Dialog Axiata heading for strong recovery

29th Jul 2010, 5:04 pm by Ajit Perera
Dialog Axiata heading for strong recovery

The recent reforms implemented by the telecoms regulator to ensure minimum tariffs and interconnection fees in particular and the ongoing recovery in the broader economy in general are expected to benefit Sri Lanka’s incumbent telecoms operator, Dialog Axiata PLC (Dialog) significantly, enabling the company to return to healthy financial profitability in 2010. In addition, Dialog has also implemented an aggressive cost rationalisation/rescaling programme, enabling its EBITDA (Earnings before Interest, Taxation, Depreciation and Ammortisation) margin to improve commencing the first quarter of 2009, lifting the group’s returns on capital and equity.

Quadruple bundle offering of telecommunications and infotainment services. Dialog is one of two telecoms operators in Sri Lanka that offer a quadruple bundle of telecommunications and infotainment services i.e. mobile telephony, fixed line telephony, broadband Internet and television media. The Dialog group now provides GSM (Global Standard for Mobile) mobile telephony, CDMA (Code Division Multiple Access) fixed wireless telephone services, HSPA (High Speed Packet Access) mobile broadband internet connectivity, Wi-Max (Worldwide Interoperability for Microwave Access) fixed wireless broadband internet access and satellite based pay television services. In addition, Dialog also operates one of the most sophisticated telecommunications infrastructure networks in the country, offering access to other telecoms operators as well.

The Dialog group now comprises the following business units.

Owned and managed by Axiata Group Berhad. Dialog is 83% owned by Axiata Group Berhad (formerly the Telekom Malaysia Group [TM]) through its international investment arm, Axiata Investments (Labuan) Limited (Formally TM International (L) Limited). Dialog was incorporated as MTN Networks (Pvt) Ltd. in 1993 as a joint venture between Axiata Investments and a Sri Lankan diversified group with commercial operations commencing in 1995. In November 1996, the local promoter divested its stake to Axiata Investments making Dialog a fully owned but indirect subsidiary of Axiata.

Axiata has transferred significant management expertise to Dialog, inclusive of secondment of highly experienced staff from Malaysia, provision of training facilities, skills development by way of posting Sri Lankan staff to its global business units etc. In addition, Dialog also benefits from Axiata’s technological expertise, lower costs of hardware, software and content purchases and access to international telecoms infrastructure etc.

First billion dollar company in Sri Lanka. In July 2005 Dialog was listed on the Colombo Stock Exchange (CSE) via an Initial Public Offering of 712.3 million shares. The IPO of LKR 8.6 billion (made up of an offer for sale by TM amounting to LKR 5.1 billion and offer for subscription by prospectus of LKR 3.5 billion) was over-subscribed by six and a half times and is to-date the largest on the CSE. Upon listing amidst significant investor interest, Dialog became the first company on the CSE to cross the elusive US dollars billion mark in market capitalisation.

Undisputed leader in telecommunications market. Dialog is Sri Lanka’s leading telecommunications services provider with a share of approximately 38% of the composite telephony market (which comprised of 871,248 fixed wire-line, 2,559,560 fixed wireless and 13,949,761 mobile connections at end 2009). In the mobile telephony segment, which accounts for 80% of total market size, Dialog is the undisputed leader with a share of 46% (based on the number of activated SIM cards). However, Dialog commands a higher 57% share of the revenues of the mobile telephony market as it is estimated that 30-35% of activated SIM cards are used by one and the same individual.

‘Inclusive’ approach to market. Dialog’s industry leadership has been achieved by transforming mobile telecommunications from its ‘exclusive’ positioning in 1995 to that of ‘inclusivity’ i.e. making mobile telephony services an affordable commodity, accessible to all sections of society. This ‘inclusive’ approach, backed by innovative pricing, product/service offerings (characterized by minimum entry costs and usage commitments) and technological innovation, spearheaded by very savvy marketing have enabled Dialog to activate and dominate previously untapped market segments. This so called ‘Blue Ocean Strategy’ of Dialog enabled Sri Lanka’s telecom industry to grow rapidly over the past decade, forcing other telecommunications service providers to upgrade product/service quality/offerings to stay in business.

Technological innovator/leader par excellence. Dialog has also been a trailblazer in the entire South Asian region being the first to introduce the latest mobile telephony and broadband internet technology to the market, be it GSM telephony, GPRS (General Packet Radio Service) internet access for mobile telephones, Wi-Max broadband internet services, 3G (Third Generation) and 3.5G mobile communications and HSPA/HSPA+ (High Speed Packet Access) mobile broadband internet services (HSPA+ supports downlink speeds of up to 28.8 Mbps [Mega bits per second]). Thanks to Dialog, Sri Lanka now boasts of one of the most sophisticated telecommunications industries in the region, perhaps on par with many developed nations.

