Big changes to Huge’s operating strategy

The transition at Huge Group is gaining traction. The company, which used to make its money in Least Cost Routing (LCR) is leaving that model behind to become a distribution business.

For companies like Huge Group, LCR used to be a small but comfortable part of the telecom market, as they would buy bandwidth from major operators at a discount and then resell it at a lower price to businesses than what the operators sold it for.

This business model, however, was dependent on static and high telecom rates.

About five years ago this all changed as sharp cuts in the discounts, along with a drop in the interconnection fee — the charge operators pay for transmitting a rival’s traffic over their networks — and increased competition between operators all but killed it.

Though LCR companies are adapting to the more difficult environment, most are still focused on offering some kind of telecom-related products. Huge Group is different because it is in effect expanding out of the telecom sector and becoming a distributor of niche products for small and medium size businesses.

For now it is focusing on

pushing electronic goods like PABX or Office Automation (OA) equipment but there are plans to branch out into selling products like insurance and accounting packages.

Huge Group’s new business model requires it to bring in resellers (it calls them business partners) to distribute its products. It signed up 425 resellers by the end of February, up from 293 a year earlier.

These resellers are key to its strategy but getting them to make a significant contribution to earnings is a slow process. “There is a lag between the time when business partners are appointed and the time sales of new connections accrue from these business partners,” said Huge Group CEO James Herbst in its latest annual reports.

It said in the report, though it increased the number of resellers 150%, average units sold per partner were up 11% for the year to end-February 2014.

Even so, the group was confident and “upbeat about future prospects for revenue growth”. It reasons that it can overcome this slow sales conversion rate by increasing the number of partners. “Greater numbers of active business partners will result in greater sales of new connections, lower churn and therefore higher net growth and revenue,” said Herbst.

This strategy is showing early signs of paying off. After three years of seeing revenue decline, the group expects marginally higher revenue for the year to end-February.

It said cumulative revenue from August last year compared to measures of cumulative revenue in the previous year was on average about 4% higher, and revenue during February this year was 7% higher than revenue generated in February 2014.

It also increased its number of client accounts by 52% in the current financial year.

The group’s prospects have improved to such an extent, it recently announced it was going to resume paying out dividends. “The existing dividend policy of the company is to pay a low, regular dividend supplemented by additional dividends when earnings exceed expectations. If earnings were to be higher than budgeted expectations in a given period, an additional dividend might be paid, which would then be designated a special dividend,” it said.

Its latest reported numbers also showed modest signs of a turnaround. Though revenue fell from R106m to R99m, taxed profit rose to R9,5m from R6m for the half year to August.

Though it had a negative cash holding of R8,3m at the end of the period, it has since received backing from its shareholders, who took up a R20m rights offer in September.

Investors are starting to take note of the group. Its share price has risen 77% from the R1,48/share it was trading at a year ago to its current price of R2,65/share.

Given its prospects and the changes it has pushed through, at a price:earnings ratio of 15,77 it looks like there is still some upside.