Recently I had a chat with Amaysim Australia Ltd (ASX: AYS) CEO Julian Ogrin and Ged Mansour, director of communications.
Revisiting the numbers
The first thing to say is that my forecast of $50 million EBITDA for 2017 contained in my previous article on the company is likely to be wide of the mark. I extrapolated results from the second half of 2016, but did not realise that the business typically has a stronger second half of the year. Therefore my forecast is probably too optimistic.
There are a number of reasons for the seasonality. Firstly, it is subject to a wholesale price review for access to Optus's 4G network every February. This year, as has been the case in recent times, Amaysim was able to achieve a favourable result from this review, but there is no guarantee that future periods will follow suite. However, given Amaysim's growing customer base I would expect that if anything the company's bargaining position will be strengthened in future negotiations with Optus.
Another reason that second half profit was so strong is that typically marketing spend is higher in the lead up to Christmas. Marketing costs actually reduced slightly in 2016 (compared to 2015) and it will be interesting to see if subscriber growth falls off as a result. Still, 2015 marketing spend was sufficient to drive an increase in subscribers of 108,000 in 2016 and so there is no obvious reason to think that a similar result cannot be achieved this year.
A third reason for the strong second half performance relates to a true-up of expired vouchers at the end of the year. This process means the company can book revenue from unused expired minutes paid for in advance and contributed to a $4.7 million rise in other income for the year.
During our chat I also broached the subject of the $17.8 million payment to Optus as part of the Vaya acquisition detailed in the company's cash flows statement. This relates to switching Vaya's subscribers over to Amaysim's existing service agreement with Optus which has superior terms to that which Vaya had previously operated under. Julian assured me that this liability is one-off in nature and will be fully paid over 24 months and so should be excluded to understand the true cash flow generation of the business. Doing so implies $34.5 million of operating cash flow for 2016, in line with underlying EBITDA, highlighting the company's tremendous ability to generate free cash.
More than just a brand
Something I never properly appreciated before is how much value Amaysim's services add to its customers. As Julian explained, traditionally mobile virtual network operators (MVNOs), those who piggyback off the networks of others, were just a brand name and depended on their wholesale partners for everything else. But Amaysim is a genuine technology leader that has developed a proprietary platform enabling it to connect subscribers at scale and manage their accounts efficiently. It also provides a seamless user interface that means customers can switch plans and activate their sim cards with the click of a button.
This explains why Amaysim receives among the lowest levels of complaints in the industry and continues to experience falling customer churn. The fact that Julian and Ged were invited to speak at the MVNO World Conference in Amsterdam earlier this year further suggests that Amaysim is a genuine industry leader.
Given Amaysim has no direct physical presence it can provide these market-beating services at very low cost. Whilst competitors are undoubtedly also investing in technology, they are invariably less agile than Amaysim due to large legacy businesses. For example, unlike Amaysim most of their customers are on long term contracts and many of them still issue monthly statements. Also, competitors usually sell handsets making them more dependent on a physical presence.
NBN opportunity
Amaysim is now aiming to deliver a similar killer combination of great service at low prices in the broadband industry and completed the acquisition of Australian Broadband Services (AusBBS) yesterday. AusBBS provides Amaysim with subscriber management technology that simplifies the complex process of setting up home broadband.
As the roll-out of the NBN gathers pace, consumers will be forced to switch-over from their existing networks. Incumbents like Telstra Corporation Ltd (ASX: TLS) and TPG Telecom Ltd (ASX: TPM) are likely to switch over their existing customers as a matter of course and so it won't be easy pickings for Amaysim. However, the company is hoping to persuade a good chunk of its 966,000 subscriber base to come across and I think its low cost, customer focused offering will prove tempting to many of them.
Whilst my original forecast may have been a little over the top, I still think that Amaysim represents decent value at current prices, especially when compared to the other listed telcos.
