on the convergent product, we are substantially extending the customer life cycle. And we are also introducing a number of new projects, including the private LTE networks for the mining sector, scoring enrichment for the banks and IoT projects for different industries as well. Also, we are developing unique and pioneering propositions such as eSIMs that we're the first ones in the market who launched electronic SIM card. And by that, we see that as one of many enablers to further underscore our technology leadership and improve the cost base. There are few things that I need to mention regarding the competitive environment. As you may recall, the antimonopoly conditions that were imposed when Kazakhtelecom acquired the majority Kcell stake from Telia included the freeze on the legacy tariffs for 3 years. In past year or so, many of Kcell competitors have introduced new tariff plans for the legacy base. But we were not able to respond as a result of these stringent conditions. We are very proud of our performance in 2019 amidst a stabilizing market. And as I've said, it was a crucial year for [turnover] of Kcell and the company, and so now we could face a brighter future continue to deliver strong performance.

At the same time, we are placed for growth and look forward to completing this current 3-year period of prescriptive regulatory conditions, but of course, in the current situation, we should also take note on the few things that we stated at the very beginning of our call.

Now let's move to the Slide #10 of our strategic priorities. As you know, in 2019, we launched our new strategy aimed at driving growth and leveraging the developments in the ownership structure of the group. Some of these are key strategic priorities are ensuring Kcell's market leadership across all business areas, #1 operator for smartphone users, #1 operator in B2B segment; offer a diversified product range that meets evolving needs of our customer segments; and continuation to identify synergies across the entire group, while focusing and further developing handset sales business.

And one of crucially important areas is the further data monetization and focus on the areas with clear potential for substantial growth. This includes mobile financial services, big data as well as potential introduction of 5G infrastructure and services.

Coming back to our revenue growth. As I already mentioned, there are -- there were several factors contributing to that. So one of the most important drivers is conversion of our pay-as-you-go billing base into bundled offers. That was the development that has been ongoing in the market for several years. Kcell was substantially lagging behind the competition. We are catching up in these areas. However, we are still lagging behind our competition if you look at that percentage of our bundled base, so there is clearly still an area for improvement, and there is still a potential for the further monetization of our existing network and existing customer base. So this is an obvious kind of a low-hanging fruit that we should be able to capture and monetize. And also another area, of course, is, I would say, rationalization of our tariff offerings and the market is moving in a direction of dropping these offers for unlimited social networks. We are carefully watching this competitive situation and also focused on the potential to monetize this area because we see that this is a substantial amount of traffic that have been carried to the customers and haven't been monetized yet. And that's basically the situation pretty much similar for all the older players in the market, but it's now starting to change. In addition, number of fixed contract subscribers with high ARPU has risen as a result of an increase in the number of contract funds, and we are basically looking at the possibilities to continue this direction of our business, which is pretty much unique for the transformation in the CIS markets even further.

If we move to the Slide 12 on the commercial trends. So we can see that the 4G device penetration continue to grow. It has reached 63.9% in the fourth quarter compared to 50.9% a year ago. The number of 4G data users increased by 25.2% year-on-year and has reached 2.5 million, in excess of 2.5 million. And number of OTT subscribers decreased 8.1% year-on-year, and now it's 637,000, mainly due to changes in the accounting methodology. While number of our MFS users grew by 55.5% year-on-year and now represent more than 170,000, mainly due to introduction of new services.

If you look at our data traffic, we can see continuing growth. It's 28% up year-on-year as the smartphone penetration reached 72.9%. However, growth in data traffic was partially offset by the packages with lower type megabyte, which led to a KZT 0.14 average revenue per megabyte. That is data revenue has increased by 10.5% year-on-year in the fourth quarter, and now it represents 32.2% of our total revenue.

And now we can have a brief look on our capital expenditures. We have continued to make progress to roll out our 4G LTE network with LTE traffic now accounting for 69% of the total data traffic, and 62.2% of population coverage. We have also now achieved 80.5% population coverage with our 3G services. And our year-to-date investments amount to KZT 20.2 billion. This basically concludes our full year results presentation. And as I mentioned before, so regarding the outlook for 2020, we are hoping that we will be able to provide our guidance during the Q1 call, which is scheduled as of now from the April 29.

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Irina Shol, Kcell Joint Stock Company - Head of IR [4]

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Thank you, Kaspars. Operator, now we're ready to take all the questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question from Ivan Kim of Xtellus Capital.

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Ivan Kim, Xtellus Capital Partners, Inc., Research Division - Equities Analyst [2]

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I just have a question regarding the outlook. I understand it's hard to provide your guidance at this point. But thinking of the potential inputs from both this COVID-19 and lower oil price on your services business, it should be fairly muted, right? Because the consumption is just on like -- the spending on the telecom sources is essential consumption as well. Roaming is probably also fairly on the low side. Just -- I'm not sure I see a significant impact on your tenge service revenue. And CapEx probably could be higher, of course, because of the FX, but any thoughts on the service revenue would be appreciated.

