Not all revenue is created equal

NT in its 10Q (filed 11/3/05) has revealed that its BSNL business might not be as big as it has once anticipated. NT has raked up losses of approximately $263 million on recognized revenues of $288 million. Not really a profitable endeavor in my opinion. Company expects to build the remaining revenues “profitably, progressively”. That remains to be seen as the size of the deal might not be as large as originally anticipated. So you have less revenues coming in then expected and you have made more losses then expected, just perfect.

The pricing pressure in Indian wireless infrastructure market is notoriously intense driven by low ARPU earned by local operators. ERICY, NOK, ALA have also had trouble making money in India selling equipment. ERICY on the other hand has focused on operating networks (ERICY runs Bharti’s network) to make up for low profit equipment sales. ERICY gets 25% of its revenues from services and operating networks, a trend that will be adopted by others and margins will come under pressure in that business also.

BSNL has a 60-70 million lines tender worth more than $4 billion out for proposal out of which about 25% is reserved for a Indian equipment maker. The NT episode has put other bidders into a defensive tizzy. ERICY, which has over 40% market share in Indian wireless infrastructure market, proclaimed on their earnings conference call “we are not going to lead prices down”. According to my sources BSNL has banned Huawei from bidding. What were they thinking by banning the lowest price bidder? With Huawei missing the pricing might not be as bad this time around. BSNL management has indicated that it would not squeeze suppliers as it was not interested in just buying cheap equipment.

Investors should always pay attention to margin each incremental dollar in revenue brings. Remember, value is created on the margin. After the dotcom bust winning market share by losing more money is not in fashion any more.