Getting the right numbers - Hitting the right numbers

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					TOPCIMA - March and May 2009



Hitting the right numbers
The March and May 2009 TOPCIMA exams will be based on pre-seen material about
the fictitious mobile telephone company, Dizz. In this article Adrian SIMs* reviews the
pre-seen material and identifies some key issues for candidates to consider.

Every six months CIMA releases new pre-seen material for its TOPCIMA exams.
These tend to fall into one of two camps: an established firm with key decisions to
face that affect its future; or a growing firm that has to balance the shareholders
demands for dividends with its capital expenditure needs whilst ensuring the share
price doesn’t fall.

The Dizz pre-seen material is an example of the latter growth scenario and therefore
is in the same tradition as earlier cases like Solberri Hotels (May 2008), Merbatty
Boats (Nov 2007) Zubinos Coffee Bars (May 2006) Domusco (Nov 2005), Sparkle
(May 2003) and particularly Constro (November 2002). These earlier cases are still
available for you to download free from the CIMA website and you can consult the
exam day unseen material for each to get a sense of the sorts of things that you
might be asked to do in the Dizz exams this March or May.

Getting engaged: the basic financial issues facing Dizz

To understand the pre-seen its worth remembering that the industry, mobile
telecoms, is just a context and that the exam is actually testing your ability to grasp
the business problems. Coffee Bars, Hotels, Builders or Telecoms, the trick is to see
the financial and strategic issues underneath. So what’s going on with Dizz?

A helpful aspect of the pre-seen to focus on first is Dizz’s share price and how to
increase it. Page 10 tells us that Dizz is committed to delivering shareholder wealth
and on page 4 we are told that the Executive Directors have share options with an
exercise price of €24.00 compared to the December 2008 price of €12.04.

Page 14 (Appendix 4) shows the 5-year plan by which the Board intends to increase
profits. It shows forecast 2014 earnings of €16,325m which when divided by Dizz’s
issued share capital of 11,400m shares (page 11) gives an EPS of €1.43. To get to a
share price of €24.00 Dizz would need to have a PE ratio in 2014 of 16.8. In June
2008 its PE ratio was 22 times earnings.

Therefore if the PE can be held at 22 and the 2014 profits achieved this would give a
share price of €31.46 (€1.43 x 22) and the Executive Directors could enjoy a gain on
their share options of €7.46 (31% gain on €24.00). If the Board can deliver the
targets in the 5-year plan then the expectation of higher future earnings may push the
share price up sooner. There are signs that this may be happening already because
page 10 tells us that the share price rose between June 2008 and December 2008.

This means that the underlying issue in the case is whether Dizz has a business
strategy that will deliver the growth in the approved 5-year plan.

Hitting the right buttons

Dizz’s strategic aims are set out on page 10.
• Increase profits in Europe by increasing revenues and reducing costs



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TOPCIMA - March and May 2009

•   Develop new products and services to ride the wave of innovation by meeting
    customers’ needs
•   Develop strategic positions in the emerging economies of Africa and Asia

Let’s unpack these three aims a bit further.

Home numbers: the European strategy

A recurring theme in this pre-seen is the ‘saturation’ of the European mobile telecoms
market with already more handsets than people. This is similar to the ‘shake-out’
phase of the industry life cycle that you studied in Management Accounting –
Business Strategy. It’s a time of industry consolidation and where the big players
seek to distinguish themselves from rivals and gain extra sales volumes by
proliferation of products and the downward drift of prices. Yet on page 7 we are told
that Dizz forecasts that the average customers spending on mobile telephony,
ARPU, will rise 20% in 6 years and in Appendix 4 that Dizz believes it is still possible
to increase customers in Europe at a rate of 9.7% in 2008/9 slowing to 6.5% by
2013/4.

