VOC - Vocus Group

[Ves]

Just comments in general - RSP's like VOC & TPG will be under intense pressure with dropping margins with the NBN, the cost of supplying the service are much greater than the amount consumers will bear, so two things happen, firstly the RSP's grossly oversell the service, which causes congestion and consumer fury at not getting what they are paying for and of course margins drop.

To give you an idea of the scale of the problem, the CSV charges for a 100mbps connection are over $1500 per month - so if my RSP were to provide a continuous 100mbps service to me - which is what I am paying for - they would make a massive loss! (there are other smaller costs as well.)

So RSP's run very low contention ratios, hoping like hell that not all the customers are trying to use all of the speed and date at the same time of day.

The double wammy is that at the same time users habits are changing with lots of users signing up to streaming services like Netflix which means the load on the infrastructure is quite different to when people just browsed the web and checked their email.

Its not a sector I have any interest in being invested in.

Hi galumay

I think we've got a fairly similar understanding but we're coming at it from different angles.

The higher costs actually favour the big players because of their much larger customer bases. My understanding is that because the Gov decided to make 121 Points of Interconnectivity (POIs) instead of 14 it means an ISP would need a much greater amount of connections to the network to service a client base across all areas. As you alluded to the costs of access to each POI are very prohibitive because the data blocks are sold in large amounts (NBN Co itself does not seem to split them into small chunks). An ISP with a small amount of customers will simply not be profitable at some POIs because of this. What will happen is the big players will buy the data blocks and on-sell any excess to the smaller players (which is how "reselling" works now, it's just that there is only one wholesaler (NBN Co) and larger "middle men").

By default the cost bases of the bigger players who can buy data blocks direct from NBN Co must be cheaper than a smaller player who has to buy them from said bigger players.

Now re access: I actually think you've got it around the wrong way. The bigger players will split the speed up however they see fit, and at the end of the day the retail customer basically has no choice. The bigger players will get the margins they want, and if you want faster speeds you'll pay through the teeth for them. The only way margins come down is through competition IMO.

The bigger players all conveniently have their own high speed networks. For instance Amcom sits in Vocus. Why does this matter? Because businesses who actually need higher speeds and reliable connections will pay for it. And they're more likely (just IMO) to go for a private player over NBN. Arguably there's probably also privacy/security benefits too.

Then there's the overseas data cables... TPG and Vocus seem very interesting in expanding these. Again outside the NBN network, but necessary by default for Australia to access anything outside of its borders. They're cash cows once you've got the scale too.

That's how I think it will play out.

 

[So_Cynical]

Im surprised at the sell off, VOC has significant network infrastructure that allows them to provide secure stand alone networks to business, this will compliment the NBN offering, provide what the NBN cannot - security and always on redundancy.

Holders participating in the dividend reinvestment plan will get some cheap shares, i only re entered the plan 2 weeks ago due to the SP weakness. love cheap shares.

 

[craft]

galumay & Ves

The combination of your two posts are gold.

Good discussion of industry situation. I've got nothing to add -other than to say my 'key' valuation driver now consolidation for all intents and purposes has completed is industry competition between the major four. Will it resembles bank competition or something more fierce.

I don't doubt that society will bare a profitable industry - and if it really won't NBN Co (govt) is likely to wear the subsidy because it is vital Infrastructure. Besides have you tried to get a phone out of the hands of kids - They would buy credit before they would pay for food.

 

[craft]

Im surprised at the sell off, VOC has significant network infrastructure that allows them to provide secure stand alone networks to business, this will compliment the NBN offering, provide what the NBN cannot - security and always on redundancy.

Holders participating in the dividend reinvestment plan will get some cheap shares, i only re entered the plan 2 weeks ago due to the SP weakness. love cheap shares.

The DRP pricing period runs from 21 - 27th - no doubt it is part of the current market price dynamics. Depending on how things work out I might have to puke up a little of my capitulation sandwich to bring portfolio risk allocation to VOC back into line however based on my perception of how the DRP pricing period normally unfolds my aim will be to wait until a little after the DRP pricing period.

 

[craft]

my perception of how the DRP pricing period normally unfolds.

To expand this thinking a bit. If you wish to maintain your allocation to a company that has a DRP with a discount and your holding is large enough that your dividend allocation is big enough to sustain a VWAP Algo across the pricing period, then you can be a price insensitive seller. Its just arbitraging to lock in the DRP discount and refresh the cost base. How much of this price insensitive selling is responsible for the spike on the CFO news? how much will it supress price over the DRP period?

