Investors that have ever looked at a mobile telecommunications firm have undoubtedly come across the terms "ARPU," "churn," and maybe even "cost per gross add." Although these figures have become standards by which mobile firms are measured and compared, they often paint an inconsistent or imperfect story. We believe there is a better and simpler way to evaluate wireless firms around the world. In this article, we look at common wireless metrics and a measure we use that pulls all these figures together, and highlight a handful of wireless stocks from around the globe we believe are attractive.
Commonly Used Telecom Terms
One of the most frequently used metrics when analyzing wireless carriers is ARPU. Short for average revenue per user, ARPU is the average monthly wireless service revenue for a quarter or year--as defined by each carrier--divided by the average number of customers served during the period in question. Wireless service revenues are primarily a function of usage and pricing, two variables that can fluctuate significantly over time as conditions change. As investors (rather than consumers), we love high ARPUs, all else equal, but falling ARPU isn't always a bad thing. Investors tend to jump to the conclusion that falling ARPU means the competitive landscape is getting tougher and carriers are losing pricing power, but several other, more benign factors are often also at work, including regulation (changes in interconnect rates, for example), the economy (recession-based thriftiness), and customer mix (lower-income users adopting service). In addition, carriers tend to become more efficient as a market matures, and some degree of the cost savings gained is likely to be passed on to consumers.
Another commonly used measure called churn is defined as the percentage of a carrier's customer base that disconnects service each month. Churn serves as a basic measure of customer loyalty. Of course, customer stickiness can be overrated, if a firm has to pay too much for that loyalty. This is one reason why it's important to keep a close eye on the cost per gross customer addition, sometimes called CPGA. This figure measures the average cost of attracting new customers. If a firm has to buy growth by pumping too many resources into promotions and handset subsidies, profitability is sure to suffer. CPGA unfortunately isn't consistently reported across the wireless industry, and many carriers don't provide the figure at all.
AMPU Brings All of Those Concepts Together
The major problems with the measures discussed above are that none can be viewed in isolation, and changes from quarter to quarter can obscure true operating performance. Maintaining high ARPU is a bad trade-off, for example, if the result is higher churn and the need to spend more on acquiring customers to grow. Low churn is bad if it comes at the cost of uneconomically low ARPU or retention costs. Low CPGA could indicate that a firm has opened the gates to customers with bad credit that can't get service elsewhere, setting up painful churn down the road, or that pricing is too aggressive. The best management teams in the industry strike a balance between customer growth and retention, pricing, and--ultimately--profitability. It can be difficult, for example, to let churn rise when others in the market are offering unsustainably low prices because investors immediately notice higher churn at the next quarterly earnings announcement. The effects of heavy discounting, on the other hand, could take several quarters to show up in a firm's financials as pricing resets across the customer base.
To cut through these issues, we've defined a measure we call AMPU, or the average margin per user. We calculate AMPU by dividing a firm's monthly earnings before interest, taxes, depreciation, and amortization for a given period by the average number of customers served during that period.