‘Dialog’ brand is household name. It would not be an understatement that Dialog almost single handedly transformed the telecommunications industry in Sri Lanka, by its ‘inclusive’ approach to the market making the mobile telephone an easily accessible/affordable communication device – and in doing so improved the quality of life of the vast majority of the population, especially at the bottom of the income pyramid. The ‘Dialog’ brand is now one of the most widely recognised in the country and is a household name even in distant rural villages. Well established brands are a significant asset in Sri Lanka’s consumer market place as customer loyalty once earned is not easily swayed by competitors.

First mover in Value Added Services introduction. Dialog has a strong track record of being the first to introduce a multitude of voice and non-voice Value Added Services (VAS) to the mobile telephony market. In fact, the early adoption of the GSM technology platform with its ability to provide VAS, back in 1995, was a crucial milestone that enabled Dialog to leapfrog from being the last entrant in the mobile telecoms industry to market leadership by 2000. The company was the first to introduce call conferencing, video conferencing, SMS (Short Messaging Services), MMS (Multimedia Messaging Services), Automatic International Roaming (covering 211 destinations encompassing 530 networks), mobile telephony internet (using GPRS, EDGE [Enhanced Data Rates for GSM Evolution], HSPA and HSPA+ technology), mobile telephony e-mail services, Blackberry services, M (mobile) Commerce applications, video calling services, mobile streaming television, in-flight calling services (in partnership with Aero Mobile), ocean cruise liner calling services (on vessels operated by 24 cruise liner operators) etc. Further to providing additional revenue streams, the continuous introduction of innovative VAS has enabled Dialog to maintain and grow its market dominance, especially in the post-paid/high ARPU (Average Revenue Per User) segment.

Extensive network coverage and infrastructure. Underpinning Dialog’s market dominance is its vast base station/infrastructure network, which provides mobile telephony service coverage of approximately 80% of the land mass of the country and 90% of the populated areas. Dialog currently has 3330 base stations (of which 2600 are 2G and 730 are 3G) on 1700 sites. The company has always led the industry in geographical service coverage, venturing boldly into new territories where rival operators have been reluctant to go. In fact, following the end of the armed conflict in the northern and eastern provinces in May 2009, Dialog was the first telco to expand operations in the region, doing so within 90 days. The company now has 159 sites (with 300 base stations) in the northern and eastern provinces – having invested USD 10 million in 2009 – and is likely to expand its footprint further.

In 2009, Dialog modernised its core mobile telephony infrastructure by migrating to an IP (Internet Protocol) based 100% Next Generation Network (NGN) from its legacy Time Division Multiplex (TDM) architecture. In addition to lowering operating costs, the NGN will enable Dialog to expand subscriber capacity and also offer advanced features/services and capture convergence opportunities.

Dialog’s telecoms service coverage areas

Vast distribution network. Dialog has also assembled one of Sri Lanka’s largest distribution/dealer networks operated primarily by 10 exclusive business partners. Dialog’s dealer network has established points of presence for its products and service in all major towns and cities in the country, inclusive of the newly accessible northern and eastern provinces. Dialog’s distribution network now comprises of over 42,000 retail outlets, 22 company managed state-of-the-art service centres and over 100 franchised customer service points. This unrivalled distribution network has also made Dialog ubiquitous in even distant rural areas.

Strong Service orientation
. One of Dialog’s key strengths is its sharp focus on customer service/care, which is probably accepted as a benchmark in Sri Lanka’s corporate sector. In fact, from its inception, Dialog developed a corporate culture strongly focused on delivering high quality service/care to all its customers, whether it be low ARPU prepaid subscribers or high end post paid customers and corporates. The company provides 24X7 support to all its services to its customers via person-to-person interaction, web based Chat, e-mail and SMS. Dialog’s service front-end is manned by an 800 strong team capable of providing customer support in all three national languages.

Dialog’s strong service orientation has contributed in no small measure to the company gaining market leadership and staving off competition, in addition to building customer loyalty, enhancing brand image and establishing a strong market presence and ‘presence of mind’ amongst customers.

Marketing mastery. Dialog’s swift ascendancy to the position of market leadership is also largely attributed to its very savvy marketing skills. The company’s marketing team is acknowledged as one of the finest in the corporate sector in Sri Lanka with strong capability in developing new market segments, creating well targeted/carefully differentiated products and services, delivering same with high sales impact and achieving (and in most cases well exceeding) predetermined sales/revenue targets. The strong market presence/acceptance of the ‘Dialog’ brand is also a manifestation of the company’s unrivalled marketing skills. Further, in recognition of its marketing skills, Dialog has won numerous accolades from independent rating institutions.

Fixed wireless telecommunications compliments mobile telephony
. In 2007, Dialog launched fixed wireless telephony services based on CDMA technology and fixed wireless broadband internet access based on Wi-Max technology. These two services are offered through subsidiary Dialog Broadband Networks (Private) Limited DBN and is primarily deployed for enterprise customers as a combined solution. The combined service has also been extended to the household market. At end 2009, DBN had 177,000 active CDMA fixed wireless telephony customers and some 7,000 Wi-Max Broadband Internet subscribers.