 

[galumay]

Hi galumay

I think we've got a fairly similar understanding but we're coming at it from different angles.

The higher costs actually favour the big players because of their much larger customer bases. My understanding is that because the Gov decided to make 121 Points of Interconnectivity (POIs) instead of 14 it means an ISP would need a much greater amount of connections to the network to service a client base across all areas. As you alluded to the costs of access to each POI are very prohibitive because the data blocks are sold in large amounts (NBN Co itself does not seem to split them into small chunks). An ISP with a small amount of customers will simply not be profitable at some POIs because of this. What will happen is the big players will buy the data blocks and on-sell any excess to the smaller players (which is how "reselling" works now, it's just that there is only one wholesaler (NBN Co) and larger "middle men").

By default the cost bases of the bigger players who can buy data blocks direct from NBN Co must be cheaper than a smaller player who has to buy them from said bigger players.

Sort of, they are two separate issues, the mandating of 121 POI's was a disaster, and anyone in the industry knew it, but Telstra lobbied very hard on that and won the day at a cost to consumers that is yet to be fully realised. It was a disgrace. It led to the sale of Internode, (australia's best ISP), to iiNet and then the takeover of iiNet by one of the worst ISP's, TPG. Its caused a massive consolidation of the industry and its not healthy for competition.

But its quite a separate issue to the CVC charges, this is i think what you mean by 'data blocks', essentially its a charge for the bandwidth on the NBN network - and its the very high price of CVC that makes it impossible for RSP's to provide the service they are selling, to all of their customers, all of the time. Hence they run low contention ratios and customers suffer severe congestion at peak times. This effects all RSPs regardless of size, sure a bigger RSP may be able to operate with some profitibility on much lower margins, but it will affect profits significantly.

Now re access: I actually think you've got it around the wrong way. The bigger players will split the speed up however they see fit, and at the end of the day the retail customer basically has no choice. The bigger players will get the margins they want, and if you want faster speeds you'll pay through the teeth for them. The only way margins come down is through competition IMO.

You may be right, consumers may be the losers, but more likely it will be the RSP's, the ACCC is already looking closely at the effect of severe congestion and RSP's simply not providing what consumers are paying for, so I dont think there will be much wiggle room to increase margins. It simply wont be allowed, NBN Co and hence the Gov need the consumer take up rate to be high and for that pricing needs to be comparable with ADSL.

The bigger players all conveniently have their own high speed networks. For instance Amcom sits in Vocus. Why does this matter? Because businesses who actually need higher speeds and reliable connections will pay for it. And they're more likely (just IMO) to go for a private player over NBN. Arguably there's probably also privacy/security benefits too.

Then there's the overseas data cables... TPG and Vocus seem very interesting in expanding these. Again outside the NBN network, but necessary by default for Australia to access anything outside of its borders. They're cash cows once you've got the scale too.

That's how I think it will play out.

I think all the existing players have some network infrastructure, the number of businesses they can supply that network to directly is small though and the NBN will be the default connection for a lot of business, to the extent that RSP's can sell their own network and infrastructure into the business and enterprise market, the margins will no doubt be better, but it still leaves a big impact from the retail consumer market. The international data pipes are a valuable cash cow, TPG must be rubbing their hands together with the network they inherited from Internode via iiNet, it was the best international network in Australia.

All in all, interesting times in the sector, considering I am not invested in the sector, hopefully I am wrong and you see good growth in these companies!

 

[craft]

Wow missed this, this morning.

Only read the price sensitive flagged announcement from ACCC re next gen. Didn't bother opening the other announcement which I thought would just be a rehash of the ACCC statement yet it had an update on NBN subscription and margins in addition but wasn't marked sensitive and didn't have anything in the heading about the update????

Update
The Vocus Corporate and Wholesale business continues to perform strongly, exceeding new sales targets in Q1 FY17 and will be further strengthened with the ability to target new customer segments and markets following the integration of the Nextgen assets.
As the roll out of the NBN gathers pace, Vocus’ Australian Consumer business will also benefit from the fibre network that the Nextgen acquisition delivers, providing connectivity to the vast majority of NBN Points of Interconnect. The Company’s NBN subscriber base has continued to grow strongly since fiscal year end with a 21.7% increase in active consumer subscribers since 30 June. The average gross margin per subscriber in dollar terms has remained constant, with NBN margins in line with bundled copper broadband margins.
A comprehensive business performance update will be provided at or prior to the 2016 AGM following the completion of the Nextgen acquisition.

 

[VSntchr]

Wow missed this, this morning.

