October 21, Videocon d2h Q2 FY 2016 Earnings Conference Call ANALYST: - PDF

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Videocon d2h Q2 FY 2016 Earnings Conference Call ANALYST: MR. VIKASH MANTRI ICICI SECURITIES LTD MANAGEMENT: MR. SAURABH DHOOT EXECUTIVE CHAIRMAN VIDEOCON D2H MR. ANIL KHERA CHIEF EXECUTIVE OFFICER VIDEOCON D2H MR. ROHIT JAIN DEPUTY CHIEF EXECUTIVE OFFICER VIDEOCON D2H MR. AVANTI KANTHALIYA CHIEF FINANCIAL OFFICER VIDEOCON D2H MR. NUPUR AGARWAL HEAD INVESTOR RELATIONS VIDEOCON D2H Page 1 of 19 Good day ladies and gentlemen, good day and welcome to Videocon d2h Q2 FY 2016 Earnings Conference Call hosted by ICICI Securities Limited. As a reminder all participant lines will be in the listen only mode and there will be an opportunity for you to ask the questions after the presentation concludes. Should you need assistance during the conference call please signal an operator by pressing * then 0 on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Vikash Mantri from ICICI Securities. Thank you and over to you Sir! Vikash Mantri: Good morning everybody. We at ICICI Securities pleased to host the Q2 FY 2016 results conference call of Videocon D2H. We have the senior management of the company with us represented by Saurabh Dhoot, the Executive Chairman, Mr. Anil Khera, the CEO, Rohit Jain, the Deputy CEO, Avanti Kanthaliya, the CFO and Nupur Agarwal, who heads the investor relation. Over to you Sir for initial remarks! Thank you all for joining the call. Thanks Vikas for hosting a call today. Our board members, management team and I welcome you all on a results call for the quarter ended September I am happy to report that in the second quarter of fiscal 2016, we continued to successfully execute on the plan which we had previously shared with you. Specifically we have achieved an EBITDA growth of over 30% in the first half of the current fiscal year over last year. This is against a guidance of 25 to 30% growth. While we are pleased with the results in the context of Q2 being a seasonally slow quarter, we are particularly excited about the uptick we are seeing in October so far and we are on track to deliver even stronger growth in the second half of this year in line with the guidance shared earlier. For the quarter, we achieved the following. Q2 FY 2016 subscription and activation revenue grow almost 25% year-on-year to INR6.29 billion. Total revenue from operations grew 20.3% year-on-year to INR6.90 billion, adjusted EBITDA grew 32.3% year-on-year to INR1.91 billion, adjusted EBITDA margin expanded by 250-basis points year-on-year to 27.7%. ARPU grew 7.9% year-on-year to INR205, gross and net subscribers increased by almost 0.6 million and 0.2 million subscribers respectively during the quarter. Net loss for the quarter came in at INR24.6 million which is a 60% improvement over Q2 FY Effective September first 2015, we had raised package prices by Rs.12 to Rs.23 on different pack level. We believe the effect of this will be visible in Q3 FY 2016 ARPU as we continue to track towards the annual guidance. We believe ARPU should continue to grow led by package price increases, improving HD mix and value added services. We clearly speak cable companies are also raising prices for the digital offering as analog cable is Page 2 of 19 switched off and a carriage revenues for them continue to come under pressure. More than 30% of new subscribers continue to take HD packages which are clearly very encouraging. Subscriber growth remains very strong for pay TV in India. We have added an incremental 1.2 million subscribers during the first half of this fiscal. We have consolidated our leadership position with the highest incremental market share in the industry as we have continued to do that in the past four years and we are on track to achieve the overall growth trends laid out by us. We expect years of organic growth ahead of us which digital subscriber based doubling from the current 18 million homes in the next five years in India partly driven by the Indian government digitization mandate for 70 million analog homes as well as let us say around million new pay TV homes which will be created as a result of the strong growth of the Indian economy. This is the unique 100 million connections opportunity for digital pay TV in the coming five years unlike any where else in the world unique to India. Many analysts forecast more than 10 million new DTH homes per year for the foreseeable future. DTH already having more than 70% of the digital pay TV homes in phase III and around 95% of the digital pay TV homes in phase IV makes our industry quite exciting and Videocon D2H expects to continue to lead the market in terms of net additions as we have done again over the last four years consistently. I will talk about some of the new initiatives which we have been planning the next few quarters. New channel service launches we believe are higher bandwidth and focused to offer more and more regional channels has been one of our key