Sept 10, 2009 - A write-off of old equipment will help Sri Lanka's Dialog Telekom, a unit of Malaysia's Axiata, lower costs, support higher call volumes in a turnaround strategy after positing a record quarterly loss, an official said.

A six billion rupee network equipment write-off drove up losses to a record 7.6 billion rupees in the June quarter at Dialog, which runs the island's largest mobile and pay TV networks and also has broadband and fixed access units.

"Our programme of cost management is in no way complete. We are encouraged by the results in the first two quarters (this year)," chief executive Hans Wijayasuriya told ETV’s Lanka Business Report in an interview.

"Over the next few quarters we will continue to be very aggressive and rescale operations and deliver the operating margins that an operator of our size should contribute."

Revenue Crunch

Small signs of a turnaround are already apparent following aggressive tariff cuts which almost halved Dialog’s average call minute revenue.

Two consecutive quarters of falling mobile revenues were reversed with a three percent June quarter top line growth over the March quarter mainly from higher post paid call volumes and international termination income.

Revenue however is still down 5.0 percent to 15.6 billion rupees in the first six months, form a year earlier.

"I think the turnaround has to come from the mobile business," says Wijayasuriya. "If industry revenue grows we will too…we are worried because industry revenue hasn’t grown, which is unfortunate."

Wijayasuriya also juggles a job as Axiata’s chief operating officer although he has substantially reduced travel to the group headquarters to concentrate more on turning Dialog round.

Dialog responded to competition with steep price cuts including free incoming calls, per-second-billing and a phone package offering 1000 minutes of free outgoing calls within the network.

Its average revenue per minute nearly halved to 2.70 rupees in the 12 months to June, while phone usage (outgoing call minutes) only rose 30 percent.

"The turnaround will come from our 60 percent share of the market," says Wijayasuriya referring to Dialog’s revenue share which is higher than its six million share of subscribers.

Its closest competitor, Sri Lanka Telecom subsidiary Mobitel, has a 20 percent revenue share.

The rest of the market is made up of Millicom owned Tigo, Hutch and latest entrant Bharti group's Airtel.

"The industry must come together and make sure revenue growth and money is there to invest," he says.

Tackling Costs

Headline grabbing cost cutting announcements including giving up expensive office space and retrenching nearly 300 staff partially helped results in the last quarter.

Direct costs excluding depreciation and non recurring expenses were down two percent and operating costs by three percent in the June quarter compared to preceding quarter.

The steepest reductions came in network and base site maintenance and salaries.

"People erecting towers, operating our network and looking after our customers are very busy, there is no room for rescaling human resource costs," says Wijayasuriya.

"Instead we looked at executive and management cadres and looked at bringing down this cost by 30 percent. We achieved more than that"

Wijayasuriya estimates quarterly HR costs would be reduced between 15 to 18 percent overall while in the June quarter, when the full impact of the layoffs weren’t felt, salary costs declined 11 percent.

"Getting our costs in line with a new economic structure is a very tough exercise but I think we are on track," says Wijayasuriya.

"We are hopeful the same momentum will continue in to the future."

Under Wijayasuriya's leadership Dialog went public in 2005 raising a then record 8.5 billion rupees.

Its shares have since halved and closed trading at 5.75 rupees on Monday which is 80 percent off its 29.75 rupee peak. Discarding the old network and investing in an advanced ‘next generation network’ will give a 1.5 billon rupee annual boost to its bottom-line because of lower operating costs and depreciation charges.

"Next generation networks offer a shrunk down cost structure in two ways, one is the cost of operating, energy, the nodes that you need, these are all de-scaled by 80 percent," says Wijayasuriya.

"In addition the incremental upgrade cost when we add subscribers is also at least 80 percent less," he says

The company will spend 4.5 million dollars replacing the 52 million dollar (6 billion rupee) network equipment write-off.

Interconnect Bonus

An interconnect agreement levying a cost based charge on call termination form the originator could be an unexpected bonus for Dialog.

"Larger operators, who have invested more on infrastructure and have created reach …are not adequately compensated due to smaller players being in a position - without the framework of interconnect - to ‘dump’ traffic (on large operators),” says Wijayasuriya who has been campaigning for an agreement for more than a decade.

"This is a value destructive activity because it destroys value in highly capitalized networks, whereas it’s only creating short term returns for those who are not highly capitalized."

Telecom regulators office is finalizing a cost based interconnection terms for telcos, including fixed-line firms, that may result in a windfall to mobile operators with wide coverage over the short term.

"Yes in the short term that’s correct, almost 55 to 60 percent of the traffic is inbound for Dialog due to its reach,” confirms Wijayasuriya.

Wijayasuriya says traffic flows will adjust as telcos adjust pricing so that costs get shared.

"Today, price advantage does not mean cost efficiency, today price advantage could mean that you are dumping traffic on to somebody else who is bearing the cost and you have no need to pay that," he says.

Small telcos attract customers with their aggressive pricing; usually by undercutting big operators. Cost based interconnection may halt the tariff slide.

"With a cost based interconnect charge there is a floor unless an operator is willing to even subsidize that floor. What it enforces is that rationally. Operators become sensible and it also prevents them doing things that are bad for themselves," adds Wijayasuriya.