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Den Networks' Q4FY18 results (Underperformer) - Weak quarter; underinvesting in Broadband…

Q4FY18 result highlights (Ind AS)

• Cons. rev. was down 4% qoq at Rs3.1bn (9% miss – performance across both Cable and Broadband segments was weak during Q4).
• Cable subs. rev. grew by only 0.6% qoq (IDFCe: 6%). Net ARPU was largely flat across phases (Phase I/II/III/IV net ARPU at Rs122/96/66/56 vs Rs120/96/64/56 qoq) as unavailability of Zee’s content on Den’s network limited its ability to improve realisation. Carriage rev. slipped 2% qoq to Rs830mn (IDFCe: 1% qoq growth). While activation rev. fell 33% qoq (IDFCe: flat qoq).
• Broadband rev. declined by 6% qoq to Rs160mn (14% miss) led by competitive pressures as ARPU as it fell by 2.4% qoq to Rs565.
• Content cost grew by 6% qoq / 15% yoy in Q4.
• Given weak top-line performance, EBITDA fell 28% qoq to Rs568mn (33% miss) while EBITDA margin declined 600 bps qoq to 18%. Ex-Activation EBITDA came in at Rs328mn (33% miss) vs Rs428m qoq.
• There was a tax write-back in this quarter (to the extent of Rs111m) even then Den reported net loss of Rs108m (IDFCe: profit exp. of Rs48m) due to weak operating performance and higher than exp. interest expense.
• DEN’s active (paying) subs. base was flat qoq at 7.4m for Q4FY18. Another ~1m active subs base is in subsidiaries which are not consolidated due to Ind-AS accounting.

Key positives: Content cost increase within guidance.

Key negatives: Flat net realisation in Cable ARPU.

Impact on financials: Cut ex-activation EBITDA by 6.7%/7% for FY19E/20E.

Valuations & view

DEN, under the changed management, has led the Cable industry in monetisation which is expected to continue, albeit slowly. However, we expect sharper increase in net content costs from here on as broadcasters look to improve their monetisation from Phase III&IV markets. DEN has historically under-invested in Broadband and is now trying a different model, of franchising, to participate in this growing market. We await execution and competition’s response before deciding on the scalability of this model. Moreover, Jio’s broadband/TV ambitions remain a potent sectoral risk. Maintain Underperformer with revised PT of Rs103 (SoTP based on FY20E). Key risk to our call is any telco led acquisition in the fixed broadband space.