Virgin Mobile Q4 2006
Virgin Mobile had a Christmas from hell, however due to appalling lack of transparency in the results comparatives are hard.
First of all, let us deal with the revenue growth which was spun as a positive with revenue increasing to £151.7m in Q4 compared to £140.4m in Q3. Of course, mobile is a seasonal business and therefore comparisons with 2005Q4 would be more appropriate, however we do not have this figure as Virgin Mobile never released full accounts for 2005/6 when they were an independent company. To be factored in here is that Virgin Mobile is predominately a prepaid consumer business and these tend not to be heavy callers during the summer holiday season and unlike business customers continue to call over the Christmas festivities. Also, Virgin Media was only acquired on July 4th so Q3 was actually 88 days compared to 91 days in Q4. In other words, the underlying growth in revenues is hard to determine, but not as big as Virgin Media made out.
Next, profits actually dropped on an OCF basis to £14.2m in Q4 from £16.0m in Q3. Here, seasonality is definitely at play because the Christmas period is normally the time of huge customer acquisitions. These sales generate large absolute commissions and handset subsidies especially on the prepaid side which is normally immediately expensed into the P&L account and therefore Q4 is not normally a good quarter for profitability for the prepaid business. At Q3, Q4 OCF was forecasted to drop to £6m and therefore the Q4 has turned out much better than expected.
The source of this positive turn is Virgin Mobile only managed 11.1k net adds for the Quarter which frankly is appalling. Given Virgin Mobile added 71k contract customers means that there was a net loss of 60k subscribers in prepaid at their busiest period of the year. Virgin Mobile did release subscriber numbers in 2005Q4 which were net adds of 193k which were almost all prepaid and in 2006Q3 net adds were 123k.
However, the indicators were around early in December that Virgin Mobile was suffering. In addition, Virgin Media was more aggressive than anyone else in pushing subsidies into the prepaid market. In true Mobile Pricing Geek style, I still have a copy of the Carphone 2006 Christmas catalogue and I can prove this. I’m not sure how much reliance Virgin Mobile put into the Cath Kidston range but it looks like the whole of the Christmas 2006 campaign was a complete disaster.
The situation gets even worse when you take into account the 90 day active rule which means that Christmas prepaid churners usually show up as churners in Q1 and Q2 of the following year. Virgin Media are forecasting “substantial” net losses in Q1 and I believe this figure could be huge – upwards of 250k. The CFO will know exactly how SIMs has gone inactive in the 0-30days, 30-60days and 60-90days windows. He will also know how many SIMs have stopped being topped-up and are in incoming calls only mode.
The spin put on the prepaid losses is that Virgin Mobile sees more value in the contract mobile segment. This may be true, but what if the scenario really is that prices have dropped so far that the prepaid MVNO model is just not profitable? As I have explained before, network operators can drop prices below termination rates for on-net traffic – a classic case is the Voda family plans which led to significant market share gains in Q3 and Q4. Allegedly and according to the jungle grapevine, these are to be “copied” by T-Mobile in 2007Q2. Similarly, O2 and Orange have plans which encourage prepaid loyalty and on-net traffic. I think the truth is that tariffs are becoming far more important in the prepaid market than handset subsidies. Very few people know the contents of the T-Mobile/Virgin Mobile MVNO deal, but I suspect prepaid is now extremely marginal to Virgin Mobile, but of course still extremely profitable for T-Mobile.
I loved the comment in the Sky Basic negotiation from Jeremy Darroch, BSkyB's CFO, that the cost for the Sky channels was the same as Virgin Mobile was charging for an on-net text message. The truth is that Virgin Mobile doesn’t own a network and 3p is probably more or less what Virgin Mobile are handing over to T-Mobile for every text message.
Intriguingly, Virgin Mobile do not release churn figures despite them being a major target for the old ntl and telewest operations. All I can say is that they must be really, really bad. It was also noticeable that an old buddy of the Chairman’s from the Nextel days has been brought in to run Virgin Mobile.
Again and again on the call, the Chairman and CEO placed the emphasis on contract sales especially the Quad Play. Fair play to Virgin Media and I’m really surprised that they have managed to sell 60k “4 for £40” bundle since its launch on 27th Sept. This is a really good start for a new “converged” product especially when it is compared to the BT Mobile performance in the consumer segment. I’d love to know how many of those are “new” to Virgin customers or are just “old” ntl/telewest customers moving to contracts with better value.
The “4 for £40” bundle was only available from the Virgin Media channels and not third parties. This leaves net sales figures for contracts of around 11k for single play product which I reckon won’t even cover the Kate Moss advertising fees. The “infamous” Carphone Sales Spreadsheet shows that Carphone sold 8,252 Virgin contracts in 2006Q3 so I suppose most of the single play contract sales came from the Carphone channel. Even more interesting was that from Apr ’05 to Apr ’06, Carphone managed to sell 71,943 new contracts for Virgin Mobile. In other words, the absolute volume of single play contracts has probably gone down as well.
