Carphone Still Struggling
I know this must sound slightly weird, but I actually felt quite sorry for Charles Dunstone on today’s rapidly arranged Carphone Warehouse (cpw) conference call. He definitely sounded subdued and the tone of the analysts whilst not quite hostile has definitely moved away from the sycophantic nature of previous calls.
Mind you, I’d struggle to sound enthusiastic if I had to kick off the week by knocking off £20-£30m of 2007/8 profits which according to the consensus of 15 analysts should come in at around £255m. This is now the second revision in 6-months after the Oct £20m increase in broadband startup losses.
It is also obvious that last week wasn’t particularly nice for Dunstone with the share price dropping around 10% with all sorts of rumours flying around the market. The early release of this mornings trading statement is probably an attempt to quieten down the gossip in the market.
On the retail front, there were a couple of questions about expected revenue growth in 2007/8, which were answered in terms of modest like-for-like growth and connection growth being approximately equal to expected store growth of 15%. In other words the questions were side-stepped. I know “like-for-like” revenue growth is the archetypical retail metric, but I’m not sure how relevant this metric is for cpw on a go forward basis. For instance, if the operators cut hard the level of commissions, then cpw could just reduce the amount of cashback they pay the customers or not bundle free gifts in the package and then gross margins could remain the same. For me, absolute gross margin growth is the key underlying metric for the retail business.
Another important metric for retail is the length of contracts on the market and despite Dunstone proclaiming that customers don’t like 18 month contracts, this rings a little hollow to me, especially given that talktalk offer 18-month contracts for their voice and broadband bundle. On a brighter note, there is a little experimentation starting in the marketplace with the Virgin Mobile 6-month contracts and the Vodafone and O2 airtime only packages. I also see the forthcoming market assault of monthly flat rate all you can eat mobile internet packages as another opportunity for cpw.
Personally, I think that there is a very different retail opportunity emerging to the traditional “pump and dump” lowest tariff with a handset thrown in to “seal the deal” model of the past. Historically, cpw has always been the market innovator and I see no reason why they can’t be the innovator again in the future. Another factor running in cpw’s favour is the more complex and diverse the mobile packages become, the more important and valuable an independent advisor becomes, even one with their reputation a little tarnished.
On the broadband front, I just can’t see any redeeming features in the marketplace for cpw. It seems to me that cpw still admits to problems in provisioning and support 12-months post-launch. Although, the rollout of the network equipment in the exchanges is progressing to plan, I can personally testify that cpw still has network reliability and performance issues.
The comment on dslams was also slightly strange: dunstone saying that partial unbundling of the aol base could not be routed through the huawei dslams and instead could only be served from the fujistu dslams. I’m sure at the time of the purchase of aol, dunstone said this was possible. I’m assuming given the other problems that they are taking a “minimal risk” approach and that it is a just a dslam configuration issue. This will account for the reason that so few aol customers have been partially unbundled. It also gives hope that if executed correctly there is plenty of opportunity for margin improvement on the aol base in moving from ipstream to partial unbundling.
The comment on customer churn also made me laugh – “after the initial 2-3 month provisioning period, the monthly churn is around industry levels of 1%”. Is this a joke? The entire TalkTalk almost free broadband base is still within the initial 18-month contract. So we are talking, 15% leaving during the contract, much higher figures exiting during provisioning say 5-10% which will leave around 75%-80% who serve out their talktalk sentence. Obviously, there is a huge potential for churn in the final 6-months of 2007/8 - time will tell and the clock is ticking.
The cps voice only base is down to 1,860k from 2,570k a year ago, which equates to a monthly net loss of 2.3% - this is not the churn figure which is probably much higher and takes monthly gross adds out of the equation. I’m amazed how quickly this base is disappearing. The same goes for the dial-up base which is down to 505k from 575k a quarter ago. These should be the elements of the division which are driving the profits forward as the sac’s and initial high customer hand holding should have been long past and therefore the customers are theoretically highly profitable on a cash-basis.
Unfortunately for cpw, I don’t think broadband pricing has yet bottomed out and there is plenty of room for Sky, Virgin Media, BT, Orange and o2/Telefonica to cause further pressure on the margins and even more expensively take broadband to the next level with video services which will make the TalkTalk offering looking rather staid. I reckon that alone Sky is 1 million subscribers sub-scale on the LLU front (1,500 exchanges @ 1k subs on average) and that is before the mobile operators. At current pace, I estimate there is at least three years price competition going forward before things settle down. And that doesn't take into account the cost of new technology deployment such as the reconfiguration for the bt 21cn and potentially pockets of FTTH, especially in the built up city centres.
And all that is without a commentary on other problem areas such as:
And that in a nutshell is why I think cpw shares are still vastly overpriced...
