The direct-to-home (DTH) service provider Dish TV posted a profit of Rs 87 crore for the second quarter and a 16 percent subscription revenue in FY16.Speaking to CNBC-TV18, RC Venkatesh, CEO of Dish TV says the company will meet its FY16 guidance of 1.5 -1.7 million subscription additions. The first half of the year made 45 percent of the business despite the seasonally weak second quarter because of monsoons, he says, adding that hike in service tax eroded the company's subscription revenue.He is confident that Dish TV will meet its six percent Average Revenue Per User (ARPU) target for the year and that festivities and digitization will benefit Q3 and Q4, respectively. Below is the verbatim transcript of the interview..Sonia: Before I ask you about the earnings I understand that you have resigned as CEO with effect from October 31, 2015. What is the reason for the resignation?
A: It is a personal choice to follow more flexible professional career going forward. So, I am very happy with the way the company has performed and come up to where it is today. So, this is more a personal reason.
Anuj: You have really taken the company to good heights. We wish you all the best for your future endeavours but since this is your last boardroom, I am assuming with us on CNBC-TV18, if you could tell us what happened in the last quarter and going forward what kind of run do you think Dish TV will achieve?
A: Traditionally quarter two for all direct-to-home (DTH) companies tend to be a seasonally weaker quarter because of the monsoons and things like that and this year particularly if you look at this quarter was coming in after two strong quarters of cricket season. So, the comparisons were likely to be muted. But we are very happy that even in a seasonally light quarter we have managed to show strong subscriber additions, we are at 338,000 subs. So, that puts us squarely within the range to achieve our overall full year guidance of 1.5 to 1.7 million because we have done close to about 740,000 subs in the first half and typically the first half accounts to about 45-46 percent of the business. So, we were quite happy with the way the business has progressed.
On the Average Revenue Per User (ARPU) front, yes, there was a little bit of disappointment but primarily that was due to extraneous factors. As you know that the service tax has increased from 12.36 percent to 14 percent. So, that had the impact of biting off about 1.64 percent or close to about Rs 14 -15 crore from our top lines. So, if we didn't have that impact our subscription revenue would have been closer to Rs 707 crore which is closer to what the street guidance was. So, that is a temporary break because coming into the next quarter the comparison would be like for like and that should be adjusted. Overall there is good momentum in the business and we are hopeful that if digitisation is on course we should have a very strong fourth quarter and the third quarter is always a good quarter because of the festive season. So, overall we are looking for strong performance in the back half of the year.
Sonia: Not just you but there have been multiple resignations that have happened in the company today. Mr Mintoo Bhandari who is a non-executive nominee director, Mr Utsav Baijal who is the alternate director to Mr Bhandari, Mr Subhash Chandra has also resigned as non-executive promoter director. Is there something that the shareholders need to worry about, why multiple resignations at once?
A: No, as far as Mr Mintoo Bhandari and Mr Utsav Baijal are concerned they were representing Apollo Management International investments in our board and Apollo has exited Dish. So, I presume you can draw the correlation, So, the other promoter directors I wouldn't be able to make any comments on that.
Anuj: But would it be safe to assume that everything is alright and there is no cause of worry as Sonia pointed out because the stock is down two percent while the numbers are quite okay. So, maybe there is a bit of worry?
A: No, nothing at all. Board appointments, shuffling the board are normal factors in the company. I don't think you should read unnecessary things into that so to speak.
Sonia: So, any idea of who will be taking over the reins from you, who will be the next CEO of the company?
A: That is up to the board and the managing director to decide. At this point of time I am not privy to any of their thought process on that.
Sonia: Getting back to the numbers you were telling us that the company will manage to meet its guidance of 1.5 to 1.7 million by the end of the year as far as subscription addition is concerned, but what about the ARPUs, this time they fall into Rs 171 versus Rs 173 last quarter, what is the expectation for the second half of the year?
A: We had guided for a 6-7 percent ARPU growth. Now if you take the impact of the service tax increase in quarters two, three and four, if you take that out of the picture I am pretty confident that we get to that 6-7. But on as reported basis you will have to account for that additional 1.6 percent. So, I believe in an as reported basis the ARPU growth will be more like between 4.5 to 6 percent.Anuj: What about pricing. We have seen consistent price increase over the last few quarters. Do you think Dish TV still has pricing power in future and will we see further price hikes?
A: Absolutely. Actually it is not only about Dish TV. As you are looking at the entire environment there is more stickiness as you are seeing the overall churn numbers also coming down as well as with digitisation in all areas where there is digitisation the ability to move prices up strengthens because the churn out of a digitised environment is far more difficult than churning out from an analog environment. So, I am very confident that the trend of price increases that we have been able to sustain for the last four to five years effectively being able to take about two price increases a year, typically one around February - March and one around the festive seasons of four to five percent will sustain and also the high definition (HD) penetration is increasing. So, that should also give some momentum to the overall ARPU movement.
Sonia: So, what are the HD ARPUs this time and how much will they grow to?
A: Our HD ARPU for this quarter was about Rs 407. It has been more or less at that level between Rs 407 and Rs 415 because we have got increased volumes now than we had two to three years ago and with increased volumes you tend to have slightly more mix in which a lot of people were trying HD for the first time, so they come in at the entry level pack. But having said that that is a very healthy ARPU when you compare it with blended ARPU which is at about Rs 171 you are effectively getting almost 2.5x with the HD subscribers.
Anuj: Two questions; how much is your incremental market share. For example in the last quarter and what kind of ad spends do you have to incur now because your competition - three or four players - have been quite aggressive?
A: Our incremental share in the last quarter was 27 percent which was the same as what it was in the previous quarter. As far as ad spends is concerned we tend to spend about 3-3.5 percent of our topline on total margining above the line as well as below the line out of which about the split is roughly 50:50. We have been able to sustain our growth momentum with these kind of spends and we aren't actually seeing too much spending yet, but having said that with digitisation around the corner you could see a spike in spreading in November and December. We too have our own plans to step up our marketing investments ahead of digitisation, especially in both markets which are coming up for digitisation.
Sonia: Your operational growth has been spectacular, your EBITDA itself has gone up by about 57 percent, do you think this 34 percent margin that the company has delivered this quarter is sustainable?
A: Absolutely. The way the P&L is constructed you generally find the middle line is fairly sticky because the biggest side on the middle line is content cost which tends to be fixed in nature for a period of time at least during the time of your deal and the only variable element in our middle line has really to do with the taxes, the entertainment taxes, the license fee component which put together is about 17 percent. So, out of the total middle line about 18 percent. So, out of the total middle line of about 50 percent you have got 32 percent which is fixed. So you have strong operating leverage. So the EBITDA margin will tend to move along with the move and the top line. So, the key thing is to keep the momentum on subscriber additions, the momentum on HD acquisitions and ARPU growing so that you get the momentum on the top line that automatically translates into higher EBITDA margins.
So, I do believe 34 percent is not where we are going to stop. We certainly have room to improve plus I am not even adding the external factors. For example, if the license fee is reduced by the government, there is a Telecom Regulatory Authority of India (TRAI) recommendation on that for a two percent reduction plus the whole thing about the Goods and Services Tax (GST) coming in and on that we could look for another 300 bps. So, the external factors which could give you between 300-500 bps plus the operating leverage in your business. So, certainly there is room for the margins to grow.
Anuj: Finally then what next for you after the stint at Dish TV?
A: I am thinking of a few projects, it is too early for me to spell those out but I am not going to be idling for sure.
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