Mobile services

SmarTone Profits Soar on Smartphone Sales

Hong Kong mobile operator SmarTone has benefited from a huge increase in net profit in its recent financial year thanks largely to booming sales of smartphones and device accessories.

The smallest of the country's four mobile network operators, SmarTone Telecommunications Holdings Ltd. (Hong Kong: 0315) saw net profit rise by 74% in the year ending June 30, to 935 million Hong Kong dollars (US$121 million), compared with the preceding 12-month period.

Revenues were up 41%, to HK$18.6 billion ($2.4 billion), over the same timeframe: Although service revenues edged up just 3%, to HK$5.6 billion ($720 million), equipment sales grew by as much as 67%, to HK$13.1 billion ($1.7 billion).

SmartTone witnessed a 47% increase in the sum total of cost of inventories sold, staff costs and other operating expenses, but its bottom line was helped by a fall in depreciation and amortization expenses.

The operator also reported a 4% increase in its customer base, claiming to serve 1.96 million subscribers in June.

During an earnings presentation, executives said that customers were increasingly migrating from plans that bundle device costs with service charges to so-called SIM-only deals, putting average revenue per user (ARPU) under some pressure.

The migration to SIM-only plans also explained the fall in overall depreciation and amortization expenses compared with the earlier financial year.

"When customers move, it affects the nominal reported ARPU figure, but has little impact on margin and profitability," said Patrick Chan, SmarTone's executive director. "The nominal figure may be steady but net ARPU has been increasing in the past 12 months."

Chan said that service revenue net of handset subsidy amortization was a better measure of the operator's recent underlying performance than headline ARPU.

While service revenues rose by just 3% in the recent financial year, they were up by 7% net of handset subsidy amortization, according to SmarTone's calculations.

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Responding to questions about the imminence of price increases in what remains a fiercely competitive market, Stephen Chau, SmarTone's chief technology officer and interim CEO, said there was "still a need for further tariff adjustment" and that "cost pressure" would remain very high in the immediate future.

SmarTone does not provide specific guidance for sales and profitability, but Chau expects service revenues to continue growing steadily in 2016.

But he is less optimistic about the outlook for handset sales. "Last year was a windfall … a bonus year," he told analysts. "In 2016 there will still be handsets that are popular but it's unlikely they will be as popular as in 2015 and so management is not expecting as strong a handset business in 2016."

SmarTone issued much firmer guidance on capital expenditure, indicating it expects to invest between HK$650 million ($84 million) and HK$700 million ($90 million) in this area in the 2016 financial year.

The operator spent HK$680 million ($88 million) on capex in the 12 months to June 30, down from HK$935 million ($121 million) in the preceding 12-month period, when it was investing heavily in the rollout of its 4G network.

A fall in prices charged by equipment vendors also helped SmarTone to reduce capex in the recent financial year.

SmarTone competes against HKT Ltd. , China Mobile Hong Kong and Hutchison Whampoa Ltd. (Hong Kong: 0013; Pink Sheets: HUWHY)-owned 3 Hong Kong in the country's mobile market.

Following its takeover of rival CSL in May 2014, HKT now claims to serve about 4.65 million subscribers, while CMHK and 3 have around 4.3 million and 3.8 million respectively.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

Mitch Wagner 9/2/2015 | 5:06:20 PM
Re: Windfall year The 6S (assuming that's what it's called) should be an attractive device. But Apple follows a tick-tock model for iPhone deliveries. Whole-number releases like the 6 deliver new features and a new design, and the following year's releases (like the one coming up next week) deliver performance improvements and polish. 

So I'm not expecting the 6S to be hugely different from the 6, but it should be enough to keep Apple from losing ground. And the 2016 model will be a big upgrade. 
iainmorris 9/2/2015 | 12:32:11 PM
Re: Windfall year He didn't mention specific handsets when talking about last year's sales although I suspect he meant the Apple devices, yes. He was asked about his expectations regarding the iPhone 6S and said he thought it would be a big seller this financial year.
Mitch Wagner 9/2/2015 | 11:44:09 AM
Windfall year 2015 has been a windfall year for handset sales, driven by popular models? Interesting. Which handsets does he see as driving the most demand? iPhone 6/6 Plus?
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