In the recent past, Denis O’Brien, who is believed to own 94 per cent of Digicel, would have looked at his sprawling telecommunications company and realised that the company’s rapid growth of previous years had slowed.
Founded in 2001, O’Brien had built Digicel, which was incorporated in Bermuda and based in Jamaica, into a telecom empire operating in 31 markets across the Caribbean, Central America, and Oceania regions.
The company’s meteoric rise from its humble beginnings was based on a simple premise: Caribbean people love to talk and if they were provided with an affordable mobile phone service, they would lap it up.
Taking advantage of the slow response of a stodgy Cable & Wireless, the incumbent telecom provider across much of the Caribbean, O’Brien soon captured the Jamaican mobile market, leapfrogging past Cable & Wireless there and eventually placing his mobile phones in the pockets of almost every adult, and many children, in the Caribbean.
To a large extent, his empire was built by reinvesting the profits generated from existing country conquests into new territories—and by accessing the international bond markets for debt. Lots and lots of debt. Digicel's bond issues came thick and fast, first hundreds of millions and more recently billions of US dollars in debt.
But the billions of dollars pouring into the Digicel's coffers every month from the company’s millions of subscribers (some 13.3 million as at the end of June 2014) have allowed O’Brien to keep up his interest payments and even to call in some bonds prematurely, as he did earlier this year when some US$775 million in 2018 notes were redeemed in full—paid for by a new eight-year US$1 billion eight-year bond issue in April.
But the explosive growth of previous years has slowed and while Digicel's margins remain extraordinary, anyone reading its June 2014 financials would be struck by the fact that while Digicel has an earnings margin of 45 per cent, its revenues are flat, its EBITDA (earnings before, interest, taxation, depreciation and amortisation) is flat and its net loss has deepened.
Among the few elements of Digicel’s financials showing growth are its debt and its borrowing ratios.
At the end of June 2014, Digicel’s debt totaled US$6.26 billion, up by 11 per cent from the end of June 2013 and the company’s cash in June this year amounted to US$768.9 million, 32 per cent less than the US$1.13 billion a year earlier.
Its gross leverage was 5 times in June 2014, up from 4.6 times a year earlier, while its net leverage was 4.4 times up from 3.7 times a year earlier.
But Digicel’s revenue for the three-month period ending June 30, 2014 amounted to US$678.6 million compared with US$678.3 million for the same quarter in 2013.
In its first quarter 2014, Haiti, Papua New Guinea and Jamaica were Digicel’s largest markets, generating revenue of US$118 million, US$109 million and US$100 million respectively. All three markets reported revenues that were lower than the 2013 quarter with Haiti declining by 5 per cent, Papua New Guinea by 5 per cent and Jamaica by 11 per cent.
The company’s gross profit of US$495.6 million for the 2014 quarter showed no growth from the US$494 million in 2013, but its operating profit increased by 4 per cent to US$188 million.
For the quarter ending June 30 2014, Digicel reported a net loss of US$49.3 million, which was a 355 per cent increase from the US$10.8 million loss it declared in the same quarter in 2013.
The company’s EBITDA (earnings before interest, taxation, depreciation and amortization) was also flat at US$290.8 million for June quarter in 2014, compared with US$290.2 million for its June quarter in 2013.
The company reported a 3 per cent increase in the number of its subscribers, which now total 13.3 million, but a 6 per cent decline in its average revenue per subscriber (ARPU) for the quarter ended June 30, 2014 relative to the prior year.
Digicel said the decline was due to decreases in Haiti, El Salvador, Jamaica and Papua New Guinea where reductions in mobile termination rates and currency depreciation impacted ARPU.
O’Brien would have seen this coming and being a visionary entrepreneur, he would have realised that he could not keep expanding his empire at a rapid pace, based only on mobile phones.
The Irishman—who is a US-dollar billionaire from his ownership of Digicel—would have realised that to be successful in the future he would need to turn ARPU into ARPA; that is transform Average Revenue Per User into Average Revenue per Account.
According to Rob Chimsky, writing in the April 2013 edition of European Communications: “ARPU was borne from a wireless age when voice, post-paid, and subscriptions were the dominant drivers of success….The obvious changes that have occurred are the significant growth in data as the primary driver of operator revenue and the increasing prevalence of prepaid services. Data and prepaid have independently changed the nature and level of revenue.
“Perhaps an even more important trend related to revenue, though not quite as obvious, has been the extreme growth in embedded wireless. Mature markets today are seeing over 100 percent penetration, a clear indicator of the trend toward people carrying multiple wireless devices.”
O’ Brien realised that he needed to get into fixed broadband (Internet) and the provision of cable television. That’s because as much as Caribbean people love their mobile phones, many of them love their cable connections to foreign fantasies even more.
Providing Caribbean people with mobile phones, as well as an Internet connection and a cable service would allow Digicel to cross-sell those services, even allow him to bundle all three services into one package and offer customers the ability to pay for their mobile phone, their cable television and their fixed broadband with one bill. This must be the holy grail of 21st century telecommunications.
O’Brien is certainly trying to grasp the top rung, snapping up four Caribbean cable companies in the last year, which has given it cable presence in six markets: Anguilla, Monsterrat, Nevis, Dominica, Turks & Caicos and Jamaica.
The company is also investing heavily in rolling out greenfield fibre networks in Trinidad, Jamaica, Haiti and Barbados, with its capital expenditure jumping by 47 per cent to US$128 million in its first quarter, according to its June 2014 bond report.
Clearly, the expectation is that fibre and cable television subscribers would boost future revenues and allow the company to continue paying off its bondholders and generating dividends for O’ Brien, its majority shareholder—similar to the US$660 million cheque he got from the company earlier this year.
But Cable & Wireless Communication’s acquisition of Columbus International is likely to impact the return on investment of O’Brien’s recent data and content strategy as it may mean a fight-to-the-death price war for cable and fixed broadband in Jamaica.
It may also mean a much longer breakeven period in T&T—one of the few countries in which Digicel is still experiencing mobile revenue growth—with the company waiting for regulatory approval of its cable licence and in the process of rolling out its fibre-to-business offering.
In the company’s favour is the fact that a debt restructuring in June means that it lowered its interest payments in fiscal years 2015, 2016 and 2017 from US$824 million to US$117 million in those years.
But it is clear that not all Digicel’s bondholders are happy with the company’s future as 14 per cent of the lenders of the bond restructured in June declined to amend and extend the facility.
Is that a sign of things to come?
And what would a weaker or non-existent Digicel mean for prices and the availability of telecom services in the region?