WeChat, OTTs Nip At China Mobile Revenue
Leading telco China Mobile (HKEx: 941; NYSE: CHL) has just released its latest quarterly results that show profits continue to sag by about 10 percent, continuing a theme from the past year. But the figure that’s catching attention in the headlines is the company’s top line revenue, which has fallen for the first time ever in the latest quarter. The revenue drop isn’t all that surprising and comes about a year after China Mobile’s profits first began to decline. But perhaps more worrisome is the prospect that revenue could continue to drop for years until China Mobile finds a way to win back some of the business that is rapidly flowing to third-party service providers like Tencent (HKEx: 700) and a new batch of mobile virtual network operators (VNOs).
All that said, it’s still quite possible that China Mobile’s profit declines have bottomed out at their current levels, as the world’s biggest mobile carrier takes steps to control costs. At the end of the day, perhaps China Mobile got just a little too complacent and accustomed to owning a far larger share of the revenue generated by the nation’s 1 billion-plus mobile users than it really deserved. I said earlier this year that a sell-off of the company’s shares on the downbeat outlook might provide a good buying opportunity, though a rally since then in the company’s shares may be running out of steam.
China Mobile’s latest report only gives operating metrics for the first 3 quarters of the year, showing that profit fell 9.7 percent during that time to 83 billion yuan ($13.5 billion) as revenue rose 3.9 percent to 481 billion yuan. (company announcement) But a break-out of third-quarter results shows that revenue fell 2 percent in the 3 month period — marking a first-ever top line decline. (English article) The profit decline looked less alarming, as China Mobile’s profit has posted drops in the 8-10 range in each of this year’s first 3 quarters. That means profit declines have perhaps stabilized and could start to shrink next year as the company works hard to control costs by cutting back on its aggressive promotions.
It’s not hard to understand why China Mobile’s revenue is dropping, and the new decline looks somewhat similar to what’s happened in the related media industry. In all instances traditional companies are suddenly having to share revenues that were once theirs exclusively with a field of up-and-coming innovative new service providers. In China Mobile’s case, the biggest revenue stealers are so-called over-the-top (OTT) service providers that offer services based on the mobile Internet. Tencent’s wildly popular WeChat mobile instant message service is the most notable example of those.
The 2 biggest losers to the encroachment of OTT services are traditional voice and text messaging services, which formed the core of China Mobile’s revenue base for years. China Mobile said its voice usage fell 0.3 percent in the first 3 quarters, while its text messaging tumbled a whopping 20 percent. That was partly offset by a doubling in its data usage, which is being driven by the growing popularity of services like WeChat that rely on such data use.
So the 2 big questions now are: What’s ahead for China Mobile as a company, and also what’s ahead for its stock? The company’s shares rallied quite a bit after the March sell-off, and are now more than 50 percent ahead of those lows. The stock’s current levels indicate investors believe the company will return to profit growth next year, which is probably a good bet. But the revenue declines could continue a while longer, potentially putting downward pressure on China Mobile shares over the next year.
Bottom line: China Mobile is likely to return to profit growth next year as it controls costs, but its shares could come under pressure over the next 12 months as its revenues enter into a longer period of decline.
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