3 is Hutchison's magic number
Boosted by a huge one-off gain, Hutchison Whampoa reported another solid set of profits, but all attention was focused on subscriber growth at its loss-making third-generation (3G) phone service.
The fortunes of Li Ka-shing's diversified conglomerate increasingly hang on its ability to sell its '3' phones.
In the event, expectations of an upswing in subscribers to 3.2 million were met. The question is whether each new subscriber is taking Hutchison closer to break-even or deeper into the red.
Buoyed by competitive new handsets, subscriber numbers across its European, Asian and Australian markets are growing at a healthy clip of 700,000 a month. Spending among customers is holding up and a new-found appetite for disclosing detailed operating data reveals that customer acquisition costs are falling.
In its largest subscriber market, Italy, it now takes just five months worth of revenue - or ?250 (HK$2,406) - to cover the cost of acquiring a new customer. That metric had stood at about six months for most of this year.
Subscribers of course, are still just one part of the puzzle, with investors needing evidence that new users will ultimately be profitable users. Revenue from data services, supposedly 3G's core proposition, remain disappointing. In Italy, data applications contributed just 10 per cent of overall revenue, a figure similar to that of 2G operators, suggesting 3's edge remains as a cut-price voice service.
It is this trend of low yielding growth that suggests it may be premature to declare blue sky ahead. Management is sticking to its forecast break-even date (on an operating accounting basis) of 2005. How much more cash 3 will use up before hitting this magic marker is the more immediate concern.
Hutchison's total bill for rolling out 3 is about US$25 billion. Its ability to finance a declared ?4.5 billion of future capital spending is less a concern than the increasing cost of that funding. Interest payments for the increasingly geared firm jumped fivefold to $2.5 billion from $565 million in the previous corresponding period.
On the other side of the coin, investors should note that treasury returns from its $139 billion liquid asset pile dropped from 5.9 per cent to 3.8 per cent.