VOC Details
Massive correction on reduced FY17 guidance of financial metrics

Vocus Group Ltd (ASX: VOC) stock price plunged over 27% on May 03, 2017 as the group downgraded its revenue estimates to ~$1.8bn from the prior guidance of ~$1.9bn for FY17. This has come at the back of an impact caused by an accounting review of the negotiated contract terms on several large projects included in the 2HFY17. The ~40mn revenue associated with these projects will be predominantly recognized in future periods rather than recognized as an upfront contribution in FY17. In order, $45mn positive cash flow benefit of these contracts is expected to be across FY17 and FY18. Further, the divestment of the Aggregato Australia business and the Cisco HCS voice platform of ~$20m revenue has a negligible earnings impact and a $12mn lower than forecast billings is expected in the Enterprise & Wholesale division.

15% reduction in underlying EBITDA and 22% reduction in NPAT over prior guidance for FY17

The company has revised FY17 EBITDA to be $365-375m against the earlier guidance of $430-450m on account of ~$33m impact due to accounting review, ~$10m lower than forecast billings combined with an increase in service delivery headcount in the Enterprise & Wholesale division. Further, ~$5m lower earnings than forecast from the mass market energy business following the volatility created by extreme weather events in 3QFY17, higher than forecast expenses of ~$12m in group services, primarily in technology, and ~$10m of other trading variances across the group have added to the EBITDA downgrade. Importantly, the Underlying NPAT estimation of ~$160-165m is 22% lower than the prior guidance of $205-215m. Further, net debt at 30 June 2017 is expected to be $1-1.1bn while the net leverage expected to be ~2.6x vs covenant of 3.5x. However, cumulative run rate of acquisition synergies expected to reach $57m in line with guidance and core capital expenditure to be ~$182m.

Despite lower guidance increasing momentum in NBN subscriber base with margin improvement

During Q3FY17, overall NBN subscribers grew by 32.4% Quarter on quarter (QoQ) to 160,346. Further, Dodo & iPrimus subscriber base grew by 28.1% QoQ to 142,380. While Dodo and iPrimus NBN order share stood at 8.4%, Vocus order share stood at 10.2% in 3QFY17. NBN ARPU (Average revenue per user) and NBN AMPU (Average margin per user) stood at $62.03, $23.74 respectively during the same period. Moreover, small improvement in margins driven by increasing number of iPrimus subscribers, skewed to higher speed packages relative to Dodo. NBN net churn remains materially lower than copper broadband at 1.5% per month in 3Q FY17.

Broadband subscribers continue to grow in New Zealand in Q3FY17

Share of UFB connections continues to increase reaching 12.5% while the share of new UFB orders in 3Q17 was 18%. Broadband ARPU and AMPU stood at NZ$71.40, NZ$28.10 respectively in 3Q.Further, churn on UFB remains lower than copper broadband at 2% and 76% of subscribers on 50mbps or higher speed packages.

H1FY17 driven by acquisitions

VOC is expanding its business via acquisitions and has recently signed an Australian Capacity Agreement with Superloop. For H1FY17, Vocus revenue grew by 403.9% yoy to $888.2mn and underlying net profit after tax grew by 235.6% yoy to $91.8mn. Importantly the performance was driven by strong demand for their products coupled with the acquisition of Amcom, M2 in February 2016 and Nextgen Networks in October 2016.

Continuous review of business portfolio

VOC is continually reviewing the business portfolio and accordingly pursuing the sale of their non-core assets or businesses. Vocus is making further investments in the sales, marketing and marketing capabilities to leverage the portfolio of brands. VOC has planned to make investments in data analytics capability to take the advantage of the shift from copper to fiber occurring over next few years in both Australia and New Zealand to grow the market share, to reduce the customer churn and to product portfolio. However, the FY 17 result would be impacted by accounting changes and deferment of revenues and cash flows to FY18 as revised.

Stock Performance

VOC stock has declined by 62% and 20% over the past 12 months and three months, respectively, as on May 02, 2017, owing to increasing competition in the telecom space and recent successful bidding for spectrum by peers.  Notably, it was down by 27% on May 03, 2017 after releasing the reduced guidance for FY17. There are some concerns over deferment of revenues and financial position due to excessive leverage. Further, market perception about a well-managed company seem to have been thrashed with concerns pouring in about integration of latest acquisitions. There is definitely a wave of disappointment with takeover speculation creeping in but the street’s view might be an exaggerated one. Efforts on mending the current issues with support from catalysts including core technology strength, expansion of broadband subscription base, enhanced international accessibility and changes to management team, might help Vocus recoup considering a long-term perspective. Looking at the recent fall and sudden build-up of uncertain environment, we put a “Hold” on the stock at the current price of $ 2.44

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