Probably not many investors take to reading transcripts of conference calls after a company release their results. However, I urge investors to read or listen in to a few of these conference calls because there are a few things you can learn from these transcripts or conference calls.
Conference calls lets the investors know what are some of the common questions asked by analyst to the managers of the company. Through these calls or transcripts, you would be able to identify what matters to an analyst. It also allows you to see the differences between what you are looking for and what most analyst are looking for.
With that you would be able to form a better set of KPI to measure this company against their competitors and also what are the red flags to look out for.
This week I was looking through Telefonica, the third largest telecom company in the world’s half year 2011 results conference call transcript [transcript here >] I gathered 5 points that sums up what analyst looked for and what matters to telecom managers.
Profit and Growth Projection do not surprise most of the time
One thing I do notice is that recession or boom time, the managers are able to gauge how their revenue will be. They revise that figure up or down but generally the advantage of this is that cash flow is predictable.
Because cash flow is predictable, capital expenditure and distribution decision such as stock buybacks and level of debts, dividends can be determined.
Price Wars are big in developed countries
If you understand game theory, you would understand that when one telecom slashes prices, it creates a race to the bottom effect. All the players do not win out. The consumer does. That is essentially what happened mainly in Europe, one of Telefonica’s home market.
Specturm becomes important to deliver adequate QOS
It is important that spectrum auction be conducted in a manner that is sustainable to the government but to the telecom industry as well.
The european telecom companies were killed in the past due to this incurring huge debts to vie for 3G spectrum.
The risk of debt is measure by how many times OIBDA rather than Net Debt/Asset
In this knack of the woods, our analysis to a company’s riskiness when it come to whether it can be a going concern is usually Net Debt/ Asset. Telefonica reported that their Debt to OIBDA is only 2.5 times, meaning given their cash flow generation capability, Telefonica can return all debts within 2.5 years.
Debt to OIBDA is useful probably because their cash flow is rather resistant even during recession. Having a low ratio shows that in the worse case, debts can be cleared quickly.
Contrast this to Singtel and Starhub who have a Debt to OIBDA of 1.2 times and 1 times roughly respectively.
The role of free cash flow
As with most telecom analyst, the conservative approach is for a telecom to pay out a high dividend through organic cash flow rather than debt and at the same time having a low debt to EBITDA ratio.
The constant query is whether Telefonica can pay a dividend of EUR 1.70 in FY 2012. The CFO had to re-iterate a few times that they are able to meet that three triangle which is to maintain the dividend guidance, stay low in debt to EBITDA ratio and pay out from organic cash flow.
It is also important to note that Telefonica do not have a fix dividend policy. Telefonica intends to pay out div till 2013 before throwing the utilization method back to share holders to decide if they prefer a stock buy back or another way of realizing value.
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