Analysis Of Celcom Axiata Investment In Melody Have a discussion Marketing Essay

Celcom Axiata is a member of Axiata Group is facing tough competition from the other major telecommunication rivals. Having coined as "malay telco professional" that is, Celcom Axiata has weak penetration into some major market segments and the technique to defeat this is by appointing the Mobile Virtual Network Providers (MVNO) to penetrate into the discovered markets using their own brand, appear and feel.

Celcom Axiata business model for Tune Conversation MVNO is by having 35% stakes in the business. After over 11 calendar months functioning, Celcom Axiata is researching its position in the corporation whether to remain its stake, increase its shareholding or pullout.

Prior to making any decision with its investment, Celcom Axiata must measure the existing Tune Converse financial standing and its capability to supply the required profits on return as well as its ability to handle the problems at hands especially those concerning the cash flows.

Introduction

Celcom Axiata is one of the 4 major mobile telecommunication companies in Malaysia. As at 31st March 2010, Celcom Axiata was ranked as second major mobile telecommunication company behind Maxis, and before Digi and U Mobile respectively. Celcom Axiata is an associate of Axiata Group of companies who manage a group of Mobile Telecommunications in the Asia region. Axiata Group was previously known as TM International and part of TM (Telekom Malaysia) Group. The process of de-merger within TM Group found the delivery of Axiata Group, designed to focus on mobile telecommunications arm of the organization within the spot whilst TM continue steadily to maintain its resolved lines business as well as broadband service provider.

According to the first 1 / 4 financial report, Celcom Axiata continue steadily to show dual digit growth over a YoY basis in every key indicators. Income was up 15% whilst Earning Before Interest Duty Depreciation and Amortization (EBITDA) increased by 16%. In tandem, Earnings After Duty (PAT) was up 24% in the same period.

On a QoQ basis, Celcom extended to show positive performance. Despite arriving off an

exceptional 4Q09, which documented the highest ever quarterly growth, earnings growth was

marginal, but nonetheless up by 0. 2%. Extended focus on costs saw EBITDA up by 2% with margins increasing by 0. 7 percentage tips QoQ to 45. 4%. PAT revealed a powerful increase of 7% to RM441 million (Celcom Axiata mass media release, 27th May 2010).

Celcom Axiata has been aggressively expanding its network and coverage to appeal to the increasing demand by the clients. Despite its ongoing efforts to permeate into the various segments in this country, Celcom Axiata still lagging in some of key marketplaces such as the Chinese market segment, immigrant market section and student market or low income earners section. These market segments are predominantly handled by Maxis and Digi and you will be the key success factor for Celcom Axiata to capture to be remembered as the main mobile telecommunication supplier in this country.

One of the technique to permeate into these segments as select by Celcom Axiata is by way of having a Mobile Virtual Network Operator (MVNO) procedure. MVNO means Celcom Axiata will appoint an authorized to run the mobile business using their own brand, leveraging independently power such as networking, channel of distribution, marketing and customer service. Using this method, Celcom Axiata can reduce its financial burden on the "go-to-market" cost which will be blessed by the MVNO lovers themselves.

To day there are four MVNOs appointed and launched by Celcom whereby all of them is given different market portion to permeate and record. Each MVNO is treated as split entity from Celcom Axiata where the respective MVNOs have full control over their own businesses and management of the firms except for Melody Discussion Sdn Bhd where Celcom Axiata has 35% show of the company.

Being different business model from other MVNOs, Tune Have a discussion Sdn Bhd sometimes appears as another Celcom Axiata joint venture company. Tune Converse is managed by the next shareholders as shown in figure 1 below

Tune Ventures (managed by Datuk Seri Tony Fernandes and Datuk Kamarudin Meranun)

Individuals shareholders are Datuk Seri Kalimullah Masheerul Hassan, Lim Kian Onn, Jason Lo (the CEO of Melody Discussion), Gurtaj Singh (the COO of Tune Have a discussion) and Symbol Lankaster (the CEO of Tune Hotels)

Celcom decision to obtain its stake in Melody Discussion is to ensure they have some form of control as one the major shareholder. Although Melody Conversation management will have control over the management of the business however the shareholders will have their words heard through the monthly plank exco getting together with. Having displayed by 2 everlasting exco participants from Celcom, it can ensure that Tune Talk business plan and strategies are consistent with its goal to become one of the most notable mobile company in this country.

