Videocon d2h Limited (NASDAQ:VDTH) Q3 2017 Earnings Conference Call January 31, 2017 9:00 AM ET
Saurabh Dhoot - Executive Chairman
Anil Khera - CEO
Rohit Jain - Deputy CEO
Avanti Kanthaliya - CFO
Nupur Agarwal - Head, Investor Relations
Randy Barron - Pinnacle Associates
Ladies and gentlemen, good day and welcome to the Videocon d2h Limited Q3 FY 2017 Earnings Conference Call. As a remainder, all participant lines will be in the listen-only mode. And there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Ms. Nupur Agarwal. Thank you and over to you, Ma'am.
Thank you. Welcome to Videocon d2h’s fiscal 2017 quarter three results conference call. We have with us senior management of the Company represented by Mr. Saurabh Dhoot, Executive Chairman; Mr. Anil Khera, CEO; Mr. Rohit Jain, Deputy CEO; and Mr. Avanti Kanthaliya, CFO.
I now hand over the call to Mr. Dhoot for his initial comments.
Thank you, everyone for joining our results call for the quarter ended December 31, 2016. And on behalf of our Board members and the management team, I wish you and welcome you beginning of 2017 and wishing you a happy and prosperous one at that.
Starting with the quick summary of our results for the quarter, I’m delighted to report that we’ve delivered a strong quarter despite the moderation naturally there in the market due to currency demonetization during the quarter. Our adjusted EBITDA grew over 33% year-on-year in line with the guidance, which is a great performance and clearly demonstrates the strength of our distribution network, our captive customer service network, and of course the excellent execution by management team.
Revenue from operations came in at INR7.8 billion on a like-to-like basis adjusting for the change in accounting treatment of entertainment tax, which we started after the first quarter. Revenue from operations would have come in at INR8.35 billion, that’s 14.2% up, year-on-year.
Subscription and activation revenues came in at INR7.11 billion. Adjusted EBITDA grew 33.2% year-on-year to INR2.67 billion in line with our guidance. Adjusted EBITDA margins came in at 34.4% during the quarter, that’s 460 basis points above year-on-year basis, and also -- this is also on a like-to-like basis.
We achieved a profit after tax for 21.8 crores -- 21 -- INR218 million and we had free cash flows of INR514 million in the third quarter. Demonetization has impacted our net subscriber additions during the quarter and net subscribers increased by 250,000 totaling to 12.77 million.
During the quarter, starting November, our Honorable Prime Minister announced demonetization of all 500 and 1,000 currency notes, which constitutes basically 86% of the value of currency in circulation in the country. Of course, subsequently the entire process also required cash withdrawal limits etcetera during the entire phase of changing over, which were lasted 30th of December.
Naturally, we believe demonetization is a great move and in the long run will have many, many benefits for the entire country, especially assuring [ph] in digital cashless era for transactions. Though, of course an exercise of this scale is unprecedented, and was expected to lead to temporary shortage of cash availability, and of course leaving to consumers holding onto cash for essentials, delaying their buying decisions where it was not supercritical.
There were other priority items that become top of the mind for the customer. And, yes, this had a short-term impact across industries. It affected our new subscriber acquisitions of course. It was hard to get that much cash for a few weeks post demonetization, especially in Phase III, Phase IV areas. It also impact B2B revenue streams, like advertising and carriage. Also recharges were also impacted for the first few weeks. People recharge in smaller denominations for example.
But having said that, of course, this is a temporary issue and we are beginning to see normalcy [ph] and demand return in the situation very well. In fact, we think the business would be absolutely back to normal with the entire currency coming in and -- with new currency coming in sufficient regulation, and the impact for any business cannot be more than one or two quarters, depending on the cash circulation eruption [ph] to digital payment mediums. I think -- and so will be B2B revenue streams follow immediately one the B2C revenue streams come in place.
So, clearly I would like to highlight here, what are the important over here is that we and what is clear from our results is that we’ve worked very well with regard to the minimizing the impact of demonetization, minimizing the impact to our customers, our retailers and the entire supply chain and I think we’ve worked very well with all our partners in achieving a very good upturn [ph] result, with no disruption to our customers. And I think we're very confident of the clear business fundamentals ahead of us, with regard a very strong subscriber and revenue growth outlook.