Only read the price sensitive flagged announcement from ACCC re next gen. Didn't bother opening the other announcement which I thought would just be a rehash of the ACCC statement yet it had an update on NBN subscription and margins in addition but wasn't marked sensitive and didn't have anything in the heading about the update????

I got lucky and only clicked the top one. Almost missed it too as I was half way to closing the ann before I noticed the trading update below.

 

[Ves]

Sort of, they are two separate issues, the mandating of 121 POI's was a disaster, and anyone in the industry knew it, but Telstra lobbied very hard on that and won the day at a cost to consumers that is yet to be fully realised. It was a disgrace. It led to the sale of Internode, (australia's best ISP), to iiNet and then the takeover of iiNet by one of the worst ISP's, TPG. Its caused a massive consolidation of the industry and its not healthy for competition.

But its quite a separate issue to the CVC charges, this is i think what you mean by 'data blocks', essentially its a charge for the bandwidth on the NBN network - and its the very high price of CVC that makes it impossible for RSP's to provide the service they are selling, to all of their customers, all of the time. Hence they run low contention ratios and customers suffer severe congestion at peak times. This effects all RSPs regardless of size, sure a bigger RSP may be able to operate with some profitibility on much lower margins, but it will affect profits significantly.

Thanks Gal, that's really helpful. Looks like I have got some gaps in my understanding and I appreciate that you have pointed them out.

Do you think the backhaul requirements for each POI would have a big impact on the viability of the smaller guys? Surely this stuff isn't cheap?

You may be right, consumers may be the losers, but more likely it will be the RSP's, the ACCC is already looking closely at the effect of severe congestion and RSP's simply not providing what consumers are paying for, so I dont think there will be much wiggle room to increase margins. It simply wont be allowed, NBN Co and hence the Gov need the consumer take up rate to be high and for that pricing needs to be comparable with ADSL.

Very big mess indeed. The big telcos here are pretty powerful and seem pretty good at grabbing the politicians by the nuts (to put it crudely). They definitely have got a lot of things they've wanted so far.

I think all the existing players have some network infrastructure, the number of businesses they can supply that network to directly is small though and the NBN will be the default connection for a lot of business, to the extent that RSP's can sell their own network and infrastructure into the business and enterprise market, the margins will no doubt be better, but it still leaves a big impact from the retail consumer market. The international data pipes are a valuable cash cow, TPG must be rubbing their hands together with the network they inherited from Internode via iiNet, it was the best international network in Australia.

That's possible but I'm thinking long-term that as technology improves reliable, fast internet will become more and more essential for business. If NBN Co cannot provide it, business has to look elsewhere IMO.

All in all, interesting times in the sector, considering I am not invested in the sector, hopefully I am wrong and you see good growth in these companies!

Thanks mate, reasonably small bet for me at this point. But I am learning heaps.

 

[Gringotts Bank]

Seems a bit weak technically and I don't follow the fundamentals described here. I'm out for a loss.

 

[Gringotts Bank]

Seems a bit weak technically and I don't follow the fundamentals described here. I'm out for a loss.

fkn hell. What happens when I override my rules.

 

[Klogg]

I'm still playing catch up on this one. But for anyone interested in the basic structure of NBN pricing, see the following:
http://tektel.com.au/wp-content/uploads/TekTel-Report-NBN-Pricing-Explained.pdf

It's a little old, but I think the structure still applies - just the numbers may have changed.

 

[galumay]

I'm still playing catch up on this one. But for anyone interested in the basic structure of NBN pricing, see the following:
http://tektel.com.au/wp-content/uploads/TekTel-Report-NBN-Pricing-Explained.pdf

It's a little old, but I think the structure still applies - just the numbers may have changed.

Yes, the structure basically remains, the pricing has changed - no RSP would make any money on those rates! (or else no one would get anything like the speed they were paying for due to horrendous congestion from the excessive contention ratios.)

 

[VSntchr]

To expand this thinking a bit. If you wish to maintain your allocation to a company that has a DRP with a discount and your holding is large enough that your dividend allocation is big enough to sustain a VWAP Algo across the pricing period, then you can be a price insensitive seller. Its just arbitraging to lock in the DRP discount and refresh the cost base. How much of this price insensitive selling is responsible for the spike on the CFO news? how much will it supress price over the DRP period?

Interesting post Craft.
Are these kinds of intricacies something that you built into a part of your approach when you started as a trader? Or something that has become more relevant overtime with an increase in size in the investment portfolio?

