Following the PTCL Group’s latest financial results’ announcement, BR Research sat down again with the PTCL chief in Islamabad. The discussion, whose edited excerpts are produced below, focused on the telecom giant’s plans for CY18. It has been nearly two years since Dr. Daniel Ritz joined the PTCL Group as its President and CEO. Prior to that, he worked as Chief Strategy Officer at the Etisalat Group. Before Etisalat, Dr. Ritz served as the CEO of Swisscom Central & Eastern Europe. He started his career with The Boston Consulting Group. Dr. Ritz holds a PhD (magna cum laude) from the Hochschule St. Gallen in Switzerland and was a visiting PhD student at the Harvard Business School.
BR Research: Let’s first talk about the PTCL Company, which provides roughly 60 percent of the group’s revenues. Looking at the CY17 financial results, what is the management’s narrative for its shareholders?
Daniel Ritz: The last time we met – it was somewhere after the 3QCY17 results’ announcement – the PTCL Company had shown a top-line decline of 3 percent year-on-year in 9MCY17. For the full year, as you have seen in the results now, the top-line decline has been contained to 2 percent year-on-year. Revenue drop was 1 percent year-on-year for the fourth quarter. So you can gather where we want to go next. The trend-line is pointing in the positive direction.
Some seventy percent of the company’s revenue base is growing, and the shrinking part of the revenue base, about thirty percent, is further shrinking. Still, we have growing revenue streams and we have declining revenue streams. But the overall revenue dynamics are working in our favour.
BRR: Has there been an improvement in yearly growth of the segments that are expanding their revenue share?
DR: The growth pattern of the important expanding segments is getting better. For instance, a big chunk of our revenue is DSL, which is about a third of PTCL Company’s total revenue. This segment grew by 4 percent year-on-year in CY17. The fourth quarter performance was even better than that figure.
BRR: What is working well for DSL?
DR: We are working on upgrading our top 100 exchanges in a large-scale Network Transformation Programme. That’s working in our favour. Also the fact that DSL is unlimited is a big plus point for PTCL. At the end of the day, it is a lot of hard work to make our network better every day. There is no magic or trick – its focus, dedication and execution that is at work.
BRR: What is the update on the Network Transformation Programme?
DR: It is a huge logistical and human challenge. At the end of December 2017, we had upgraded about thirty out of the hundred identified exchanges. The bulk of them came towards the latter part of the year, so you can see this programme is ramping up over time. The impact of the upgrades wasn’t visible in CY17, but this year we will see more business benefits.
While the programme has gone quite well, we’d have loved to do a bit more in 2017. So if you ask me, ‘are you on track’, I’d say, not fully. This is simply because we have a number of challenges. For instance, many places that we go to we need to dig, and for that we need to obtain the ‘right of way’. Some people have figured out that it’s a good way to make revenue for them, but we are not willing to pay just any price. So, the ‘right of way’ can sometimes become very time-consuming and expensive. The operational engine is working, but there are some things that are not in our control.
BRR: How many upgraded exchanges are you targeting this year?
DR: We are aiming all the 100 exchanges to be up graded by 1QCY19. But again, the progress is coming online over time. The full impact will not be immediately visible, but you will see results by 3QCY19, by when all 100 exchanges will be fully functional.
BRR: Which revenue streams do you see getting impacted by this programme?
DR: The primary one that we are targeting is DSL. But there are two more services that will see the spillover. PSTN – landline – is one of them, because with DSL, we also sell PSTN. Traffic revenues on PSTN are not going to grow, but we will see a positive effect on subscription revenues. The other is IPTV, whose penetration on our DSL line is about ten percent, quite low by international standards. A better fixed network will also help IPTV.
BRR: How motivated is your team on the ground to accomplish the targets?
DR: I have seen a significant change. Seeing is believing! This programme is unprecedented. Now that people see that this is happening and producing results, it is creating a positive momentum within the organisation.
BRR: How has the company’s wholesale business been doing?
DR: Our wholesale business, which is about 13 percent of total revenues, is doing well, with the exception of mobile-to-fixed business. If you strip that one out, carrier wholesale business showed a growth of 8 percent year-on-year in CY17. We are becoming the ‘carrier of carriers’ by partnering with cellular operators. We are building fiber-optic capacity on behalf of cellular operators, who are seeing explosion in data traffic. If there is more 4G and 5G in the future, it is a good opportunity for us on the wholesale side.
BRR: Let’s turn to Ufone, the group’s cellular arm. Its losses have been reduced in recent years but it is still in the red. Will things be any different this year?
DR: It’s a top-line question for Ufone. In a positive-moving trend, Ufone’s top-line decline was reduced to one percent year-on-year in CY17. And in 4QCY17, Ufone actually recorded reasonably-positive top-line growth year-on-year. Ufone has done well in the fourth quarter on the back of increase in subscribers and despite the disadvantage in terms of coverage, scale and spectrum. Also, a TRI’M survey has showed Ufone at number two out of four operators in terms of customer satisfaction.
Ufone has a 32 percent EBITDA margin, which is not bad for a number three or four firm even by international benchmarks. Other operators with a 32 percent EBITDA margin are making a net profit. So for Ufone, it is not the EBITDA, but what happens below. It is the depreciation and amortization, which are quite significant. Ufone needs to attack that. Going forward, we see a positive trajectory for Ufone, too.
BRR: The PTCL stock has been gradually going south in recent years, including in the roughly two years that you have been in charge at the group. Does that slide concern you?
DR: The stock price does matter, but I don’t look at it on a daily basis. Is the price where it should be? No! It is fair to say that we are significantly undervalued, say, in terms of EV/EBITDA.
There are reasons for it. One is the level and quality of our disclosures, which we are working on. We are sitting here and we want to do more of that. So our part is to be more forthcoming in explaining business dynamics, because it’s a complex company with various revenue streams. The other is that the free-float in theory is 12 percent but trading volumes are so thin. When markets are down, PTCL suffers; when markets are up, PTCL doesn’t move much. It has more to do with the market sentiment than with underlying performance.
BRR: You mentioned some operational challenges earlier. Towards the end, what can the federal government do to make doing business easier for telecom operators in this country?
DR: On the strategic level, there has to be a national-level framework for broadband. There has to be a commitment to encourage fiber-optic connectivity in the country. At the tactical level, taxation continues to be a problem. I understand that tax income is important for the government; but broadband consumer sales taxes as high as 20 percent are not helping in terms of affordability and thus widespread adoption. Besides, a clear framework for ‘right of way’ would also help. Depending on where you go, you have so many entities to talk to; and then you have to haggle over price.
BRR: Generally, how do you see the business environment in the country?
DR: The fundamentals are actually very strong. This is a young, growing and tech-savvy population. The basics are in place. There is still a lot to be done and there are many investment opportunities. If you are an investor and have an appetite for risk, Pakistan is a good frontier market.
BRR: This issue doesn’t directly concern the PTCL management. But is there any update on the $800 million PTCL-privatisation dues owed by Etisalat to the Government of Pakistan?
DR: A meeting recently took place between the Prime Minister of Pakistan and an Etisalat delegation. I am not going to comment on shareholders’ matters. But from the PTCL perspective, we have every interest that this matter gets settled one way or another.
More often, the public confuses that PTCL owes the government something. It doesn’t – this is a matter that is actually between the two shareholders. It would help us as a company that this dark cloud goes away. It’s a valuation matter between shareholders, but it’s not something that concerns us.