Digi's digital bet
Digi.Com Bhd is capitalizing on the digital wave for the further growth, according to CEO Albern Murty.
THAT mobile telecom operators in Malaysia face increasing competitive pressures in a fast saturating market is not new. But what is worrying is the digital disruption taking place globally, where Internet giants pose a threat to many incumbent businesses – telcos’ included.
Internet giants like Google, Skype and WhatsApp are offering services that compete with telcos. It is no surprise that telcos’ earnings are gradually declining. They are facing a gloomy prospect of merely being connectivity infrastructure companies serving the needs of the Internet giants.
But the telcos are fighting back. The current landscape is forcing them to become more like Internet companies. This means embedding the digital mindset into their strategies and network competencies.
For Digi.Com Bhd, the journey began 2½ years ago, when it sought to remake itself. In the middle of last year it set up Digi-X – a unit that will comb for opportunities in the digital and internet of things (IoT) space.
Digi has also been looking into other tech areas such as financial technology (fintech) and analytics and has a game plan to launch new products soon.
“We are looking at a 10% contribution towards earnings by 2020 from our venture into the digital and IoT space,” says Digi CEO Albern Murty.
Albern, who was promoted to CEO from head of marketing, says Digi needs to embrace the digital revolution and bring to the market what consumers want in the Internet age.
“We have gone through multiple phases from aggressively growing our customer base to inculcating innovation and going on network expansions. There was 3G and then 4G but throughout all the changes, we remain constant with three things – we always focus on the customers, we are not afraid of innovation and we keep trying to offer simplicity and value propositions,” he says.
The digital space is not the only area of growth for Digi. Owning a wider telecommunications spectrum, Digi is growing its postpaid segment after having led the pre- paid market for many years.
Digi acquired additional spectrum on the 900MHz band under the spectrum re-allocation plan by the Government, and this has been assigned for 15 years effective July 1. In the process, it had to give up some spectrum on the 1800MHz band.
It is also making inroads into the enterprise market.
Digi has also shed its “yellow man” image to have the look and feel of a mature Internet company.
“We are shifting gears to take advantage of the digital boom, and it is about what’s next we can do, we are exploring how we can do more (and at the same time grow our core business of selling access),” says Albern.
Telco’s that are slow to embrace the digital age face margin pressures and are dubbed mere “pipe suppliers”. Experts say that telcos that are able to capitalise on the digital revolution stand to improve their profits significantly.
But will Digi’s strategy work? “Digital services contribution towards revenues will be 10% by 2020,” predicts Albern.
Digi posted a lacklustre second quarter result, indicative of the pressures facing even the best of telcos. Its net profit was down 14.7% to RM358.9mil from RM420.6mil although this was attributed to higher depreciation and additional finance costs. Revenue for the quarter also fell by 6.2% to RM1.56bil from RM1.66bil a year ago.
But a report on Digi by CIMB Research remains positive about the telco’s prospects.
“Digi is a well-managed company with a good execution track record in terms of cost controls and sales and distribution, which should help it weather the short-term competitive pressures and position it to capture future growth opportunities,” the report states.
Changing patterns
For almost two decades, Digi has relied on migrant workers to grow its prepaid revenues. But in the past few quarters its revenues have been falling due to intense competition, high churn rate, and a weaker ringgit that is taking a toll on mobile operators as they need to pay more for IDD calls.
With new spectrum allocated, Digi is pushing to grow its postpaid business.
“Two years ago the market competition intensified. We were challenged in our prepaid market as we were No.1 in that space. We were the smallest player in the postpaid market segment and decided to aggressively push for postpaid,” Albern says.
To do that, it strengthened its touch points using digital systems, bundled products and redefined postpaid in its own way, including offering affordable data roaming options.
“We are looked on as the brand that challenges the norm and we used that to grow our postpaid business,” he adds.
It has been growing its postpaid customer base, with net additions of 103,000 in the second quarter alone, to hit 2.3 million. Digi also grew its prepaid subscriber base during that period by 151,000 to 9.7 million. With a total subscriber base of 12.03 million, it is in the lead position.
As of the end of the second quarter, Maxis Bhd’s subscriber base stood at 11.66 million while Celcom Axiata Bhd had 9.9 million subscribers. U Mobile is the fourth player in the mobile space but its numbers are not available.
Digi’s pursuit of new segments of business has led it to invest heavily into creating a digital-enabled core network.
That digitalisation journey is ongoing even though it began in 2015, says Albern.