Adopting the terminology of Michael Porter the pre-seen tells us that Dizz seeks to
compete by a strategy of differentiation (pages 5 and 9 ) and we learn that ‘the
differentiating factor is the quality of the overall customer experience’ (page 6). This
differentiation is maintained by:

•   high network reliability and coverage (page 5)

•   good customer service delivered at point of sale or for subsequent enquiries by
    well-trained call-centre and shop staff (page 6)

•   IT systems that permit ordering and tracking of new handsets and also account
    services (page 8)

But in the pre-seen we are warned that Dizz is seeking to reduce costs in Europe.
There are hints that Dizz may consider outsourcing: for example it does this already
(page 3), its African Division Customer Services Manager is planning changes which
could open a discussion more generally (page 8) and Dizz may have as one of its
target markets, India, a country popularly associated (at least in English-speaking
countries), with call-centres (Page 2).

The question to consider here would be whether Dizz can maintain differentiation
based on service whilst at the same time cutting costs by shifting its call centres, and
perhaps IT operations, to outsource partners.

On pages 9 & 10 we learn also that differentiation will also be accomplished through
marketing: by sponsorship; co-branding with web brands and other brands; and by
Dizz offering exclusive handsets able to access the internet.

A quick look at the European market will show you that the examiner is referring to
technologies like mobile broadband that encourage second connections, Apple
iPhone’s which devour bandwidth and boost ARPU as users transmit or download
videos, soundfiles etc and of course by users checking up on social network sites like
facebook and flickr. It may be hinting towards future applications like interactive
gaming, downloaded e-books and e-zines and even movies. For several years
network provider Orange has associated itself with movie-going and in December
2008 launched a film club forum in association with social network sites facebook


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and Bebo for the public to swap comments on films and download exclusive movie
previews to their phones. Brands such as Google recently teamed up with T-Mobile
for exclusive launch of its Android phone under the branding ‘T-Mobile: G1’. facebook
has recently launched ‘facephone’. These are the web 2.0 brands that Dizz too will
wish to partner with to gain customer volumes but also to increase ARPU.

However the sheer power of these brands is also a threat to Dizz. Large numbers of
high-value customers will change supplier because they are loyal to these brands
and consider the mobile phone provider’s brand to be unimportant. In other words
network providers increasingly provides a commodity service, bought on price, for
customers to arrange their lives and to network with friends through these major
internet brands. This means these brands can charge a high price to mobile phone
network providers for their collaboration. Some can even emerge as direct rivals.
Skype is a software application that permits telephone calls and other data transfer to
be made free over the internet using VOIP (Voice over Internet Protocol). In addition
to making calls from fixed lines these free calls can also be made from any mobile
handset running a Windows operating system and which also have a wi-fi capability.
About 50 Personal Digital Assistant (PDA) handsets available on the market at
present have this feature and capability. But it depends on both parties having
access to Skype. In 2008 Skype launched its ‘3 Skypephone’ to push the market
further. Skype is owned by another huge web 2.0 brand, e-Bay.

Dizz has made the ‘firm strategic decision’ not to enter the market for landline
telephony (page 9). The pre-seen material seems to warn us away from considering
fixed-line too much. But another way of reading it is as a heads-up that if Dizz needs
to offer more than just mobile telephones in Europe to compete then the Board may
need to hear some very good arguments before they consider it to be an acceptable
strategy. A similar mobile-only stance was maintained by real-world operator
Vodafone until 2008 when it entered the fixed-line business with a series of
acquisitions. The motivation seemed to have been corporate clients’ desire for one
seamless telecoms solution and the desire of households to have an integrated
broadband, telephone, and mobile package. To serve the latter UK cable operator
NTL merged with Virgin Mobile in 2007 to create Virgin Media, giving it the ability to
offer fixed line phone, broadband, television programming and mobile
communications.

Consider also the sponsorship and co-branding. A lot of music festivals and venues
are associated with mobile phone companies and so are sports like Formula One
and soccer. Consider how sponsoring these can attract high ARPU customers and
increase usage. How do all those shaky videos of bands and sports events get on to
YouTube?