The Situation

Tune Have a discussion is getting close to its first anniversary on the coming 19th August 2010. Celcom need to determine its investment and examine whether Tune Discussion business is moving to the right route and hence make the desired dividends to shareholders.

In order to attain the target, Celcom needs to keep an eye on Tune Discussion management's way of working the business enterprise. The long lasting exco members relaxing in the boardroom must have the ability to drill right down to the bottom range and review their way of spending their finance.

This is vital to Celcom as the major shareholder in Tune Talk so that it can choose the next course of actions such as to inject more finance into Tune Discussion, or to continue to be its position without adding any more cash or worst case opt to pull out from the load up.

Prior to such decision, Celcom must gather the maximum amount of information as you can with regards to Tune Talk financial position, business guidelines, marketing strategies and other commercial things which will be the key conviction factors.

Based from the previous exco reaching it was learned that Tune Conversation is facing complications to move onward with its business plans and marketing strategies scheduled to shortage of cashflow. Tune Talk Main Financial Official (CFO) during his demonstration to the plank of directors highlighted the following situations

a. Increase in Managed Services Costs

Tune Talk adopted the managed services concept to deploy and keep maintaining the Intelligent Network (IN) billing system, network related infrastructure specifically Short Note Services Centre (SMSC), Home Location Register (HLR) and other Value Added Services (VAS).

Managed services concept is a new development in telecommunication and it (IT) business whereby the customers or business providers do not buy outright the related systems but pay to the provider or supplier on usage founded. This method will save the business from spending an upfront purchase of a secured asset, hence reduce the cash outflow. Managed services can help a specific company to avoid from needing to allocate depreciation cost which may impact the company balance sheet.

In the situation of Tune Discuss the burden they are really facing now is because of the increase in the amount to be spent on this managed services. The deal they are experiencing right now is based on the number of subscribers using the machine, the higher the amount of subscribers the bigger the been able services cost to be incurred. The amount will increase in tandem with the consumption of new subscribers where the average cost per customer remain unchanged. Unlike buying own resolved asset, the average cost will tend to reduce as the number of new subscribers develop until it reaches the economical of scales.

Increase in Channel and Circulation Cost

In Malaysia, all the mobile operators are highly dependant to the standard traditional channel ie. mobilephone traders to sell its SIM credit card and recharge vouchers.

Being too dependant to the type of syndication channel will raise the company's cost of sales whereby for every sales of SIM credit cards or recharge voucher the company needs to allocate some amount of percentage as a motivation for them to thrust its products within the competitors.

Traditionally, in mobile telecommunication business the route of distribution contain 3 tiers

distributors

master dealers

ordinary dealers

Normally only a handful of marketers are being appointed to send out to the get better at dealers whom will then sell it through the ordinary dealers. Each one of these channels could keep a small ratio as their incentive from the retail price.

Operators are normally caught up with this route cost that they cannot run away with in order to motivate their products to the customers.

On average an operator must spend not less than 10% from its retail price being area of the channel cost.

Allocation for Marketing Cost

As a fresh mobile operator in Malaysia contending up against the other 4 major mobile telecommunications service providers Tune Converse is facing trouble to bring in its brand to the marketplace.

According to Nielsen Co Malaysia 2009 statement (a research company), the telecommunication companies are among the highest contributor to the total advertising costs in Malaysia with Celcom leading the pack at RM 115. 8 million, accompanied by Telekom Malaysia at RM 94. 3 million, Maxis with RM 89. 7 million and Digi for RM 87. 1 million (see Amount 2 below). Newspaper and TV advertisements represent the most notable 2 categories to promote followed by Radio, Journal and Outdoor.