competitive advantages to further strengthen such channel offering, we continue to add more and more regional channels to our platform. Improving our HD channel offering has been a clear focus area for us given a technological edge. Your company continues to add more and more proprietary services for our customer base. We are pleased to announce that we have launched our proprietary Hollywood HD service with close to 300 blockbuster movies. This is exclusively for a subscriber base and a subscription driven service. This we expect to gain traction coming quarters like our successful Bollywood subscription service. Your company also launched a devotional service recently called Dharsan which is also driven by subscription. So to sum up in the past six months we have added five proprietary services including the recently launched Hollywood HD and a devotional service, 27 new standard definition channels operated by the broadcasters, 8 new high definition channels operated by broadcasters. We plan to even strengthen our 4K content offering. We are one of the only two who have a 4K offering in the market. With this intention we have been identifying content for our 4K service and have some success in this front in the past quarter. Page 3 of 19 We believe the 4K service gives us the unique marketing position to attract the up market and high end customer. Our 4K channel will continue to be a multi genre pie which wills premier leading Hollywood and Bollywood films, showcase live event such as FIFA, Cricket World Cup and also breathtaking lifestyle infotainment content. We also have a focus on TV everywhere in OTT. As we have shared earlier we rolled our TV everywhere services for our subscribers. We are continuing to strengthen this offering in line with our overall focus on OTT market space in India. We intend to strengthen our TV everywhere service offering in two ways. We currently offer around 90 channels in the past few quarters we have been securing digital rights for the content wherever possible. We now plan to add more channels with this. We also planned to build a VOD library around films and kids related content for our mobile app. This will again be exclusively offered to our existing subscriber base only. On an overall perspective the active engagement on various platforms is currently very low in India with regards OTT. Clearly poor broadband infrastructure, high data cost being multiple times higher than what pay TV cost are clear challenges to OTT which is not the case for developed world. Particularly we also believe this will gradually improve in the medium-to-long term through wireless technology also given Indian OTT market space is expected to be dominated by consumption on smart phones, TV everywhere and other OTT services will have an interesting business model in future but overtime. We are monitoring this space closely and will plan our moves accordingly. I am pleased to share that our ad sales team is gaining traction ahead of our expectations and many marquee brands have started advertising with us. This includes Pepsi, Unilever, Facebook, Volkswagon, Skoda and many more. We believe this is the effect of having a strong network of 50 to 60 million eyeballs on a daily basis and this continues to grow even further. Moving on to guidance for the current fiscal year, we reiterate our EBITDA guidance of at least Rs.8.2 billion for the current fiscal year ended March 2016 with guidance increasing up to Rs.8.6 billion if digitization proceeds on a faster side of expectation. This range has provided previously is based on various estimates for timing and pace of digitization. This range represents approximately a 40% to 45% EBITDA growth over H2 compared to last year H2. We reiterate our prior guidance and ARPU growth and second half subscriber growth exceeding the first half regardless of timing and pace of digitization. We continue to expect Page 4 of 19 that we lead the DTH industry in terms of incremental growth as we have been has been the case in the previous several years. I am also delighted to announce the shareholder approval for the appointment of Mrs. Geetanjali Kirloskar on our boards subjective to regulatory approvals. We really welcome her and she comes with immense knowledge and experience in the fields of advertising branding and media. I believe the vast experiences of her bring our table of great advantage to the company. We are hosting a group investor update and reception on Thursday October 29, 2015 in New York. I request you to please register for the event on our website or let our investors been know if you can attend this in person. I really look forward to meeting some of you all at the event on that day in New York. Thank you so much. I hand over the call to our CEO Mr. Khera for a business update. Thank you Mr. Saurabh Dhoot. I just take into few transition processes. According to our internal estimates there are 130 million TV homes under phase III and phase IV digitization. Out of this 130 