An interview with President & CEO PTCL Group
Dr. Daniel Ritz is finishing up his three-year term as President and CEO, PTCL Group. He has previously worked as Chief Strategy Officer at the Etisalat Group. Before Etisalat, Dr. Ritz served as the CEO of Swisscom (Central and Eastern Europe). He started his career with The Boston Consulting Group. He 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 sat down with the PTCL Chief in Islamabad and discussed issues relating to the Group’s turnaround in particular and Pakistan’s business climate in general. Edited excerpts are produced below:
BR Research: Latest financial results suggest that you’re leaving the PTCL Group in a better shape. While the group subsidiaries have returned to operating profitability under your watch, it appears that the long-standing top-line problem at the PTCL Company persists: the ‘growing’ revenue streams are barely able to offset the impact of ‘declining’ revenue streams. How do you characterize this complex situation?
Dr. Daniel Ritz: I will put things into perspective. Two events happened around 2015, right before I took charge at PTCL. As I recall, 2014 was the last year when PTCL Company had shown some top-line growth, with a material contribution by the International Clearing House (ICH) regime. When ICH was abolished in 2015, it had significantly negative impact on PTCL financials. And secondly, DSL broadband was growing at the time but when 3G and 4G were launched, the prevailing network and quality of service issues were exposed. All this led to a significant drop in revenues in 2015, which my management team and I were busy addressing ever since. I am happy to report that in 2018, we managed to bring the company back to growth for the first time since 2014.
Keep in mind that the ICH revenue was of very high gross margin, so it’s going away had a very substantial impact on the company’s EBITDA and net profit in the following years. Besides, the cost structure of PTCL is less flexible and sometimes there are certain things that cannot be changed. My management team and I thus put significant focus on growing the top-line and improving service as cost cutting is not an effective strategy, so the primary focus was on bringing the revenue back.
BRR: How are things looking for PTCL at the end of your term?
Dr. Daniel Ritz: If you look at the revenue base, approximately 75 percent of it is now growing that helps to contain the declining revenue streams. If the current trends continue, mathematically, the relative weight of the shrinking base will get less over time and the company is set to continue growing. Will the trends continue? Let’s look at the individual businesses.
The highest growth revenue streams are in the new business under the Corporate Services, i.e. Data Centers, Managed Services, Cloud, etc. These are growing at approx. 90 percent year-on-year (YoY) and this trend is set to continue. We also have high growth in DSL services and IPTV services in areas where numerous high revenue exchanges have been upgraded under the Network Transformation Program (NTP). We have now witnessed that the revenue growth has doubled in NTP areas as compared to non-NTP areas. Charji (4G) is also growing positively, however it is increasingly facing competition from mobile operators’ dongles. Carrier Wholesale is growing on the back of strong demand for Data services. It is also pertinent to mention here that the International Business, which was previously declining, is now growing. Let me also tell you that approximately 90 percent of our capex has been going into these growth areas.
Amongst the shrinking revenue streams, it’s mostly Fixed-to-Mobile Voice Substitution affecting us and is happening around the world, so it’s not only specific to PTCL. Although Voice is shrinking, however at a lesser pace than it used to, which is mainly PSTN (landline) and a bit of WLL (Wireless Local Loop). EVO/ CDMA will continue to decline until it phases out completely.
All in all, we can expect the trends to continue, which gives us the confidence that PTCL is set for continued growth.
BRR: Right. But even if you do everything right, PKR depreciation can hammer your costs and spoil the bottom-line.
Dr. Daniel Ritz: Yes, the currency’s impact is significant. The reported year-on-year (YoY) drop in EBITDA at PTCL, which was about 7 percent in 2018, reduces to about 1 percent drop if adjusted for currency depreciation last year. So, we lost 6 percentage points just on currency last year. As currency hedging is not possible, we are in discussion with our suppliers to try to convert non-PKR costs into either PKR, or where Chinese vendors are involved, into Chinese Yuan.
BRR: Which particular indicator(s) you have been tracking to assess financial health of the group?
Dr. Daniel Ritz: It’s a mix of three indicators that we look at for the Group as well as for subsidiaries, which are Revenue, EBITDA and Net Profit. For the Group, all three have gone up compared to three years ago. As for PTCL, the main focus was on revenue growth, which has made a positive come back. As I explained earlier, EBITDA has been negatively impacted mainly due to the significant currency impact in 2018 (4QCY18 EBITDA yearly growth was +1%, adjusted for currency).
Still, PTCL delivered Rs7.4 billion in net profit in 2018, which is a significant number. With approximately half a billion rupees in net profit, U Microfinance Bank is now positive, while Ufone has reported a significantly reduced net loss. At the Group level, there is 32 percent growth in net profit year-on-year, and all the trends are pointing in the right direction for us.
BRR: Looking from the outside in, it appears that the ongoing Network Transformation Program (NTP) would be your legacy. Now it’s 2019, the year when you expected NTP to start delivering results. How satisfied are you with the results so far and what lessons are you leaving for your successor?
Dr. Daniel Ritz: The consumer customer base of PTCL is served out of 427 exchanges that are characterised by varied socio-economic and competitive dynamics. We had selected top 100 exchanges to be upgraded end-to-end through NTP. So far, 51 out of these 100 exchanges have been upgraded and we are expecting another 20 to go live by March. NTP’s operational progress remains on track, despite some delay in 2018, which was due to a temporary ban imposed on a network vendor by the US.