Of course, as you all know, we announced arrangement for the amalgamation of Videocon d2h into Dish TV. We are seriously evaluating a GDR listing on the London Stock Exchange as an alternative to the earlier announced GDR program in Luxembourg. This is keeping in mind feedback from all our shareholders. Both the companies are in favor of the GDR in London and we’re studying legalities in the process of making it happen.
We have applied already for an approval from the Competition Commission of India and we expect an update, and we are hopeful of concluding the deal by September, October 2017. We are extremely excited about the deal and the long-term benefits of the complementary skill sets, which the two companies bring to the table.
I think we can create a powerful service offering for our customers, which will create a sustainable shareholder value for all our investors and all the stakeholders involved with the Company.
Coming on to guidance. With the moderation out there through demonetization, we expect net subscriber additions of 250,000 in the fourth quarter. We expect EBITDA to come in at INR2.7 billion in the fourth quarter.
Now before I handover the call to Mr. Khera, who will take us through an industry and business update, I would like to again reiterate, how excited and fully prepared we are all to seize the growth opportunity in the fastest-growing PayTV market in the world through a leading distribution network, a strong customer service focus, a differentiated content offering, our launches in technology, and apps in the new digital age, and all of this supported by a really very healthy strong balance sheet and free cash flows. I think with this and the proposed merger, we are really so excited about the growth outlook of the Company. Mr. Khera?
Thank you, Mr. Saurabh. An important development during the quarter was with regard to Phase III and Phase IV digitization. in November 2016, the Delhi High Court cleared all the stay orders and ordered switch off of analog signals in Phase III digitization area. The Ministry of Information and Broadcasting provided additional time for the remaining analog cable subscriber in Phase III areas to switch to digital platform by 31 January 2017. It was also made clear that no further attention would be allowed.
Additionally, the deadline of Phase IV digitization has moved forward to 31st March 2017. We believe Phase IV is a huge opportunity ahead of the industry and there would be over 40 million analog cable homes covered in this area. This ensures that d2h industry will continue to grow its subscriber base for many more years to come.
In line with our strategy of content localization and premiumization, during the quarter we have launched two regional value-added service. These are d2h Mauja for Punjabi viewers from North India and d2h Rangilu for Gujarati viewers, in Western India. We also continue to strengthen our high-definition offering on the -- on our platform. We now offer more than 600 channels and services, including 60 high-definition channels and services.
We are also happy to share that driven by our manufacturing cost advantage, we have now started installing high-definition enabled set top boxes in all our new subscriber acquisition. This will help promote our high-definition offering and enhance our ability to upgrade subscriber from standard-definition high-definition in future.
To do so, we offer high-definition add-on on various genres, making it possible for our subscriber to sample the content in a smaller quantity, instead of upgrading to full high-definition packs all the time. This enables a wider range of customer to sample high-definition content.
Taking demonetization as a trigger, we have launched education and awareness campaign on several front with our subscriber base, some like method and ease of recharging through e-method and e-wallets, encourage customer to recharge their account for package value instead of recharging part amount or a lower round figure, encourage the customer to recharge on time before the next recharge due date and while they are in active mode, encourage customer to offer a long-term recharge.
We believe, of this will help reduce suspension of customer and win back churn [ph] customers. Additionally to increase penetration of high-definition by introducing small sachet pack of high-definition channels. Talking about tariff order, during the quarter, a draft tariff order released by TRAI was challenged by one of the broadcasters. We await more clarity on tariff order from High Court.
As seen in the regulatory processes in India, this thing evolve over a period of time. This tariff order is still in draft phase and mainly the tariff order talks about sealing of channel pricing from broadcasters to platform and from platforms to the customer.
It also talks about regularization of high-definition channels from broadcasters to platform and to the customer. It also talk about various bookcase [ph] to be offered from the broadcaster site to the platforms, platform like DTH and cable and bookcase which can be tailor-made by the platforms to the customer.
Additionally, we’ve talked about GST and its benefit many times in the past. News flow suggest that implementation starting April 2017 looks difficult, and that the Finance Minister has clarified that GST can be implemented from any date not only from beginning of the financial year.
We expect some clarity on GST in the Union Budget, which we are expecting tomorrow and look forward to hearing the Finance Minister on GST rates implementation and timeline in his budget speech tomorrow.
I now hand over to Mr. Rohit Jain for the financial update.