The company spent RM904mil in capital expenditure (capex) in 2015, and RM780mil last year. This year it will be 11%-13% capex to service revenue ratio, but not all the capex is meant for the digital transformation of the core network.
In a report, CIMB says that Digi’s 4G network is now delivering a more acceptable level of quality of service in terms of signals and speed.
The new 900MHz spectrum allows for wider coverage and about 87% of populated areas are 4G-enabled, and 46% with 4GPlus.
Albern says Digi is also sticking to its focus on keeping a lid on costs and using technology to achieve that. For example the organisation is going paperless.
“Our cost to serve customers has not increased and we are modernising the way we deal with them,” Albern says.
It has also created an app – MyDigi – that self serves and rewards users with all kinds of loyalty offerings. Digi has tied with third party merchants with a targeted marketing concept. Over two million people are using the app.
Digi ran a Peugeot advertisement on its app last month and at least 50 people responded, which surprised even the car company.
It has also started refurbishing its existing stores, which are fully digitised, paperless and without counters.
That is complemented by its online presence which enables orders for phone and services, that can be promptly delivered to a place and time convenient to customers.
Albern believes that by 2020, about 80% all Digi customer interactions will be digitally-driven.
Digi is also using analytics to track consumer patterns. One change arising from its study of patterns is in roaming charges. Instead
of the RM36-a-day package, Digi also offers RM5, RM10 and RM25 depending on usage patterns.
“Everything we do is to cater for the changing needs of the customers so that we can serve them using technology,” he adds.
Earnings ambiguity
Despite Digi’s efforts, equity ana- lysts covering the company feel that the telco’s subscriber base and arpus (average revenue per user) will remain under pressure. This is in part due to Maxis and Celcom aggressively improving their 4G coverage and service quality, according to AmInvestment Bank Bhd in a note.
Digi’s blended arpu for 2Q was RM41, versus Maxis’ RM52 and Celcom’s RM41.
Digi had long been a top pick by analysts covering local telcos but today, most houses have a “hold” call on the stock.
When Digi’s second quarter earnings were released last month, several broking houses revised downwards their target price for Digi’s shares. The shares naturally came under some selling pressure. Analysts had felt that Digi’s service revenue trajectory was ambiguous. This is despite efforts to boost revenues and make the organisation more agile and efficient.
MIDF had cut its target price for Digi to RM5.02 from RM5.42, with an unchanged “neutral” stance. The research house noted that the overall subscriber base, arpu and service revenue were undermined by the contraction in the prepaid segment in view of the heightened competition among Digi’s peers. But Albern remains positive. “We think we are still a favourite among several houses, we have a good management team and offer dividends. Our net debt ratio is extremely good, we are investing in infrastructure and network. We keep doing new things and a lot of investors are looking at us. We are bold enough to become early adopters and believe in our growth story in postpaid. We are shifting gears,” he says.
In the second quarter, Digi’s mobile service revenue was down to RM1.47bil from RM1.56bil a year ago although ebitda margins were slightly higher at 46.2% from 44.4% a year ago.
“Recent earnings have been pressured by intense prepaid competition, as well as rationalisation of legacy services, notably in the migrant workers segment. Nevertheless in the longer run, we continue to believe that Digi is a beneficiary of the spectrum re-allocation exercise,” CIMB says.
Albern points out that the cost improvements the company is implementing will have a positive impact on margins.
“We run a profitable business and margins will improve. A big part of what we do is to improve our efficiencies, so the impact on our bottomline will be positive,” he says.
In the first half of 2017, prepaid growth was challenging, but postpaid grew 4.7% and he says “we are closing the gap to capture more postpaid and we expect double-digit growth amid intense competition”.
For the full year, he says there will be no major surprises. Service revenue growth will remain intact with low to mid single-digit decline, and ebitda margins will be around the 2016 level of 45%.
“People want what makes sense to them and their companies. So it is about taking positions in IoT and digital. Our SME business remains strong, and enterprise will be an interesting play for us,” he says.
He expects “high single-digit growth in the enterprise side next year.”
As for 2018, he said “looking at our enterprise and postpaid business, we are quite confident it will be a strong 2018.”
By 2020, digital-fintech-e-wallet and IoT will make up 10% of revenues, while its mainstay – prepaid, postpaid and enterprise business – will account for 90% of revenues.
Digi’s dividend policy remains unchanged and it has funding facilities and flexibility to cater to investment needs.