million 40 million homes are already on DTH platforms and around 8 million on digital cable. There are nearly 70 million analog homes and 12 million government free dish. Over and above this we estimate where there are an additional 25 to 30 million new TV homes that would get added in the next four to five years. This leads to a target market of 100 Million subscribers and that would subscribe to digital platform in next four to five years. Now if we look at phase III digitization alone the deadline for this is December 31, We believe there are around 50 million homes that come under phase III digitization of this 50 million homes around 25 million TV homes are already on digital platform so about half the homes with phase III have already moved to a digital platform which makes migration for the rest of the market easier with this critical market place already. This includes 17 million homes that are all DTH platforms are almost 70% on digital migration today. So that leaves the target analog homes of around 25 to 26 million that comes under phase III digitization. We believe DTH industry should continue to gauge substantial market share and phase III digitization covered areas. We continue to see positive approach and intent from government towards digitization agenda. A top most for the earlier setup monitoring progress of digitization, in my regular interaction with various operative in my capacity of Videocon B2C or as well as DTH Association President, I feel positive about traction so far. As a deadline phase III the Page 5 of 19 digitization is approaching a very constructive step is the joint awareness campaign that has been started by the broadcasters in the past few weeks. This advertisement about digitization is running on top channels in India. We believe this is a significant positive development and we are excited and fully prepared to benefit from this one time subscriber land rate. I am also happy to share that Q3 has been a terrific start in terms of subscriber addition having said this we continue to believe this would be a process that is the implementation is likely to happen in the phased manner. We are sufficiently geared up in terms of inventory to cater immediate spurt in demand as the digitization deadline approaches. We currently having well over one million set top box in inventory and can source an additional one million set top box on very short notice from our vendors given a domestic manufacturing. While the deadline is another year away, there is already substantial migration to digital platform for phase IV with over 95% or 23 million homes go into DTH voluntarily. I would also like to talk about two key marketing initiatives that we have started. We have extended our Rs.99 pack to all India which was earlier available only in the regional language driven market in nine states. Effective October 13, 2015 this pack offers around 143 to air channels. In order to target subscriber in areas those come under phase III and phase IV where analog cable is very, very cheap we have tailor-made packages so as to enable consumer to switch analog cable to DTH network. We are also targeting the consumers that are currently on the government free dish services. The intention of launching this pack is to expand the market organically. This pack targets first time DTH users to sample our services given the limited content provided in this pack gross margins in these packs are very healthy. The idea is to acquire customer at a lower entry pack and let us offer them pay channel as part of upgrade or add on pack. For example we are also providing an additional pack of Rs.86 over and above Rs.99 which offers 14 Hindi entertainment channels and pay channels in regional language of their choice. This will enable us to expand the footprint in phase III and phase IV market. We are now focusing on upgrading our existing customer to high definition especially higher end standard definition customer to high definition. We expect to see good result out of this in the coming quarters. I would like to reiterate that this marketing initiative will not be a margin dilutive in our view. With this I now hand over call to Mr. Rohit for a financial updates. Thank you so much. I am pleased to share our results for the quarter in detail. The total revenue grew 20.3% year-on-year to Rs.6.9 billion. Subscription and activation revenue grew 24.6% year-on-year to 6.29 billion. Carriage revenue grew 33% year-on-year to 196 Page 6 of 19 million. Ad revenue came in at Rs.109 million as against 14 million in the base quarter and balance 306 million is the other revenue. Adjusted EBITDA grew 32.3% year-on-year to 1.91 billion. This is after adjusting for ESOP expenses to the tune of million. I am happy to share that H1 EBITDA grew 30.3% year-on-year. This is slightly ahead of guidance of 25% to 30% growth. Adjusted EBITDA of margin expanded 250 basis points year-on-year to 27.7% for the quarter, this is despite the higher content cost in the base