JSE-listed Huge Group, which operates in the least-cost routing (LCR) space, saw its stock close 9.91% lower on Friday, despite reporting profit that improved just more than three times.
Although revenue dropped 26.6%, from R212 million to R156 million, in the six months to August, the group grew its net profit to almost R9 million, from R2.7 million a year ago. Despite the gain, its shares traded lower on Friday to close at 100c, an 11c or 9.91% decline on the day.
Huge says the decline in revenue is due to the loss of "upper segment clients" whose value of spend is more than R60 000 a month, although margins are lower than those who spend less. "Competition at the upper segment of the market is fierce and price elasticity is greater," says Huge. "Given the price compression at this end of the market, gross margins are very small."
As a result, says Huge, its largest unit, Huge Telecom, has decided to focus on the lower end of the market, which is less price-elastic and offers better margins. Huge Telecom continues to focus on cost containment, which led to lower operating expenses, down a further 9.41%, to R34.6 million.
Huge benefited from its controversial single stock futures contracts and contracts for difference, which increased its operating profitability R3.8 million in the six months to August, compared with a R6.4 million loss in the first half of last year.
In 2009, two Huge directors bought shares in the company for R8 million, which were then sold back to the entity without minority shareholders being told. The JSE fined CEO James Herbst and then chairman Anton Potgieter R5 million each for allegedly flouting its rules.
The directors challenged the fine at the Financial Services Board, which amended the JSE's decision and set the fine aside, replacing it with a R3 million sanction for each of the directors.
Lower prices
Huge says the market for telecommunications products and services will continue to experience wholesale price compression in "the immediate future", which is good news for Huge Telecom as this should lead to higher profit margins.
The LCR unit will continue to focus on adding alternative revenue streams that complement its business and will seek to grow its client base to enhance capacity use to improve margins, it adds.
Huge notes that its telecoms unit needs to grow revenue to be successful in its bid to target the lower end of the market.
Eyeballs, Huge's media interest, continued to develop its proprietary in-application mobile phone advertising technology, in support of its technology provider strategy. The Eyeballs technology is available for all Symbian phones as well as BlackBerry, while other operating systems will be continually considered based on the size of the addressable market, says Huge.
Eyeballls is well placed to achieve breakeven profitability in the near future, says Huge.
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