Great year, but TIME moves to address glacial EBITDA growth
By Karamjit Singh June 9, 2014
- Predictions of 1% margin growth per year
- Founder feels company getting ‘fat,’ complacent
COMING off a year of record revenue and profits and decent results for the first quarter of 2014, a standard press conference after TIME dotCom Bhd’s 17th annual general meeting (AGM) offered a vivid illustration of how an entrepreneur-led and owned government-linked company (GLC) behaves.
The uneventful press conference, spiced with the usual acerbic comments against main competitor Telekom Malaysia Bhd (TM), burst into life when TIME’s dynamic chief executive officer Afzal Abdul Rahim was asked what can go wrong, seeing how everything was going right for the data-centric telecommunications company that Afzal described, tongue-in-cheek, as being “Malaysia’s biggest corporate embarrassment” back in 2008.
“A lot,” replied Afzal in his typically candid manner while highlighting three in particular – pricing pressure; TIME as a company getting too comfortable and therefore complacent; and any fundamental unexpected change in the market, such as a new competitor coming in.
“I do get the feeling we’re are getting too comfortable and I don’t like being ‘overweight’,” he said, reflecting on how six years ago the concerns were just around meeting monthly payroll.
Today, TIME has almost RM700 million worth of DiGi.com Bhd shares and around RM200 million in cash. Describing this financial buffer as “fat,” Afzal feels TIME is getting a little lazy. [RM1 = US$0.31]
Where five years ago it had to fight for survival, today it is paying dividends. This change has brought a subtle ripple in the culture of the company that Afzal senses is a potential danger to its ambitions, and he wants to nip any erosion of its competitive culture in the bud.
“I think we can be doing a lot better and just feel that we need to shift into a higher gear and drive our people even harder,” he said while sharing his belief that there are still markets it has not penetrated and customers it has not reached.
Then there is the pricing pressure which poses a clear and present danger, especially “if we do not manage this well,” acknowledged Afzal, adding, “margin erosion is a certainty in the telco business and we are expecting the same erosion moving forward.”
The answer to this is simple: “We just need to sell in bigger volumes.” That, and the fact that when all three cables are in place, TIME can use its own bandwidth to sell to customers, therefore enjoying margins of up to 60%. When it leases and then resells to customers, margins are rarely higher than 25%.
The intensity of the margin erosion Afzal spoke of can be seen from the example he gave from when Global Transit was launched by Afzal towards the end of 2005. The price of Internet access on IP (Internet Protocol) transit was US$700 (RM2,260) per MB per month. Today, in 2014, it is as low as US$12 (RM39).
For Metro E and lease lines, there is a similar erosion but of between 15% and 25% per annum. This is balanced by volume growth outpacing the price erosion.
But the bigger picture is this – with such intense pricing pressure, magnified by competitors cutting prices further and TIME having to defend its turf, EBITDA (earnings before interest, tax, depreciation and amortisation) margins will crawl along at a projected 1% a year growth – nowhere near the 40% margin Afzal had hoped for.
When calculating that it could take up to six years to get to this 40% level, Afzal, again tongue-in-cheek, said, “I hope I am not in the same job then.”
But those who know Afzal will also tell you that he is not the kind to accept a 1% yearly EBITDA growth. And the various analysts have it spot-on when they note that the obvious catalyst for TIME will be when it makes an acquisition.
Afzal has indicated that it is looking and “will probably pull the trigger on a couple of things in the region.”
In fact, he sees the potential to grow a few ‘TIMEs’ in neighbouring countries. “There are smaller Metro Fibre players in neighbouring countries that we would love to get involved in,” he declared.
While that is the predictable play, look for TIME to do something pretty interesting in this space and even not in the expected areas of data centre or international bandwidth, an area TIME has focused the majority of its RM270-million capex (capital expenditure) over the past two years.
But even then, price erosion is a constant danger. Afzal himself has indicated that “unless we can come up with a brand new thing and spin our business successfully ... where, at the flick a switch, margins go up,” the future will see TIME plodding along.
Is this “brand new thing” just wishful thinking or can TIME actually do something really cool? I am betting it can. Watch this space.
At the press briefing late last week, TIME announced that for the financial year ended Dec 31 2013, operating profit jumped 61% from the previous year to RM118 million. Revenue rose 31% to RM548.3 million on higher data sales.
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