Needing to top up credit

Between 2009 and 2014 Dizz plans to invest a total of €103,000m in infrastructure
expansion across three continents, in systems development, and to support its
growing customer base. Its total planned profits over the same period are only
€66,772m, of which half will be distributed as dividend. So on top of its operating
cash flows the 5-year plan says it will raise an additional €6,000m in loans (Appendix
4). This means that majority of the planned capital expenditure will be financed by the
cash forecast from present operations.

You may find on exam day that their operations are not yielding the cash they were
forecast to do (say due to global recession or greater competition forcing down
prices), or they couldn’t raise some planned loans due to the Credit Crunch. You may


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TOPCIMA - March and May 2009

have to recommend ways of using the existing assets better – for example by valuing
and liquidating poorer performing subsidiaries maybe?

It is always helpful to be reminded of the distinction between profits and cash flow.
Dizz appears not to be able to afford to pay for the investment project from profits but
it may be able to pay for it from cash flows. Page 12 (Appendix 2) shows us that in
2008 Dizz generated €17,775m of cash from its operations, more than €10,000m
greater than its profit for the period of €7,405m (page 11). This is because of the
large amount of depreciation being paid each year by Dizz (€7,785m in 2008) and
which will increase over the coming years as capex increases Dizz’s assets further.

We don’t have detailed cash flow information to accompany the 5-year plan but we
can assume that Dizz will rely on returns from its existing investments in Europe,
Africa and Asia to provide the free cash flows needed for its dividends and its funding
of most of its capital expenditure.

It’s not possible to derive a cash flow forecast from the 5-year plan in the pre-seen.
However in past TOPCIMA exams the unseen material has often included post-tax
cash flow information for the firm, a division, or a project. If one appears in March or
May it is a fairly reliable sign that you are expected to use an NPV calculation to
value the company or project, or that you should be looking for cash flow issues.

It may be possible to employ the terminology of the Boston Consulting Group
Growth/Share matrix to understand Dizz’s strategic position. This might view the
established European operation of Dizz as a Cash Cow that is being relied upon to
support its faster-growing Stars or Problem Children divisions in of Africa and Asia.
Neither is actually a problem, they are both potentially valuable investments, but they
will need cash to develop them.

This shows a vulnerability in Dizz’s 5-year plan. The cash flows Dizz depends on to
build its business in Asia and Africa relies upon a stream of cash flows from its
established business. If returns from the European market don’t hit the targets in the
5-year plan (i.e. the customer numbers and ARPUs) then Dizz might find itself with
too-little cash to fund its growth in Asia and Africa.

In the exam you might be told that growth and ARPU are already below target for
2009 or forecast to undershoot the targets in the 5-year plan. You will need to point
out the impact on year end profits but also the impact on the ability of Dizz to afford
to fund growth in other markets.

Another stumbling block would be the appearance of a significant additional demand
for capital spending. The pre-seen makes reference to emerging new technologies
like 3G (page 6), high dependence on IT systems (page 9) and expensive
sponsorship (page 10). A demand for spending on one of these could appear in the
unseen material on exam day and require you to evaluate its pros and cons and to
mention that the opportunity cost would be the sacrifice of some opportunities in
Africa or Asia.

Roaming – Dizz in Africa and Asia

Seeking to pursue growth in both Africa and Asia at the same time will strain Dizz’s
cash flows and you should be prepared to make recommendations on which Dizz
should focus on.




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Asia seems to be the more promising market. Using the 5-year plan on page 14 we
can see that its revenue is forecast to grow 288% between 2008 and 2014
(€29,695m/€7,660m) with a 218% increase in customers (242m/76m). This
compares with growth rates for revenue and customers in Africa of 125% and 97%
respectively. By 2014 Asia will deliver more than twice the revenue of Africa
(€29,695m compared to €13,696m) and will have become the continent that provides
51% of total customers (242m/474m).

