This article first appeared in Corporate, The Edge Malaysia Weekly, on May 23 - 29, 2016.

STARTING off as the smallest of the Big Three telcos, DiGi.com Bhd has enjoyed phenomenal growth over the years that has made it a darling dividend stock. But that was in the recent past. CEO Albern Murty, who took the helm in April last year, faces what is arguably the most challenging transition period for the industry yet.

Between the structural shift in consumer behaviour towards data, weakening economic fundamentals and increasing competition that has precipitated a price war, DiGi in 2015 posted its worst year-on-year earnings performance in almost a decade.

It is a great time to be a consumer and a tough time to run a telco, but Murty certainly isn’t on the back foot.

“It’s been an extremely interesting year. I have been with DiGi for a while (since 2002), so I know the challenges and the opportunities that are coming. It is an extremely interesting period to take this challenge up,” Murty tells The Edge in his usual energetic and chatty manner.

If he is feeling the pressure, he certainly does not show it.

In FY2015 ended Dec 31, DiGi’s earnings before interest, tax, depreciation and amortisation (Ebitda) contracted for the first time in over five years, down 5.69% to RM2.98 billion. Meanwhile service revenue growth almost ground to a halt, rising only 0.24% y-o-y to RM6.35 billion, compared with 3.3% growth in the previous year.

In line with weaker earnings, dividends were trimmed by nearly 15% y-o-y, which has been reflected in DiGi’s share price — down almost 24% since Murty took over.

“It was not surprising that we had a rough 2015 as an industry, partly because the industry contracted. We had GST, some economic challenges, and also [weakening] exchange rates,” Murty tells The Edge.

To make matters worse, the telcos also engaged in a price war that has driven down the average revenue per user (ARPU) and Ebitda margins. DiGi’s blended ARPU fell to RM45 in FY2015 from RM47 in FY2014. In the first quarter, blended ARPU fell to RM42.

“So, all put together, we had a perfect storm, which basically we need to manoeuvre and manage around. There were two choices — one is we just defend, but that’s not what we did. We went out there and innovated. We went out there with two prepaid value propositions and we fine-tuned our postpaid,” says Murty.

On a brighter note, DiGi also saw a decent 1.7% y-o-y increase in subscribers to 12.34 million as of March 31, 2016, which might make it the largest telco in terms of subscribers. Note that Celcom’s first-quarter numbers have not yet been released, so it isn’t clear just yet if DiGi really has the top spot.

Interestingly, Murty downplays the significance of DiGi possibly taking the top spot in terms of subscribers. He points out that Q1’s growth can be attributed to seasonality, particularly among prepaid subscribers, which will likely swing in the other direction in the coming quarters.

More importantly, Murty points out that the company’s top KPI is to grow service revenue, as opposed to focusing on ARPU and subscriber numbers alone.

Still the prime concern for DiGi’s investors comes back to the company’s ability to pay dividends. Thus far, the group has been able to pay out almost 100% dividends. But if margins continue to fall, that might not be sustainable.

This is because two more players — Telekom Malaysia Bhd’s Webe and YTL Power International Bhd’s YES — are expected to join the industry’s four incumbents, comprising DiGi, Maxis, Celcom and U Mobile, over the next one year. More competition would put even more pressure on margins.

For FY2015, DiGi’s Ebitda margin also fell to 43%, down two percentage points from 45% previously.

Despite the headwinds, Murty asserts that DiGi will be able to maintain its Ebitda margin at this level in FY2016. Likewise, dividends should remain stable in the near term.

Changing the game

The real question is whether margins and dividends are sustainable in the longer term. Murty is well aware of the challenges that the industry faces and he argues that the way forward is to innovate and diversify from traditional core businesses — voice, SMS and even data.

Instead, Murty plans to reposition DiGi as an internet company that will rely on digital services to grow.

“If you look at our five-year ambition, we want to be the customers’ best digital partner. We do not want to just provide infrastructure network, but also customer experiences. Today, 70% to 80% of our business is in the core (voice, SMS, data), and 30% in value-added services. Going forward, we want to have an equal focus on both,” he explains.

Direct operator billing is one such example, where purchases of apps or services made on the phone is added directly to the customers’ phone bill.

“Monetising digital services is challenging, but it is a challenge for all industries. The question is, can you innovate faster than innovation can bite you?” he poses.

He argues that DiGi has two distinct advantages. On the one hand, it is relatively small among the Big Three, which makes it more 

agile. Secondly, it can rely on its 49% shareholder, Norway’s Telenor Group, for financial muscle when it comes to exploring new innovations.

Telenor, through its arm Telenor Digital, has been actively acquiring companies that may be able to create value through digital services. DiGi itself doesn’t undertake these acquisitions. In fact, Telenor last week acquired Prabhu Money Transfer Sdn Bhd, a licensed money services business based in Malaysia.

Given that DiGi has a substantial amount of foreign workers using its services, remittances of money back to their home countries have huge potential for DiGi.

Recall that back in 2014, Telenor paid €180 million (RM822.83 million) for a 33% stake in 701Search Pte Ltd, which operates online marketplaces like Mudah.my.

Still that investment is relatively small compared with the US$360 million that Telenor paid to acquire New York-based Tapad Inc. Tapad specialises in providing unified cross-device marketing technology. In layman’s terms, the company enables advertisers to target specific customers over multiple devices.

It is such digital services that Murty hopes to leverage to continue driving growth in a highly saturated and competitive market.

“Being in the industry for a long time, I sense a shift. What is probably known as a traditional business is changing. I’d like to say that it is driven by us, the telcos, but it isn’t. It has been driven by technology and consumers: trends and usage,” he explains.

To support DiGi’s ambitions, it also has to invest heavily to modernise its network and provide high-quality service as well. The group has spent around RM900 million annually over the past couple of years and is expected to maintain this level of spending going ahead.

“One of the challenges for DiGi has always been the perception of our network and coverage, but that was a long time ago. Since 2012, we completely modernised our networks,” says Murty.

In fact, the past year has seen a stark improvement in DiGi’s network. The group’s 4G LTE coverage has grown from 33% in end-2014 to over 73% population coverage today — the widest in the country. On top of that, the company has also built up its 4G LTE-A (LTE Advanced) coverage to 33%, also the widest at the moment. LTE-A technology is supposed to be able to deliver “true LTE speeds”, nearly three to four times faster than its LTE predecessor.

“Our disadvantage was that without the low-band spectrum, we couldn’t [penetrate] further, which is why we are very happy with the current spectrum allocation. We are still waiting for the government to finalise the spectrum’s commercial value; we will know that soon,” says Murty.

He is referring to the government’s spectrum re-farming exercise this year, which saw DiGi allocated the 900MHz and 1,800MHz bands for 15 years. Full implementation of these new bands will take place next year. Previously, DiGi only had access to the 2,100MHz and the 2,600Mhz bands, which have inferior in-building service quality compared with lower frequency bands.

Looking ahead, it remains to be seen if DiGi’s digital strategy will be able to drive growth and monetise its infrastructure capex. At least, DiGi is not blinkered and focused solely on data monetisation, which has proven to be difficult in Malaysia. The good old days are gone, and data cannot simply be monetised like voice.

It won’t be easy, but Murty is right. The telco industry must innovate if it hopes to grow again.

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