To date Tune Talk acquired already spent RM 2 million in their advertising cost through billboards, papers, Television set and radio advertising. This amount is quite really small compare to the total amount spent by the top giants and it may well not supply the required publicity that Tune Discussion likely to create its brand awareness to the marketplace place.

Based from the record and dip stay survey conducted by Melody Converse marketing department their brand index is still very low and they would require more finance to be pumped set for this purpose.

Slow Moving of Customer Recharge Activities

Tune Talk is merely advertising prepaid mobile and it main source of income is by advertising the SIM card and recharge vouchers. As far as Tune Discussion is concern the revenue made from these sales are believed as their income (predicated on the generally Accepted Accounting Theory).

This is due to the fact the income will be reported when it's received (Ross, Westerfiled, Jaffe, Corporate Finance, 7th release). The great thing about prepaid business is the trades are in cash terms. This means Tune Talk will get to track record the deal into its e book as and when the SIM cards or vouchers can be purchased to the vendors.

In accounting, the earnings from sales of SIM credit cards and recharge vouchers will only be realized after usage rather than after sales. Nonetheless, as far as Tune Chat income can be involved it has already acquired the amount of money from the distributor and came to the realization in its reserve as income as per GAAP.

As a rippling result to lack of awareness of its brand in the market place, Tune Talk sales of SIM credit cards and recharge vouchers are moving alternatively at an extremely slow pace. Desk 1 below is example of the average sales and projected 1st calendar year revenue from SIM cards and recharge vouchers

Table 1

Items

Average Monthly Revenue

Projected 1st Year Revenue

SIM Cards

RM 500, 000

RM 6, 000, 000

Recharge Vouchers

RM 900, 000

RM 10, 800, 000

Total

RM 1, 400, 000

RM 16, 800, 000

This figure is far weep from the original budget that Tune Talk must make which is RM 36. 0 million for its first year operation and increase to RM 50. 0 million and RM 72. 0 million in yr 2 and 3 respectively.

High Customer Turnover or Attrition Rate

It is common in the prepaid business industry that users tend to move or expect around in one operator to another operator to find for better offer and cheaper cost. Melody Chat is also influenced by this game by the customers whereby the pace of customers churning out or leaving for another brand continue increasing on month-on-month basis.

Malaysian prepaid business industry rate of customers residing in a specific operator (industry language is "length of stay") is within average of 6 months. However in the situation of Tune Speak its customers average amount of stay is a mere three months which is about 50 % of the industry average.

The impact of this short stay may cause a high acquisition cost to Tune Talk whereby its cash flow will be badly affected. To be able to stay healthy, Tune Conversation needs more than 3 months for every single customer with average use of RM 30 monthly to recover its in advance acquisition cost including the channel incentive, marketing cost and the other changing costs.

Shortage of Cash

Tune Talk started off its business with RM 7. 5 million worthy of of shares with 35% own by Celcom whilst the rest are by other individuals. After 11 calendar months of operations, Tune Talk is currently facing with the most critical instant in its business where their cash flow is deteriorating. Despite being truly a slim and mean in costs and had not spent any money on fixed asset, Tune Have a discussion still face the money movement difficulty.

An area that has badly affected Tune Conversation cash flow is the route motivation and the inexpensive airtime rates so it has to pay back to Celcom. With intense competition Tune Discussion needs to place its incentive on par or just a bit better than the competition in order to obtain the route attention and support.

On the other hands, the pre-paid business market is competing on the decision rates to be offered to the finish users to be able to beat others. Since Tune Converse is buying its airtime from Celcom at preset rate, the competition which had compelled Tune Speak to also reduce its selling rate to the end users possessed cause Tune Converse margin to reduce and became smaller. The effect is, the income accumulated from the sales of SIM cards and recharge vouchers should be spent basically to motivation and wholesale airtime to Celcom, departing only peanuts to Melody Talk to be utilized to re-generate its business. Additionally it is better for Tune Speak to maintain a level of working capital which allows it to make it through those crunch times and continue to operate the business enterprise within restricted budget (Cater McNamara, Authenticity Consulting LLC).

Action

Celcom Axiata really need to review its investment in Melody Conversation Sdn Bhd by looking currently situation and its own potential. It is an acknowledged fact that every home based business need some times to have the ability to stabilize and start to show positive effect out of its investment.

