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I am an individual investor with managing personal investments as my full-time occupation. My investing style is fundamental-driven. I am not a technical trader and do not typically daytrade.
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  • MICC - The short case
    At today's stock price of $79, MICC's enterprise value is $9.9 billion and its 31 million subscribers are valued at $320/sub. Is that cheap, fair or expensive? Let's take a look.
    Their ARPU (average revenue per user) is $10/month and monthly churn rate is 5%, implying that the average customer lasts 20 months i.e. providing a cumulative gross revenue of $200 before the customer goes away. Even if they had zero operating costs, zero corporate overhead and zero customer acquisition costs, just the gross revenue number makes them look overvalued today. But of course the aforementioned costs are nowhere near zero. My estimate is that their average subscriber should be worth less than $100, implying the aggregate value of their current subscribers to be no more than $3.1 billion, which backs out to $15/share.
    So the next question is: Could they significantly grow their subscriber base or improve the value of their existing subscribers to justify the $320/sub tag? Let's look at key factors that will impact the answer.
    1. Could MICC increase the ARPU (say from $10 to $20 per month) by providing 3G, value add services etc.? This would have been thinkable if they were providing services in the developed world or even India/China. But the bulk of their upgrade opportunity lies in African and Central American countries where per capita income is on the average $125 per month. I don't think the masses will spend 16% of their income on their cellular bill. My verdict: Very difficult for them to double their ARPU across the board.
    2. Could MICC reduce churn rate (say from 5% to 2.5%) effectively doubling the life of each customer? Reduction of churn rate could add a lot more value to their subscriber base. However, most of their subscribers use prepaid cards, which is the norm in most less developing countries. Such subscribers shop for the lowest price and have zero loyalty. There are multiple service providers in each of their markets - in some they are one of six providers. It is possible they could score a slight improvement in their churn rate but I don't see it halving given the customer behavior. My verdict: Customer churn will remain an issue.
    3. Could MICC grow the subscriber base by increasing penetration and/or gaining market share? The short answer is yes. However, their relatively wealthier Central and South American markets already have a 60-80% penetration and stiff competition which is primarily based on pricing. There is limited growth opportunity in those markets. Current penetration is lower in African markets. There is a lot more room to add subscribers in African markets but given the demographic makeup, new users are likely to be at $5 per month ARPU rather than $20. Their new subscribers will be worth even less than their current subscribers.
    My belief is that the business will have a best case valuation of $6 billion in a couple of years assuming they add another 10 million subscribers and somehow improve their ARPU and churn rates to accomplish a $150 per subscriber valuation. This would also be consistent with a 10x 600 mm free cash flow valuation, which is my best case estimate of their stabilized free cash flow net of capex, assuming MICC grows to 40 million subs and significantly cuts down on growth capex. This backs into a share price of $40-$45.
    Why pay $79 for this today?
    Don't just take my word for it. Their website has a 3Q 2009 investor presentation which provides very detailed information by market (full credit to them for this) and do the math yourself.

    Disclosure: I own in the money puts on MICC.
    Tags: MIICF
    Jan 06 4:20 PM | Link | Comment!
  • CBEY - Reported churn rates hide more than they reveal.
    My attention was first drawn towards CBEY when it was first profiled in the Citron Research “Hall of Shame”. Not content with taking Citron's research at face value, I decided to dig into the numbers myself. Upon scratching below the surface, my conclusion is that their operational metrics are far worse than they appear at first glance.
    The key data point here is the churn rate i.e their ability to retain their customer base. Their current reported churn rate of 1.4-1.5% per month implies that their average customer will last 5.5 to 6 years. Once you factor in the $750 per month ARPU, their historical 18-22% cash profit margin (pre-capex) and a 10% discount rate, the math will tell you that their average customer should be worth around $8,000. The market is valuing their 49,000 or so customers at $8,700 today. It seems a little pricey but not horrible given that they have been growing their subscriber base by entering new markets.
    But this is where the numbers begin to get misleading. It seems that most of their customers are locked into 3 year contracts, which means customers have no way of getting out before 3 years unless they want to pay material penalties. So a more accurate way to look at the churn rate would be on a 3 year lag basis. By analyzing the subscriber data from their public filings, it is my estimate that 75-80% of their customers do not renew their contract after 3 years. First, that speaks something about the value proposition of their business and second, even if the remaining 20-25% of their customers stay with them for 6-8 years, it gives them an average customer life of 3.6 to 4.2 years. Assuming a customer life of 4 years, the implied “static pool” churn rate is 2.1% and the valuation per customer is $5,700. In reality, even this valuation is generous  as the company will need to spend capex even if it stops growing, so a more accurate valuation would be $4,000-$4,500 per customer.
    CBEY has been burning up pretty much all free cash flow to enter new markets. This keeps fattening its customer base which keeps the reported churn rate low due to an ever increasing denominator. This masks the issue of concern that a very high percentage of customers are choosing to go away once their contract expires. In the short term the company may continue to grow their subscriber base by burning more cash, but they will run out of growth opportunities sooner rather than later and the churn rate will catch up. I don’t believe that the current business model will ever be able to generate the kind of free cash flow needed to justify today’s valuation. If you layer on top of that (i) the ongoing economic pressures on small businesses and (ii) declining ARPU due to commodity like product and fierce competition from much larger providers, then nothing seems positive for the company.
    In my view, this business is worth no more than $200-$225 million today, implying a $8-$8.5 stock price.

    Disclosure: Short position paired with a protective call, at the time of original writing 1/6/10. Currently, no position.
    Tags: CBEY
    Jan 06 1:54 PM | Link | 7 Comments
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