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Kaspars Kukelis, Kcell Joint Stock Company - CEO & Chairman of the Management Board [3]

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I'll be very, very happy to give you extended comment on these, but you have to know that the situation have been changing by hours, yes? We have been meeting sometimes 2 to 3 times a day on the same subject with changing inputs. So as of now, I can't see anything that would require some separate warning or anything, but it's just not enough of consistent stabilized information to tell you anything. I would say that I've seen some publications from some western countries like Spain or wherever, where the traffic is up like 70% or something else. They're not observing as of now anything like that, but we are very few days into some real situation, of some limitations to the all sorts of modus operandi of the malls closing, some cities being locked up and so on. It's just basically most of these things are within the last 72 hours. So I just can't provide you any important thought on this.

The roaming situation is not so important for us because we are basically observing -- yes, there most probably would be a decrease on inbound and outbound, which is pretty much netting off to a certain extent. And you know that we are not very touristic country. We are not Spain or Croatia, whomever, who are -- like roaming part represents like 30% of business and whatsoever. So it's -- whatever happens with roaming is not going to kill or save our results in 2020. We are not very intensive inbound to tourism country, and we are not very intensive outbound like would be like Germany or U.K. or some others. So as soon as I'm ready to give you some information, I definitely will. But as of today, I feel that would be irresponsible.

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Operator [4]

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(Operator Instructions) Our next question comes from Dan Gardiner from Edison.

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Dan Robin Gardiner, Edison Investment Research Limited - Director [5]

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I just wanted to wish you and your staff well in the next few weeks and months. There's a lot of uncertainty out there, and I think it's wise to kind of defer any meaningful outlook at this point, but as far as I could see. I just wanted to question on the existing order performance in Q4. There seem to be -- even as I understand it, the growth recorded or the service revenue growth recorded by the business was below that of your peers in the Kazakh market. And you mentioned on the call there, the impact of some of the legacy prescriptions on bundles. Was there any other reason for that? And how relevant are those -- would that explanation be going forward as we look to kind of compare you versus those others?

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Kaspars Kukelis, Kcell Joint Stock Company - CEO & Chairman of the Management Board [6]

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Thank you for the question, and it's very good question, and there is no single-line answer to that. There are many components. We are definitely lagging behind the competitors. But basically, the first challenge that we faced with acquisition of this company was, first of all, to return it to growth per se, yes. We are lagging behind the competitors because basically competitors have been in these growth dynamics of the -- for a substantial period of time before Kcell was coming out of decrease because basically, even -- if you look even at the Q1 2019, where we were basically still sliding, so our growth didn't start as of Jan 1. We lost some time in the first quarter that brought basically our starting point even lower where it was on the Jan 1. It's one important thing. Second important thing is that we were lagging behind in many things technologically. One important aspect was just the general network, our -- the fleet of our billing systems and other important systems. So it requires substantial time for us to replace and update many of those, and we are still -- if we are looking at the network, as of now, we are the third operator among the 3 in the market, if we are looking at the situation as it is. However, of course, that was basically one of the reasons why the group opted for the acquisition. I think you can read there are fresh interviews of members of our Board of Directors that came out just like today, so you can get some idea on the plans of the radio access network integration and other things that are about to happen in the nearest observable future. So that should sort out this situation. On the network level, we are still working also with some of this lag. This is our billing systems and then some other systems. And I believe that our next challenge would be to catch up, to match at least the growth of the more mobile operators in the market. So that's a fair comment. We admit that. But to -- not fully ready yet to be on par with everybody else here.

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Dan Robin Gardiner, Edison Investment Research Limited - Director [7]

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Okay. And if I'm allowed a follow-up on that. Obviously, recognizing your limitations to make forward-looking statements, but you talked about not wasting money on low-quality subscribers, and that's been the reason for the growth in profits over the last year. Is there a chance that the subscriber base is stabilized, all things being equal?

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Kaspars Kukelis, Kcell Joint Stock Company - CEO & Chairman of the Management Board [8]

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I think there are several things going on in the market. Overall, we see that the penetration in the market is stabilizing. And as you know, there is not much of a population growth in the country. So with the pricing more going into the bank, whom also -- there are few -- less and less incentives basically to -- for customers to remain as active 2 or 3 SIM users. Because basically, it becomes a burden if they need to maintain the package on at least 2 SIM cards, which is just basically a waste of money. It doesn't represent any clear function or technological or whatsoever, other sort of reasons. So that's basically one thing. And of course, with the consolidation of -- in the market, there is also certain normalization that is going on in the retail because we all understand that in all markets where we have growth, there are certain numbers of activations happening just for the sake of activations just because there were certain numbers of incentives either for retail or for the end customer or other things. So now we are basically cleaning the market, make sure that there are no incentives for any sort of -- no matter, end user or retail fraud or whatever, that might be there. So we are also rationalizing the relationship with all sorts of retail and the end customers, engaging them into the long-term contractual relationship and all these things. So we are basically just trying to clean the business model from all sorts of leakages that were there for many years.

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Operator [9]

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(Operator Instructions) At this time, we have not received any further telephone questions. I would now like to turn the conference back to our host for any additional or closing remarks.

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Irina Shol, Kcell Joint Stock Company - Head of IR [10]

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Thank you very much. That concludes our today's presentation. Thank you for joining. Thank you, and bye-bye.

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Operator [11]

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This will conclude the presentation. Thank you all for your participation, you may now disconnect.