As far as telecommunication industry can be involved, at the least 3 years is required for a particular mobile operator to have a strong foothold and have substantial subscriber base to be relevant.

The question here is whether Tune Discussion strategies are gearing on the right direction that may guarantee to tolerate fruits at the end of 3 years? Just how much will investor need to pump directly into ensure that Tune Converse can still survive before 3rd 12 months ?

It is important that Celcom Axiata representatives in the Melody Talk mother board of directors to demand Tune Chat management to examine their existing business models which got obviously afflicted their cash flows. Serious attention must get by Tune Talk management to revisit its dependency on the existing channel which will become its biggest threat in trying to reduce its cash out flows.

Tune Conversation management also needs to re-negotiate with its managed services specialist to review the charges being enforced to Tune Talk for each and every new clients added into the system. The charges should be on decreasing style as more customers being added.

Tune Talk could also want to consider finding new manage service agency if the negotiation come to a deceased end. That is important in controlling Tune Chat spending over the long run.

Prior to Celcom Axiata to make any decision using its investment, it requires to analyze Melody Speak financial condition. It is advisable for Celcom Axiata to scrutinize the Melody Converse financial management and ensure that the monies are well put in and efficiently managed to protect its interest. Celcom Axiata funding manager needs to advice the Chief Financial Official (CFO) of the real condition of Tune Talk by inspecting its financial record cash flows.

Having put in for over RM 2. 6 million and retaining 35% of Melody Talk stocks, Celcom Axiata has the responsibility to are accountable to its mother board of directors on the improvement of its investment. The Celcom Axiata plank of directors must be very interested to know if the management of Celcom Axiata has made the right decision by buying Tune Talk. One thing interesting in this business design ie MVNO is because the airtime for sale by Tune Discussion (in cases like this the MVNO) is using Celcom network infrastructure. This implies even though Melody Talk does not make huge income and may not have the ability to provide the required rate of come back in conditions of dividends to the shareholders but as far as Celcom Axiata can be involved, it still make money from the airtime sold. Thus, mother board of directors of Celcom Axiata may be thrilled by the increase in Celcom Axiata revenue alone rather than going down to the details of getting through the Tune Have a discussion dividends.

Another area that requires special attention is to evaluate the existing Tune Converse management team style and business competencies. This industry is regarded as highly competitive and it requires excellent team to have the ability to compete with the big boys (as being described the seasoned mobile operators). Celcom Axiata staff in the Tune Talk exco users must be able to provide information to the Celcom Axiata management whether there can be an existence of conflict of interest in the Melody Chat management team. Although matching to Vishny and Robert W, NBER Reporter, Sept 1989 said that the standard and ideally company allows management to possess 5% of stocks. This is ascertained by judging to their way of working the business, their seriousness in fulfilling the required duties as outlined available programs, their priorities in spending and managing the cash moves.

Conclusion

It is most likely early for Celcom Axiata to make decision to grab from this pack by merely basing on the first 11 or 12 months Tune Talk operation. However any decision to increase its capital in Tune Talk either by buying more stocks or by pumping more income to support Melody Talk functions must be done with great fine detail analysis. It is not a good idea for Celcom Axiata to simply inject more cash to Tune Have a discussion without viewing any improvement or improvement on some of the region of concern which have been highlighted in previous pages.

The major conditions that have to be really scrutinize by Celcom Axiata financial supervisor is on the cash flow management. The action items outlined in previous webpages suggested Tune Speak to enhance the way it works its business that may eventually give a positive impact to its cash flow.

It is said that high risk will normally generate higher rate of go back, but having said that, the save decision at the moment is designed for Celcom Axiata to stay its position without adding more money but to continue to monitor Tune Talk improvement and improvement. In the end, Celcom Axiata is the main one who makes more money from other people in the load up which is through the sales of low cost airtime.

This investment although had not been able to make dividends to Celcom Axiata but somehow has managed to complement the poor area that cannot be penetrated by Celcom Axiata using its own brand.

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