AltX-listed Huge Group has posted a strong turnaround in its fortunes in the past six months, converting a R5,9m loss in the six months to 31 August 2009 into a profit for the full year to 28 February of R8,1m on revenues that fell from R608,5m to R573,5m.
The group has done this, it says, by improving operational efficiencies and focusing on lifting gross profit margins. “The focus of the group for the coming year will be to translate the improved operational efficiencies and higher gross profit margins achieved by Huge Telecom into increased profit margins at group level,” it says.
The results, however, do not reflect the reduction on 1 March in wholesale mobile termination rates — the fees the mobile operators charge one another and other operators to carry calls onto their networks. Companies like Huge Group, which provide least-cost routing solutions to corporate customers, are likely to take the full brunt of a reduction in the rates.
However, in notes accompanying the financial results, Huge Group says it also “stands to benefit from the regulatory reduction in termination rates”.
It says the reduction will put pressure on voice-over-Internet Protocol (VoIP) service providers. It says a plan by industry regulator, the Independent Communications Authority of SA (Icasa) to reduce termination rates on fixed-line networks — possibly by as early as next month — could “post an imminent threat to least-cost routing companies in Huge’s peer group that invested heavily in recent years to build VoIP infrastructure”.
“While these players may have briefly enjoyed additional revenue streams on incoming voice traffic, their investments are at risk of being rendered unprofitable long before their expected break-even point if the proposed lower fixed-line termination rates come into effect in July 2010,” the group says.
“Huge Telecom’s strategic decision not to adopt a VoIP-dominated business model has meant that its economic viability will not be affected by these possible changes.”
To deal with the threat posed to its least-cost routing business, the group says that in the year ahead it will focus on introducing “alternative revenue streams that complement its business”. It doesn’t disclose the likely financial impact of the reduction in termination rates on 1 March, or the likely impact of future rate cuts.
Huge Group CEO James Herbst told TechCentral in an interview last year that there were “mitigating factors to the risks” posed by lower termination rates. “We’re not putting our heads in the sand and saying least-cost routing is not under threat. What we’re saying is the business model may change,” he said. “We may have to reinvent ourselves, but we can do it a lot quicker than people think.”
In the 2010 financial year, Huge Telecom, the group’s largest subsidiary, reported an 11,8% increase in gross profit margins, improving from 18,6% to 20,8%. This was achieved through better management of input costs. Notably, Huge Telecom created a revenue assurance department to enhance the management of airtime available for sale. As a result, it says airtime lost due to expiry was reduced dramatically.
For the 2011 financial year, Huge Group says it will continue to focus on improving efficiencies. It also wants to lift revenue in its new Huge Media division, which, through the Eyeballs Mobile Advertising operation, develops a proprietary advertising platform for mobile phones. It plans to take this offering to international markets, it says. — Staff reporter, TechCentral