Mind you, I’d struggle to sound enthusiastic if I had to kick off the week by knocking off £20-£30m of 2007/8 profits which according to the consensus of 15 analysts should come in at around £255m. This is now the second revision in 6-months after the Oct £20m increase in broadband startup losses.
It is also obvious that last week wasn’t particularly nice for Dunstone with the share price dropping around 10% with all sorts of rumours flying around the market. The early release of this mornings trading statement is probably an attempt to quieten down the gossip in the market.
On the retail front, there were a couple of questions about expected revenue growth in 2007/8, which were answered in terms of modest like-for-like growth and connection growth being approximately equal to expected store growth of 15%. In other words the questions were side-stepped. I know “like-for-like” revenue growth is the archetypical retail metric, but I’m not sure how relevant this metric is for cpw on a go forward basis. For instance, if the operators cut hard the level of commissions, then cpw could just reduce the amount of cashback they pay the customers or not bundle free gifts in the package and then gross margins could remain the same. For me, absolute gross margin growth is the key underlying metric for the retail business.
Another important metric for retail is the length of contracts on the market and despite Dunstone proclaiming that customers don’t like 18 month contracts, this rings a little hollow to me, especially given that talktalk offer 18-month contracts for their voice and broadband bundle. On a brighter note, there is a little experimentation starting in the marketplace with the Virgin Mobile 6-month contracts and the Vodafone and O2 airtime only packages. I also see the forthcoming market assault of monthly flat rate all you can eat mobile internet packages as another opportunity for cpw.
Personally, I think that there is a very different retail opportunity emerging to the traditional “pump and dump” lowest tariff with a handset thrown in to “seal the deal” model of the past. Historically, cpw has always been the market innovator and I see no reason why they can’t be the innovator again in the future. Another factor running in cpw’s favour is the more complex and diverse the mobile packages become, the more important and valuable an independent advisor becomes, even one with their reputation a little tarnished.
On the broadband front, I just can’t see any redeeming features in the marketplace for cpw. It seems to me that cpw still admits to problems in provisioning and support 12-months post-launch. Although, the rollout of the network equipment in the exchanges is progressing to plan, I can personally testify that cpw still has network reliability and performance issues.
The comment on dslams was also slightly strange: dunstone saying that partial unbundling of the aol base could not be routed through the huawei dslams and instead could only be served from the fujistu dslams. I’m sure at the time of the purchase of aol, dunstone said this was possible. I’m assuming given the other problems that they are taking a “minimal risk” approach and that it is a just a dslam configuration issue. This will account for the reason that so few aol customers have been partially unbundled. It also gives hope that if executed correctly there is plenty of opportunity for margin improvement on the aol base in moving from ipstream to partial unbundling.
The comment on customer churn also made me laugh – “after the initial 2-3 month provisioning period, the monthly churn is around industry levels of 1%”. Is this a joke? The entire TalkTalk almost free broadband base is still within the initial 18-month contract. So we are talking, 15% leaving during the contract, much higher figures exiting during provisioning say 5-10% which will leave around 75%-80% who serve out their talktalk sentence. Obviously, there is a huge potential for churn in the final 6-months of 2007/8 - time will tell and the clock is ticking.
The cps voice only base is down to 1,860k from 2,570k a year ago, which equates to a monthly net loss of 2.3% - this is not the churn figure which is probably much higher and takes monthly gross adds out of the equation. I’m amazed how quickly this base is disappearing. The same goes for the dial-up base which is down to 505k from 575k a quarter ago. These should be the elements of the division which are driving the profits forward as the sac’s and initial high customer hand holding should have been long past and therefore the customers are theoretically highly profitable on a cash-basis.
Unfortunately for cpw, I don’t think broadband pricing has yet bottomed out and there is plenty of room for Sky, Virgin Media, BT, Orange and o2/Telefonica to cause further pressure on the margins and even more expensively take broadband to the next level with video services which will make the TalkTalk offering looking rather staid. I reckon that alone Sky is 1 million subscribers sub-scale on the LLU front (1,500 exchanges @ 1k subs on average) and that is before the mobile operators. At current pace, I estimate there is at least three years price competition going forward before things settle down. And that doesn't take into account the cost of new technology deployment such as the reconfiguration for the bt 21cn and potentially pockets of FTTH, especially in the built up city centres.
And all that is without a commentary on other problem areas such as:
- the german (phonehouse) and uk (fresh) mvno market where margins seem to be under pressure at the other mvno's who report on a more frequent basis; and
- potentially the disruption occuring in the european handset trading market, where HMRC is causing a lot of cashflow problems to both minor and major players.
And that in a nutshell is why I think cpw shares are still vastly overpriced...
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