Television/media has strong potential
. In December 2006, Dialog acquired Communiq Broadband Networks Limited (CBN), a satellite based telecaster, through subsidiary Asset Media (Private) Limited, which was later renamed Dialog Television (Private) Limited (DTV). DTV holds licences for Television Broadcasting and provision of Pay Television Services. DTV telecasts over 70 local as well as international/regional television channels such as CNN, BBC, Bloomberg, HBO, AXN, ESPN, Discovery, MTV (Music Television) etc. via satellite direct to home, covering the entire country. At end 2009, DTV had a subscriber base of 149,449, which accounted for a share of some 80% of the Pay TV market. Although subscriber numbers are still low, growth should accelerate as household disposable incomes rise.

Unrivalled historical financial performance. Dialog’s almost single-handed development of the mobile telephony market in Sri Lanka enabled the company to record unparalleled levels of profitability over the past decade. From only LKR 0.54 billion in 2000, Dialog’s net income rose by a compound annual rate of 63% to reach a phenomenal LKR 10.1 billion in 2006, probably the highest level recorded by a Sri Lankan corporate.

Dialog’s ‘per minute’ formula. Dialog’s financial success is attributed to its very early adoption of ‘per minute’ performance measures, recognising that the voice mobile telephony service is as much a utility as the legacy fixed wire-line business. Thus, by treating available airtime capacity of the already built network infrastructure as a commodity to be sold, the company maximised profit by maximising revenue. This focus on ‘Revenue per Minute’ (RPM), ‘Cost per Minute’ (CPM) and ‘Profit per Minute’ (PPM) metrics as opposed to its rivals’ concentration on increasing ARPU enabled Dialog to reach out to the lower levels of the income pyramid, thus, growing its market, market share, revenue and profit significantly.

Super profits attract super competition
. In 2007, net income reached LKR 8.9 billion but with a blind tariff war unleashed by rivals in pursuit of new subscribers and eager to replicate Dialog’s financial success, the company recorded a net loss of LKR 2.9 billion in 2008, as prices had to be cut to preserve the subscriber base. In 2009, the full impact of the global credit crisis and a heightened level of conflict in the Northern Province (in the first half of the year) caused a slowdown in economic/business activity in general and impacted Dialog’s sales volumes and acquisition of new subscribers. These, combined with higher operating costs due to inflationary pressure, an increased staff cadre and capacity building, caused the company to record a net loss of LKR 12.2 billion in 2009.

However, half of this loss, amounting to LKR 6 billion, is attributed to a one-off write-off of the legacy high cost core TDM network infrastructure following upgrade to a highly efficient IP based NGN  while a further LKR 3.2 billion was due to alignment of capital inventory/capital work-in-progress and depreciation accounting policies with international best practices.

Dialog’s Annual Group Net Income/(Loss)

2009 a year of housekeeping and rationalising/rescaling costs. Dialog used the economic hiatus in the second half of 2008 and 2009 to put its house in order and to rationalise/rescale costs aggressively in response to the tariff war that left the entire telecommunications industry with considerable losses. Among the key initiatives undertaken by Dialog were;

Upgrading of core mobile telephony infrastructure to a more efficient and lower cost IP based 100% NGN.
Right-sizing of the staff cadre with a Voluntary Retirement Scheme (VRS).

Rationalisation of group organisation structure and more effective utilisation of personnel.

Switch to less costly SIM cards, recharge cards, starter packs, phone accessories, bill printing etc.
Relocation of offices to cheaper premises.

Renegotiation of insurance and office maintenance contracts.

More focused advertising and promotion and ensuring sales impact.

Redirection of capital expenditure to areas with high growth potential such as mobile broadband internet and monetising the current investments to maximise yield.

These measures have already begun to show results with EBITDA and Net income and thus the respective margins improving throughout 2009 and into the first quarter of 2010.

Dialog’s improving quarterly financial performance

Dialog strongly placed to capture emerging growth opportunities. Relentless focus on technology and innovation, an ‘inclusive’ approach to the market, multiple marketing strategies aimed at capturing all segments of the market/income pyramid, extensive network coverage, top notch customer care and service delivery, comprehensive Value Added Services, unrivalled brand equity and marketing communication strategies and a strong management/human resources team have all contributed to Dialog’s success during the past decade and combined with the recent group-wide reorganisation of operations, processes and cost structures, are likely to provide significant competitive advantages to the group in the future.

Dialog has used the economic hiatus in the second half of 2008 and in 2009 to re-focus on its core business of mobile telephony, reorganise non-core operations, restructure/rescale costs, regroup its human resources and fine-tune marketing programmes. The group has emerged much leaner and also hungrier to capture growth opportunities that are emerging in the post conflict era of peace in Sri Lanka that is yet to be charted, most obviously by the likes of Dialog Axiata.

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