quarter. Fixed cost as a percentage of revenue declined from 17.6% in Q2 of the fiscal 15 to 15.6% in this quarter. Net loss came in at 246 million. This is a significant 60% improvement over the same quarter last year. We have added 0.57 million gross subscribers and 0.2 million net subscribers in this quarter. We closed the quarter with the total of million gross hubs and million net hubs. Churn for the quarter was 1.19% given the impact of seasonality with H1 churn level at 0.84%, we remain in line with our estimate of approximately 10% churn for the full year. Hardware subsidy declined to 1775 per subscriber during the quarter. With this our subsidy has come down by almost Rs.100 in this current fiscal year which is in line with the guidance base provided at the beginning of the year. The capex for the Q2 was Rs.2.46 million. This is primarily relating to the set top boxes. Capex was relatively high in this quarter as we are building up the set top box inventory ahead of the festive season and digitization phase III. As of September 30 we had a gross debt of billion and total cash and short-term investments of 8.75 billion. Net debt essentially remained flat at the levels of Q1. As we shared in a last call during the quarter, the condition for the first half performance driven earn out was met as a result 7.19 million ADS and ADS equivalent will be issued to the founder and silver eagle sponsor taking up our total ADS count to million. We have received the shareholder approval for the same. This is now pending the MIB approval for the final process to be accomplished. With this we finish our opening remarks and open the floor for questions. Ladies and gentlemen we will now begin the question and answer session. The first question is from the line of Jai Doshi from Kotak Securities. Please go ahead. Good morning and thanks for the opportunity. This question is around the million opportunity that you are seeing for phase III now when we look at MIB numbers they are sort of indicated that the TV households for phase III is about 38 million and the number Page 7 of 19 that you are suggesting is something that even some of your peers have been talking about, just wanted to understand if you have been able to figure out where is the gap and what is the disconnect between MIB number and your estimates? The MIB estimates the figures which they have published is as per the sensex report 2011 and after that the consumer electronic industry has added many TV homes so we have taken that into account and also the multiple television ownership we have taken that also into account and that is how our figures are slightly more brighter than what is announced by the MIB. Right, so according to your estimates its about 50 million pay TV homes in phase III markets? Very true. Of which I think you mentioned 25 are already digital, which would largely be DTH, is that correct? DTH as well as digital cable, out of which 17 millions are DTH and around 8 million are digital cable. Understand. But this is purely phase III and not the contiguous areas which technically may fall under phase IV but are you factoring in that as well? We have factored in only phase III, only phase III towns which list has been published by the MIB. Thank you and one more question, your net subscriber additions in this quarter are a little tad weaker than what you sort of been delivering for the past few quarters, so just want to understand that this is the sort of industry phenomenon or may be specific to you and how do you see the overall market? I am aware that gross subscriber relations are somewhat similar to the previous quarter? The net addition for H1 is 0.66 million have been a bit lower than the historical trend but this has the factor of seasonality build into this. But with the festive season ahead of us a rich cricket calendar which has the World Cup T20 taking place in India and obviously the big digitization phase III opportunity, we expect the second half of the year to be very strong. Our expectation is Q3 also given the kind of charge we have seen in October is likely to be much stronger than the historical numbers. Overall we remain on track for a strong ethical growth of almost 40% for H2. Page 8 of 19 Thank you so much and all the best for the coming quarters. The next question is from the line of Yogesh Kirve from B&K Securities. Please go ahead. Yogesh Kirve: Thanks for the opportunity. I wanted to ask our content cost has increased quite sharply in FY 2015 and also in the first half of this year and also if we look at in absolute terms of our content cost seems to be quite higher than the listed peer, so any comments on that and when could we see the increase in the content cost to taper off, as I am sure there will be lot of the fixed cost deal with the broadcasters as well? So we have guided for approximately 37% content cost for the year as against 38.4% last year. If we look at H1 our content cost for H1 has
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