We will be happy to share the details of the results for December quarter. During the quarter, as mentioned earlier, demonetization adversely impacted gross subscriber addition, subscription recharges, advertising and carriage revenue. In spite of that, the total revenue came in at INR7.77 billion, comprising of subscription and activation at INR7.11 billion, carriage revenue at INR277 million and ad revenue at INR71.
While the new currency circulation is picking up and business is coming back to normal, we think that the impact of demonetization would be partly felt in Q4 as well. Especially with respect to the B2B revenue stream, such as advertising and carriage revenue.
Adjusted EBITDA grew 33.2% year-on-year to INR2.67 billion. Margin came in at 34.4% for the quarter. On a like-to-like basis, adjusting for change in accounting treatment for Entertainment Tax, EBITDA margin would have been 32%, which is 460 basis points growth over last year. Content cost came in at 39.6%, largely as a result of impact of demonetization on revenue. Fixed cost as a percentage came in at 13.9%.
We reported for the quarter net profit of INR218 million, as compared to loss of INR220 million during the same quarter last year. ARPU which is reported on total revenue came in at INR205. Again, this was a factor that has some impact of demonetization on account of higher suspensions by customers. However, we are quite happy that our overall churn is in control. We are not loosing customer. The monthly churn rate for the last nine months had been 0.78%, compared to 0.8% last year. Hardware subsidies came in at INR1,924 per subscriber.
CapEx for Q3 was INR1.51 billion, and adjusted EBITDA less CapEx came in at INR1.15 billion positive for the quarter. As of December 31, we had term loans of INR18.29 billion and cash and short-term investments of INR3.82 billion. In end -- in summary, we delivered EBITDA of INR2.67 billion, largely in line with the guidance. For the Q4, we’re guiding for INR2.7 billion of EBITDA and net subscriber addition of 250,000.
With this, we’re happy to open the floor for questions now.
Thank you very much. Ladies and gentlemen, we will now begin with the question-and-answer session. [Operator Instructions] We have the first question from the line of [indiscernible] & Company. Please go ahead.
Good morning or I guess, good evening to you. Just on the -- on your costs, I notice that your overall operating costs were relatively flat relative to Q2, but yet your content costs went up. And so I was just wondering what other areas of the operating costs were you able to reduce?
Well in the quarter three, there is some amount of marketing and other sales and distribution costs that have come down. And some of that since we had impacted subscribed addition during the quarter, some of that has come down.
Okay. So, as the impact of demonetization starts to fade, you would expect that -- you would expect some of those expense to move back up?
Yes, and those expenses will move in line with the growth. But largely speaking, minor variations apart, I think the cost has been fairly stable over the year. I think the variation in that is fairly minimal upwards or downwards.
But only thing you can add to that is the economies of scale on those costs.
Sorry, could you repeat that?
The only thing additionally which favors those kind of costs, whether its sales, distribution, [indiscernible] marketing, on an absolute basis they’ve been pretty stagnant or similar -- stagnant is a wrong word, stable over the years and so the -- what benefit to enjoy over them is the economies of scale of higher revenue and of higher subscriber base.
Right, right. Okay, great. Thank you.
Thank you. We have the next question from the line of Randy Barron from Pinnacle Associates. Please go ahead.
Thank you. Good evening. Can you summarize the feedback that you received over kind of your conversations with investors related to the new co-deal [ph] structure and the GDR, in particular. I’m curious why you’re considering London versus Luxembourg or any other market?
If you could be more specific, I could be more helpful with the answer. But I would say that we -- the focus with regards to London versus Luxembourg is not to do with logistics of our current shareholders and that transition to holding the stock through a depository versus …
I think some of this is probably slightly more to do with experience of various markets with trading patents. I think the feedback that we got from a lot of our investors was -- historically U.S investors have been more used to dealing with the London exchange and London GDR. I think Asian and Indian companies tend to have more experience dealing with Luxembourg. I think from the Company point of view, technically there isn't really any difference between the two, but given the higher comfort levels of, I think, the investor base in our case, which is more centric around U.S. And I think there are some more final nuances in that, some of them have issues in terms of their backend supporting London over Luxembourg slightly better. So, all of those things I think -- those are the feedback that we’ve received.
Thank you. Ladies and gentlemen, that was our last question. On behalf of Videocon d2h Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.
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