Internal Reserve

The Kazakhstani telecom market is going through an interesting period. For the first time since the GSM operators appeared in the country in 1999, the industry is experiencing a serious change in the balance of power.
 
When state-owned Kazakhtelecom purchased the mobile operator Kcell, the transaction was accompanied by vivid public debates between operators, public organizations and observers discussing the appropriateness of that deal. However, the deal took place. Beeline, Kcell, and Tele2 are the current leading mobile operators, but there is no absolute leader on the market. At the same time, the deal means a completely new paradigm for all market players. During the interview, Kaspars Kukelis, Chief Executive Officer of Kcell JSC, told Kursiv how the situation has changed for Kcell after it was purchased by Kazakhtelecom.
 
– Kaspars, many had been talking about the benefits from synergy that Kcell might get from Kazakhtelecom even before the deal was closed, but what is the reality? Could you please describe the latest financial results of your company?
– There might be some synergy effect in the future, but now Kazakhtelecom does not greatly affect our performance. Concerning financial results, as you know Kcell is the only mobile operator in Kazakhstan that publishes all financial information. In the latest quarter of this year, the company’s net sales grew by 6.1% and amounted to more than 41 billion tenge. Revenue from services increased by 8.4%, to 36.2 billion tenge. Concerning other key financial indicators, Kcell is also in the «green zone». Voice communication services grew by 2.7%, company revenue in the corporate segment increased by 18.1%, and revenue from data services grew by 18.6% to almost 13.5 billion tenge.
 
In the latest quarterly report, Kcell showed that the number of devices sold by the company continues to grow. However, sales of mobile devices by value decreased by 8.2%, to 4.9 billion tenge. This happened due to the expansion of the company’s offers and strengthening of Kcell’s position in the mid-price segment, which compensates for a decrease in the premium segment. As a result, the company’s net profit grew to 10.9 billion tenge. Over the past few years, Kcell’s revenue fell from 185 billion tenge to less than 150 billion. Today we are on the way to returning to our once strong position.
 
– Were there any cost-cutting measures?
– Marketing expenses decreased by 40% to 500 million tenge, and general and administrative expenses decreased by almost a third to 2.2 billion tenge. The cost of sales also decreased by 4.5% (to 27.4 billion tenge).
 
– What is changed in the subscriber base and what does the dynamic of average revenue per user (ARPU) look like?
– The ARPU indicator is growing: in the period from July through September 2018 ARPU was 1189 tenge. In the same period of this year, it’s already 1415 tenge. However, this is not an increase in the cost of service, and for most subscribers nothing has changed. Now we have 8.44 million subscribers in total.
 
Today we are not interested in attracting subscribers with a predictable short lifespan in the company. I mean, those who spend less than 200 tenge per month for communication services. Previously their share in Kcell was noticeable, but now it’s decreasing, which has a positive effect on ARPU growth.
 
Usually, low-margin subscribers arrive and leave with the same frequency. They buy SIM cards because of bonuses or packages for first-time users. In theory, one person can consume as much as 52 SIM cards per year, changing them one by one weekly. Of course, this is an extreme example, but it happens all the time. A lot of this «rotational traffic» takes place when someone sells something large and doesn’t want to show the main number, so they just buy a new SIM card and then easily drop it.

– According to some of the subscribers, the quality of Kcell’s connection is getting worse. Is it some kind of legacy of the past?
– Currently, we are thinking about how to improve the work of our mobile network. You know, it’s planning, budgeting, equipment ordering, production, delivery, installation, and testing. In general, these are problems for all mobile operators in Kazakhstan during the last 15 years because people expect much more than networks might give technically. If you take a look at the international statistics of customer satisfaction, it also shows a decrease in loyalty even though physical networks are constantly being built and more new technologies are involved in the industry.
 
– Kcell is actively promoting its new online store where active Kcell subscribers can buy a smartphone in just a few minutes and pay later by installments. How does it work?
– Consumption is growing and the role of mobile devices in people’s lives is growing too. Now gadgets are occupying a prominent place in daily life and sometimes we spend more time with our smartphones than with our loved ones.
 
Also, about 80% of Kazakhstani consumers buy cell phones on credit or by installments. For many buyers, this is one of the main purchases of the year. So, we see serious potential for growth in this direction with very good margins. One trick to sell more phones is an increasing number of physical points of sale. However, it’s too hard to convince people to invest in more shops. Therefore, we went online.
 
I agree that at some point Kcell missed this opportunity, but the company has its own very mature scoring and anti-fraud systems, which might be matched with many Kazakhstani banks. We have almost 8.5 million subscribers and know them very well: how long they have been using the company’s services, their monthly expenses and so on. In other words, we work with the internal potential of our subscriber base. Anyway, specific issues still remain concerning scoring transfer from offline to online.
 
– Can you give some examples?
– No, because this data might be used by scammers.
 
– What does Kcell offer in its online store?
– Contract phones. It means that when you buy a specific device, its price already includes an operator contract as well as additional gadgets, a power bank for example. After the consumer pays for the device he chooses, he can pick it up by himself or wait for delivery. This option is available in 18 major Kazakhstani cities and takes only 90 minutes.
 
– Does Kcell have a new business development strategy?
– I can’t respond right now because Kcell is a public company. Probably in the first quarter of next year, we will share our plans for future growth.