Against these figures in favour of focusing on Asian investment are the apparently
better returns from Africa. Page 4 shows us that operating margins are better in
Africa at 36% (€2,200m/€6,100m) compared to Asia (30%: €2,300m/€7,600m) in part
due to the higher ARPU in Africa (page 7) which is forecast to stay higher because of
higher levels of data transmission and increased mobile phone usage.

Real-world mobile phone network providers are encouraged by the fact they face
much less fixed-line competition in Africa and so will enjoy more of the growth of
customers and from the extension of broadband. Educational applications are a
significant opportunity and so is M-banking, the use of the mobile phone to transmit
payments from one customer to another and using the customers ‘credits’ as the
bank account.

But these markets are not just opportunities for Dizz. The saturation of the European
markets and also some parts of the Asian markets, notably the Gulf States, has led
rivals to look at the opportunities in India and elsewhere. In January 2009 Batelco
(Bahrain Telecommunications Co) bought a 49% stake in one of India’s operators, S
Tel, as part of its global strategy. One report states that in October 2008 alone 10.2
million additional Indian customers bought mobile phone connections.

Alongside the potential financial benefits from Africa and Asia there are also risks to
be considered.

Dizz reports its earnings in Euros but, according to its 5-year plan, by 2014 it intends
to earn 39% of its revenues from outside Europe. It will have a lot of assets outside
Europe too. It will suffer translation risk if the Euro rises in value against the
currencies of the African or Asian countries. This will cause its profits to be lower
than anticipated in the 5-year plan and also its assets will appear to fall in value. It
might also be mentioned that if any of its European subsidiaries are outside the
countries that have adopted the Euro then a rise in the Euro would have similar
consequences for these earnings (presently these countries include the United
Kingdom , Switzerland, Sweden, Denmark and the 9 most recent EU accession
countries from ‘new Europe’).

Dizz may also suffer political risk. Although the World Trade Organisation commits its
members to introducing a free market in services such as telecommunications the
reality lags far behind. Many national governments seek to keep control via
restrictions on foreign share ownership, policies to regulate behaviour and policies to
control currency movements. India maintains Foreign Direct Investment (FDI) rules
which limit the percentage of shares in Indian companies that can be foreign-owned.
In January 2009 China’s National State Council agreed to auction the countries 3G
phone licenses. The Chinese government already owns 75% of the stock of the 2G
operators and there is speculation that it will insist on the 3G networks being Chinese
built and managed or that China will only allow consortiums with foreign companies
that own a less than 50% stake in the Chinese operation.




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The account statement

Performance management is another important theme in this pre-seen. Specific
measures are mentioned on page 4 and some further measures are implied on
pages 5 and 6. Page 4 links these back to remuneration of senior staff and
executives, the latter receiving these payments in addition to their share options.

Dizz should also consider developing measures for other aspects of it operations
such as efficiency of its supply chain (stock-outs, delivery time, number of on-time
deliveries, customer service and communication, supplier relations etc) and for its IT
systems.

There is no explicit mention of these measures being used to control performance
below management level which could be the next step for Dizz in driving improved
business performance, particular in a firm which depends so much on its technical
staff and customer services to differentiate it from other mobile phone network
providers.

Also Dizz should monitor their relative performance against these measures
compared to rivals in each county. This means they will need to collect performance
data on rivals or firms with similar operations in billing, service provision and sales
and query handling.

The importance of Balanced Scorecards and of benchmarking has featured in
previous TOPCIMA exams.

Going off-line

Its IT systems are one of Dizz’s competitive advantages but also a major risk factor.
These systems clearly reduce costs and that is one reason why they are installed in
all the newly acquired divisions. They’re one of the ways that Dizz can improve
operating margins and also, it seems, improve customer service and so increase
sales and reduce churn.

However the IT systems are business critical, Dizz is ‘totally dependant’ on them
(page 9). The risks are pointed out: breakdown, hacking, fraud, and data loss. The IT
Director wants €1,500m to ensure they support the growth of the business. This is
about 5% of the capex budget over the three years and should be safeguarded.

