Earlier this morning Vocus Communications Limited (ASX: VOC) reported that underlying NPAT was up by 53% to $13.6 million which was bolstered by a 38% rise in revenue to $92.3 million. However, CEO James Spenceley provided analysts with a little more detail when he presented the annual results this morning.
Mr Spenceley now predicts that capex will remain roughly flat in the coming year. This is because the company sees "lots of opportunities," and as a result, Mr Spenceley believes that "artificially constraining capex would be a mistake." This chart show's why he's right:
The reason analysts and stock brokers might want to constrain capital expenditure is so that the company starts generating more free cash flow and can pay a bigger dividend as a result. This would also reduce the speed at which depreciation is increasing, and gradually make the value of the company more obvious to those investors who focus on earnings rather than cashflow. This would allow early investors to sell out at a premium.
Indeed, it was heartening to see that Vocus' personnel are "excited" to report that the company produced free cash flow of $9.2 million in 2014. This is despite a substantial amount of capital expenditure that will grow the business in years to come.
The fact that the company is focussed on cashflow is pleasing because this is the best way to value this type of business, according to Warren Buffett. Now that the company's free cashflow exceeds its capital expenditure, it will be able to make more acquisitions, increase the dividend and generally have even more flexibility than it had before.
Vocus has four business segments, and investors should pay attention to each of them.
Internet
Revenues were up a whopping 38% to $37.5 million, but the really good news was that the steadily reducing yield is beginning to stabilise, as the chart below demonstrates.
Voice
Voice revenues declined by 16%. Although this is the least important segment, regular readers will note that another one of my shareholdings – My Net Fone Limited (ASX: MNF) is more focussed on these kind of services. As I've said before, Vocus mainly offers voice as part of a product bundle.
Fibre and Ethernet
This division is the most important one because it provides the sustainable competitive advantage. Pleasingly, the revenue was up over 87% to $28.2 million. This division is to be bolstered by the acquisition of FX Networks in New Zealand. It is important to understand that FX Networks has relatively low yield because the network has not been properly leveraged.
More broadly, the company has now connected 1,048 buildings, up from 641 last year, which is impressive growth indeed. There's plenty of scope to increase the number of customers per building – and this is a key focus of marketing efforts.
Data Centre
Data Centre revenue was up 19% to $18.6 million. Mr Spenceley noted that they expect further revenue growth from the Auckland and Melbourne data centres, and I was chuffed to hear that they are expanding one of the centres by removing the reception area. After all, data centres don't need a reception and that shows the company is serious about making the most of every dollar spent.
Importantly, the Perth data centre acquired from ASG Group Limited (ASX: ASZ) is expected to allow Vocus to cross-sell other products. This was certainly the experience they have had with the first data centre they acquired in Perth.
In conclusion…
The bottom line is that Vocus is increasingly focussing on building its brand. The idea is that this will allow the company to win customers at lower cost, rather than have too many salespeople chasing customers. The company is optimising its systems to allow it to leverage its netwtorks in the ways I described above. I think this is a strong strategy, and my opinion is that most investors underestimate how valuable fast and secure dark fibre internet connections can be. My guess is that Vocus will outperform the S&P/ASX 200 Index (INDEXASX: XJO) over the next 10 years.
