Ovum comment: 3 Group - the road to profitability still looks very bumpy

Hutchison 3 group, which is part of the Hong-Kong based Hutchison Whampoa conglomerate, has announced its 2006 full year results. Hutchison 3's total revenues are up 35% year-on-year to HK$50,668 million (€5.3 billion), and the group narrowed its losses, before tax and interest, by 45% year-on-year to HK$19,996 million (€2.1 billion).


Hutchison's 3 Group had 14.7 million customers in December 2006, compared with 11.9 million in December 2005. Average 12-month rolling ARPU rose by 8% to 45.63. Its average monthly churn has dropped from 3.2% to 2.6%. The Group's subscriber acquisition costs dropped to €250 in 2006 from €262 in June 2006 and €293 in 2005, despite Hutchison's increased focus on higher-value segments and its use of discounts to attract customers in those segments.


Hutchinson Whampoa continues to believe it can achieve positive EBITDA after deducting all subscriber acquisition costs in the first half of 2007.


Ovum senior analyst Elsa Lion comments:


Hutchison 3's top level performance is improving noticeably. The group continues to report one of the highest ARPUs amongst all operators worldwide, as well as one of the highest non-voice ARPUs. Moreover, its ARPU continues to grow. Its customer base is also growing at a healthy rate, even though it operates in some of the most competitive markets on the planet.


Factors underlying this performance include 3's attractive data offerings, a stronger pricing strategy and a push for on-net offers. This has enabled the operator to lower its costs while attracting new customers.


However, while the top line figures paint a very positive picture, below the varnish it is easy to see large cracks. 3 is still a long way from sustainable profits. The operator is doing very well in some of its smaller markets, such as Australia and Sweden, but it is unlikely that 3 will be able to sustain this growth without substantial further investment. These are mature and highly competitive markets, where call charges are dropping (3 Australia and 3 Austria's ARPUs are down).


In any case, it is primarily the health of 3's businesses in Italy and the UK which will determine whether the operator will succeed in becoming profitable in 2007.


Over 75% of 3 Group's customers are in these markets. Italy's blended ARPU fell by 3%, even though the operator grew its postpaid user base significantly.


Its prepaid revenues in the UK and Ireland have dropped by 23% even though its prepaid customer base grew by 4%. The operator also continues to subsidize users in Italy and the UK very heavily, offering two handsets for the price of one, half price line rental, and large commissions to retailers.


If its SACs at Group level are falling it may be because 3 is not acquiring as many of these expensive customers in its core markets. In these core markets a 3G network is no longer a competitive advantage, and 3 competes mainly on price. Therefore, it will be difficult to achieve both short-term profitability and long-term growth.  


Elsa Lion is a senior analyst contributing to the [email protected] advisory service