INTEGRATED telecommunications services provider, LIME Jamaica, continues to rack up losses for the three months to June 30, 2011. Its Income Statement for the period under review, reveals that LIME Jamaica generated revenues of $4.609 billion which produced a loss of $1.3 billion dollars. This comes on the heels of the telecoms company posting a whopping loss of $3 billion for year end March 2010.

Operating expenses were up by 25 per cent.

A major debilitating factor has been its operating expenses. For the quarter under review operating expenses came to $3.8 billion, a 25 per cent increase on last year. Employee expenses climbed to $1.10 billion while administrative, marketing and selling expenses came in at $1.66 billion. All in all, the Group recorded an operating loss before restructuring costs of $863 million. This compares with $216 million for the quarter ended June 30th, 2010.

However it was not all bad news. Despite the decline in revenues, mobile revenue and gross margin increased by 1 per cent and 46 per cent respectively over the same quarter in 2010. Under the stewardship of its chairman Chris Dehring and managing director Garry Sinclair there has been an uptick in LIME Jamaica's postpaid mobile subscriber base and improved retention and churn management of postpaid mobile customers.

Improving ARPUs

A very important barometer of LIME Jamaica's business which hinges on mobile, fixed line and broadband is Average Revenues Per User (ARPUs). Here there is a ray of hope with increases for mobile, fixed line and broadband by 7 per cent, 3 per cent and 14 per cent respectively. As far as broadband is concerned, LIME saw its margins fall by 2 per cent. The group has stated that it will be pushing on with increasing its residential penetration, and the increase in Internet usage augurs well here. The fixed-line business, in effect, the jewel in the crown, proved a tad disappointing registering lower margins.

LIME Jamaica has put together an all-star local executive cadre that includes Stephen Price, Grace Silvera and Kamina Johnson-Smith with the hope that they can fashion a turnaround. The group has also placed great faith in its mobile TV offering and launched it with great fanfare. It may well take off during the upcoming World Athletics Championships.

Give Dehring a chance

Despite the recent financial haemorrhaging, it is hoped that its parent company in London will give Dehring and his team enough time to turn things around. Already initiatives have been put in place, such as the signing of an MOU to provide Internet services to 283 educational institutions across Jamaica, and a number of cost-management initiatives. All too often a managing director is appointed and lasts for about two years before being succeeded by another with a new initiative to turn the fortunes of the telecoms behemoth. Dehring has the unenviable task of having to contend with an upbeat Flow and Digicel -- who continue to grow subscriber base and is looking to acquire Claro's operations in Jamaica.

Managing Director of LIME Jamaica Garry Sinclair, commenting on these first quarter results, said: "The quarter under review provided mixed results as the business begins to reposition itself as the island's only full-service provider. Our mobile business showed encouraging signs of improvement in terms of both revenue and gross margin over the same quarter last year, despite a reduction in prepaid subscribers. Higher ARPUs in both prepaid and postpaid of 19 per cent and 12 per cent respectively were primarily responsible for this performance. We will continue to focus on those areas of the mobile business whilst also making efforts to obtain a level playing field within the regulatory landscape.

"Revenues and margins from our Business segment were respectively 14 per cent and nine per cent higher than the same period last year due to more competitive pricing of our data products."

Dehring has for some time now bemoaned the lack of a fair regulatory playing field. Addressing the impending merger of Claro's operations with Digicel, Sinclair added: "We continue to closely monitor the planned merger between our major mobile competitors and are encouraged by the cautious and deliberative approach being pursued by both the government and regulators regarding its approval. We reiterate our expectations that a transaction with the potential for such an enormous impact on competition and the likely effects of market dominance will be given the requisite scrutiny by the government and our regulators before any approval is considered."

Citicorp, commenting on LIME Jamaica's performance, wrote: "The most charitable interpretation of the fiscal 1-Q results for C&W Jamaica, which is separately listed from controlling parent CWC, is that the business is gradually starting to bottom out. Revenue, gross margin and EBITDA were all down both sequentially and year on year, but the deterioration in revenue and gross margin appears to be moderating and the percentage gross margin at 63.9 per cent was the best for three quarters. Based on only one quarter's evidence, and given seasonality has lately been getting more extreme, this is not definitive."

Jamaica key to CWC turnaround

"We argued in our 6 July 2011 report Sunshine and Rain, given its gearing, CWC shares could go up a lot if it arrests the deterioration in its Caribbean business for which Jamaica is the key. In 2010/11, Jamaica generated 10 per cent of group sales, but absorbed 14 per cent of operating costs and 22 per cent of capex.

An analyst working in the City of London, speaking under condition of anonymity, said: " Dropped into the Jamaican stock exchange on the last possible working day prior to the filing deadline, on a Friday evening in mid-August, it was hard to imagine when opening them that CWJ's 1Q 11/12 results were going to be stellar. But the first few paragraphs of the CWJ results mentioning mobile revenue growth of one per cent hardly prepared one for the horror of the cash flow statement which showed a quarterly cash outflow of $1.4 billion (US$17million) on revenues of only $4.6 billion (US$54 million). Net debt ($22.6 billion) is now a faintly hilarious annualised 33x EBITDA, measured on a former incumbent boasting an EBITDA margin below four per cent.

"What must be more disconcerting for CWC shareholders is what these results imply for the rest of CWC Caribbean. While CWJ reported Jamaican mobile revenues up one per cent and ARPU up seven per cent, in the July IMS, CWC Caribbean reported ARPU down four per cent and revenues implied (by ARPU x subs) down 7.5 per cent (a worsening trend). If CWC's KPIs are actually a useful measure of financial performance, this implies that the rest of Caribbean mobile printed revenues down nine to 10 per cent in 1Q 11/12... ie there must be something wrong elsewhere beyond the "economy".

"It is hard to know what to say. Here is a telecoms company with $1 billion to refinance by March '13 which cannot, on our estimates, meet its August '12 bond obligations out of current financial resources without cutting the dividend completely, trading on 5x EBITDA (the same multiple as Vodafone), but without the cashflow support and with much worse trends. CWC trades on a FCF multiple of > 40x 11/12E and even ~14x in '12/13E and is currently — but perhaps not for much longer — paying a dividend of roughly 3x its underlying FCF. There are clearly people a lot braver than us in their assumptions. Our 28p price target assumes that the business does not get into financial distress because management actually does cut the dividend or sell assets. Clearly if management fails to amend/extend its bank facility (bond issuance seems unlikely in the current environment) or sell assets, this could get very much more ugly than we assume."

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