 

[Ves]

Yes, the structure basically remains, the pricing has changed - no RSP would make any money on those rates! (or else no one would get anything like the speed they were paying for due to horrendous congestion from the excessive contention ratios.)

Saw an Article in the AFR last week that the pricing will be changed again some time in 2017. Industry consultations will be starting shortly (that's the official line, my view is the government has had its arm twisted for a long time).

Interesting to see how significant the changes will be, but there has been a lot of talk that the current pricing model will put a lot of smaller ISPs out of business! (which fits in with your comments, I think?).

 

[So_Cynical]

Saw an Article in the AFR last week that the pricing will be changed again some time in 2017. Industry consultations will be starting shortly (that's the official line, my view is the government has had its arm twisted for a long time).

Interesting to see how significant the changes will be, but there has been a lot of talk that the current pricing model will put a lot of smaller ISPs out of business! (which fits in with your comments, I think?).

Uncertainty = opportunity.

 

[craft]

Interesting post Craft.
Are these kinds of intricacies something that you built into a part of your approach when you started as a trader? Or something that has become more relevant overtime with an increase in size in the investment portfolio?

Just observations. I should have been selling every day to keep under the portfolio risk limits and knowing I had signed up for the DRP you soon realise the two are pretty much going to negate each other which then gets you to thinking what the big funds might be doing.

Probably got hurt a bit breaking the rules and not balancing daily because it wasn't as strong on the 28th as I thought. So above theory is not proven by this example but I've made many observations of Discount DRP pricing periods acting interestingly.

TPM gap filled to perfection today and VOC has revisited lows on low volume and then had a pretty good bounce. I'm back loaded to the brim .... Think I'm playing with fire though.

 

[craft]

TPM gap filled to perfection today and VOC has revisited lows on low volume and then had a pretty good bounce. I'm back loaded to the brim .... Think I'm playing with fire though.

VOC is not feeling right. Spent most of yesterday spewing up the previous days ‘low volume retest’ purchases.
The value I ascribe to VOC is $7.50 at the moment. But the market doesn’t give a crap about what I think especially in the short run even if I happen to be within the ball park. Restoration of the price closer to ‘value’ doesn’t look so imminent to me anymore. I was looking for the Novemeber AGM to restore some clarity to the fundamentals and hence some early traction to appear from technical signals – but with some analysts now questioning the accounting methods and potential synergies (possibly as an excuse to bridge the gap between previous price targets and actual price) I don’t think the company guidance is going to carry a lot of weight and will largely be ignored until things are delivered. Add Industry Competition uncertainty, NBN wholesale pricing (politics as to whether NBN has to generate a profit as a standalone accounting unit), Integration risk of recent purchases and potential market pressure to clear all ex VOC and AMM shareholder that may not be natural holders of a more retail oriented telco.

I think an extended consolidation is more likely than quick recovery. No idea of what shape that consolidation will be, so I’m trimming back to the original core holding, which I will continue to carry through – because that original investment thesis is not negated by a long term consolidation.

I would still like to re-build the position which had been trimmed on the way up because of portfolio risk limits whilst the stock is below what I view it to be worth – but it doesn’t feel right at the moment- so at this stage I’m more happy to get it wrong and miss out than get it wrong and have to persevere through a potential extended consolidation with newly acquired high cost parcels.

Last glimmer of hope for this being the low of the consolidation is if it can bounce again real soon, but even if it does I think we are in for a decent duration consolidation that’s probably going to have quite a few swings and some lower time frame trends. Maybe one more try here but I can imagine better opportunities to try again later – But it’s all guessing!!!!!

 

[Klogg]

Integration risk of recent purchases and potential market pressure to clear all ex VOC and AMM shareholder that may not be natural holders of a more retail oriented telco.

That, in combination with your previous post on M2 reverse takeover are spot-on. Grist, Spenceley and Correll all leaving, which makes the M2 takeover official.

The only thing that doesn't add up - why would Grist add 250,000 to his holdings (August 30 notification) if he was going to reliquish his board position?

 

[craft]

That, in combination with your previous post on M2 reverse takeover are spot-on. Grist, Spenceley and Correll all leaving, which makes the M2 takeover official.

The only thing that doesn't add up - why would Grist add 250,000 to his holdings (August 30 notification) if he was going to reliquish his board position?

That explains the weakness I felt whilst transacting in the shares. Guess where my attention is going to be today...everything should be clearer now.

Wouldn't even like to guess Girst's motivation, manoeuvring, value, trading, personal, tax who knows, and at the end of the day its not really important to the business performance.