Under the new Virgin Media the standalone Virgin Mobile business seems to be falling apart.
First of all, let us deal with the revenue growth which was spun as a positive with revenue increasing to £151.7m in Q4 compared to £140.4m in Q3. Of course, mobile is a seasonal business and therefore comparisons with 2005Q4 would be more appropriate, however we do not have this figure as Virgin Mobile never released full accounts for 2005/6 when they were an independent company. To be factored in here is that Virgin Mobile is predominately a prepaid consumer business and these tend not to be heavy callers during the summer holiday season and unlike business customers continue to call over the Christmas festivities. Also, Virgin Media was only acquired on July 4th so Q3 was actually 88 days compared to 91 days in Q4. In other words, the underlying growth in revenues is hard to determine, but not as big as Virgin Media made out.
Next, profits actually dropped on an OCF basis to £14.2m in Q4 from £16.0m in Q3. Here, seasonality is definitely at play because the Christmas period is normally the time of huge customer acquisitions. These sales generate large absolute commissions and handset subsidies especially on the prepaid side which is normally immediately expensed into the P&L account and therefore Q4 is not normally a good quarter for profitability for the prepaid business. At Q3, Q4 OCF was forecasted to drop to £6m and therefore the Q4 has turned out much better than expected.
The source of this positive turn is Virgin Mobile only managed 11.1k net adds for the Quarter which frankly is appalling. Given Virgin Mobile added 71k contract customers means that there was a net loss of 60k subscribers in prepaid at their busiest period of the year. Virgin Mobile did release subscriber numbers in 2005Q4 which were net adds of 193k which were almost all prepaid and in 2006Q3 net adds were 123k.
However, the indicators were around early in December that Virgin Mobile was suffering. In addition, Virgin Media was more aggressive than anyone else in pushing subsidies into the prepaid market. In true Mobile Pricing Geek style, I still have a copy of the Carphone 2006 Christmas catalogue and I can prove this. I’m not sure how much reliance Virgin Mobile put into the Cath Kidston range but it looks like the whole of the Christmas 2006 campaign was a complete disaster.
The situation gets even worse when you take into account the 90 day active rule which means that Christmas prepaid churners usually show up as churners in Q1 and Q2 of the following year. Virgin Media are forecasting “substantial” net losses in Q1 and I believe this figure could be huge – upwards of 250k. The CFO will know exactly how SIMs has gone inactive in the 0-30days, 30-60days and 60-90days windows. He will also know how many SIMs have stopped being topped-up and are in incoming calls only mode.
The spin put on the prepaid losses is that Virgin Mobile sees more value in the contract mobile segment. This may be true, but what if the scenario really is that prices have dropped so far that the prepaid MVNO model is just not profitable? As I have explained before, network operators can drop prices below termination rates for on-net traffic – a classic case is the Voda family plans which led to significant market share gains in Q3 and Q4. Allegedly and according to the jungle grapevine, these are to be “copied” by T-Mobile in 2007Q2. Similarly, O2 and Orange have plans which encourage prepaid loyalty and on-net traffic. I think the truth is that tariffs are becoming far more important in the prepaid market than handset subsidies. Very few people know the contents of the T-Mobile/Virgin Mobile MVNO deal, but I suspect prepaid is now extremely marginal to Virgin Mobile, but of course still extremely profitable for T-Mobile.
I loved the comment in the Sky Basic negotiation from Jeremy Darroch, BSkyB's CFO, that the cost for the Sky channels was the same as Virgin Mobile was charging for an on-net text message. The truth is that Virgin Mobile doesn’t own a network and 3p is probably more or less what Virgin Mobile are handing over to T-Mobile for every text message.
Intriguingly, Virgin Mobile do not release churn figures despite them being a major target for the old ntl and telewest operations. All I can say is that they must be really, really bad. It was also noticeable that an old buddy of the Chairman’s from the Nextel days has been brought in to run Virgin Mobile.
Again and again on the call, the Chairman and CEO placed the emphasis on contract sales especially the Quad Play. Fair play to Virgin Media and I’m really surprised that they have managed to sell 60k “4 for £40” bundle since its launch on 27th Sept. This is a really good start for a new “converged” product especially when it is compared to the BT Mobile performance in the consumer segment. I’d love to know how many of those are “new” to Virgin customers or are just “old” ntl/telewest customers moving to contracts with better value.
The “4 for £40” bundle was only available from the Virgin Media channels and not third parties. This leaves net sales figures for contracts of around 11k for single play product which I reckon won’t even cover the Kate Moss advertising fees. The “infamous” Carphone Sales Spreadsheet shows that Carphone sold 8,252 Virgin contracts in 2006Q3 so I suppose most of the single play contract sales came from the Carphone channel. Even more interesting was that from Apr ’05 to Apr ’06, Carphone managed to sell 71,943 new contracts for Virgin Mobile. In other words, the absolute volume of single play contracts has probably gone down as well.
Under the new Virgin Media the standalone Virgin Mobile business seems to be falling apart.
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