The exchanges that went live under NTP have shown positive results. The revenue growth in DSL for NTP exchanges is more than double as compared to non-NTP exchanges. But the average doesn’t tell you everything as we have seen higher improvements in certain areas with upgraded exchanges. We have seen positive results as we measure the impact, not only on revenue and ARPU, but also on fault occurrence and resolution of complaints. We have made the local management of our exchanges more accountable by giving them actionable targets in line with their respective local, regional, and national averages.
Our key learning number one is that NTP works and we have stats to prove it. Number two, the quality of the copper rehabilitation is as important as shortening loop lengths and installing MSAGs. Number three, we now have a lot more focus on preventive maintenance then we used to. Where you have new deployments, you can go with GPON; however, copper has a long life and provides good speed if you maintain it properly. And lastly, there is more appreciation at PTCL now for local activations at the exchange level. Once an exchange has been upgraded, it gives even better results through localised marketing initiatives.
BRR: What about the other half of PTCL’s customer base?
Dr. Daniel Ritz: Since NTP works, we can take it to the rest of our customer base over a period of time. We have already started by deploying MSAGs and by shortening the loop lengths in non-NTP areas, under which we have less competition as most of these exchanges are outside the metros. We will do more of this during 2019 and beyond.
I always come back to what I said three years ago, Pakistan has more potential than the existing 5 percent of this country’s households using fixed broadband that can easily be taken to 20 percent. The way I see it; PTCL and other companies on the fixed broadband side are not constrained by the market demand. The demand is very much there. We, at PTCL, have been ramping up pretty significantly on that front.
BRR: You earlier mentioned large growth in the ‘Corporate Services’ segment. How can the company further penetrate this market?
Dr. Daniel Ritz: So there are two areas within this segment, Connectivity Business and New Business. Connectivity revenues are more or less stable, but new business is growing significantly as we are moving up the stack of higher-end services.
The new business is basically in four areas, i.e. Managed Services, Cloud and Hosting Services, Security, and IT projects. There is serious competition in these areas; however, we not only compete but also collaborate with other players in the market. We see a growing demand by corporate and government entities for these services, e.g. outsourcing their Data Centers/ Disaster Recovery. Another focus area for us is ‘Security’, where we are partnering with Etisalat for robust solutions.
In order to accomplish all this, we have not only hired experienced people at PTCL, but also have partnered with various top notch IT companies.
BRR: Amidst talks of market consolidation; how does the future look for Ufone?
Dr. Daniel Ritz: When we talk of market consolidation, I think that 200 million plus market in Pakistan can accommodate four players. Currently, cut-throat price competition and currency impact make it a challenging environment to do business. Having said that; Ufone performed well in 2018 by growing its revenues and EBITDA to double digit, growing its customer base and winning back market share. They have now launched 4G in some cities and the indicators are pointing in the right direction.
BRR: Let’s pivot to the state of business climate in the country. In our previous discussion, you had advocated for a national broadband framework, with emphasis on issues like lower broadband taxes, fiber-optic connectivity, and right of way. Towards the end of your term, how far do you think the government has come in appreciating the limitations caused by those issues?
Dr. Daniel Ritz: The present government has good intentions and they are listening to the concerns pertaining to the industry, which is very positive. Having said that, the Right of Way (RoW) challenges still persist. The Telecom Act (1996) clearly states that a licensee has the right to share any public or private RoW. However, certain private housing societies still continue to apply new rules to obtain the required NOC and sometimes charge exorbitant fees for a telecom licensee to acquire RoW. A uniform and nationwide RoW policy, which has been in the making for quite a while is much needed.
Secondly, another challenge we and our customers face together is the 19.5 percent provincial sales tax on broadband. While some tax relief has come for cellular operators through the Supreme Court’s Suo Moto Notice on mobile recharge, however, it has not provided any relief to us as a fixed line operator.
In order to make ‘Digital Pakistan’ a reality, these RoW and tax challenges need to be addressed. I am hopeful that in this regard, we will see some good progress in 2019.
BRR: Other than sector-specific policy interventions as highlighted above, what other measures should the new government take to improve the business environment?
Dr. Daniel Ritz: As I said earlier, the intentions of the government are good and I have had positive interactions with government as PTCL is a member of forums like PBC and OICCI. They are on the right track in terms of their focus on ease of doing business.
I would again come back to the tax issue. Not only it is about the level of taxation, but it is also about tax receivables with the government, which has been over due for a long time including PTCL and other large companies.
Although, I am not expecting an early resolution on those refunds given the fiscal situation, however any new potential investor will look at how the government is facilitating the existing investors, which also includes the predictability of the tax regime.
BRR: Lastly, how would you rate your overall time spent in Pakistan as a foreign business executive living, working and socialising here?
Dr. Daniel Ritz: My wife and I, both loved being in Pakistan. We made a conscious decision for her to move with me to Pakistan. The idea was to be part of the social fabric here so that we can play our part in the transformation of this company.
While heading PTCL Group has been demanding, however this has also been a life-changing experience for me. There is no doubt that I would like to keep coming back. My reason for moving back home is purely personal as I would like to spend some time with my parents and our son back in Switzerland. This will not be for the long run, it’s a little break as we would take time off and then venture into the world again.
What I am really proud of at the end of my term is that the company’s culture has been transformed for the better, which is why I took personal interest in making sure that PTCL core values are implemented at all levels across Pakistan. I am glad that people have opened up to a more progressive culture and a healthy workplace environment with a stronger communication flow across the organization. Not only that, I have also ensured a more open and transparent sharing with the media and the analyst community. In fact, the overall trajectory is positive for PTCL.
I have been quite impressed by the generosity and resilience of the people I have met across Pakistan from different backgrounds and diverse cultures. We loved the natural beauty, especially in the North. Pakistan will always have a special place in our hearts.