Responsible use

.Corporate Social Responsibility (CSR) embraces policies on staff but also the other
factors mentioned in Appendix 5.

Adhering to CSR can improve revenue by allowing Dizz access to markets and
perhaps attracting individuals and firms with a concern for CSR. It may also reduce
costs because avoiding excessive energy use and not printing and mailing
statements will be cheaper.

But the mobile phone industry usually has a wider picture of its CSR than Dizz seems
to. For example Vodafone in addition has policies on:
• Driving safety whilst using mobile (advice on safe use)
• Avoiding street crime to steal mobiles (IT systems bar the stolen phones so they
    are locked out of networks and so of no value)



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TOPCIMA - March and May 2009

•   Making low cost technology available in emerging markets where it can support
    education and health care
•   Seeking to improve the functionality of handsets for disabled persons and
    reducing ‘preventable exclusion’
•   Researching and advising on health effects of masts and handsets
•   Visual impact of masts and need for stakeholder consultation

Some of these may be existing safety and legal issues with which Dizz already
complies and so are not included in its CSR goals because Dizz is already doing
them.

To some extent CSR may be a requirement put on Dizz by the national regulators as
a license condition. They may help them win future tenders for mobile phone
licenses. It can avoid fines later. It may also directly influence the share price by
allowing Dizz to position its shares for purchase by ethical funds.

An issue may whether Dizz can afford some of the costs of CSR in a tougher market,
for example staff community secondments, or how these CSR commitments will
translate into emerging economies.

On the horizon for mobile phone network providers are deeper-rooted issues about
mobile phones. These include:
• The ability of the handsets to be used for tracking the whereabouts of the user.
   Corporations routinely use this for handheld devices but the same information
   could be requested by governments about their citizens
• Listening in to calls by government agencies. Intelligent IT systems employed to
   counter terrorism monitor bursts of activity or even particular words in
   conversations to alert the authorities to potential threats. This could be extended
   to other issues such as crime but at a cost to privacy


The TOPCIMA exam awards 10 marks for recognising, explaining and providing
recommendations to deal with ethical issues. 5 of these marks are for giving advice
to management on what to do, so do ensure that you provide detailed advice on each
issue that you identify and discuss.

Your call

So what’s coming up in the exam?

On exam day you will be given the Dizz pre-seen again but with a further 4 or 5
pages of unseen material following it. These will update you on the situation of Dizz
as it stands on the day of the exam. Generally there will be about 6 or so ‘twists’.
These are developments in Dizz or its environment that provide the Board with
challenges and on which they want you to advise them.

Sometimes it’s like an episode of a soap opera. It’s hard to believe that so much can
happen to one firm in 3 hours. In fact it happens over the 2-5months since the final
date shown in the pre-seen, December 31st 2008, and could involve matters
happening before then have led to impacts recently, for example a global recession.
But of course Dizz is global with operations in 17 countries on three continents –
there’s a lot that can happen. You just have 3 hours and 20 minutes to recommend
how to deal with the most important of the issues facing Dizz.




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TOPCIMA - March and May 2009

Basically you have to advise management on what to do. And you have 3 hours to
write a report prioritising the issues, analysing the implications of them and the
various responses that Dizz could make, and then recommending to the Board what
to do.

I have no private line to the TOPCIMA exam panel so I don’t know what’s going to
come up. But there is still some value in speculating and preparing some thoughts on
how you would analyse it and what you would recommend if by some stroke of luck
you did spot one of the twists.

Basically one key area will be the factors affecting the ability of Dizz to double its
share price by delivering the targets in its 5-year plan.

•   2009 interim figures (the exam in March is month 9 of Dizz’s financial year) that
    show sales volumes and/or ARPU have not achieved targets and a need for a
    story to tell investors to reassure them such as cost reductions or new initiatives

•   Opportunity to acquire telecoms firms in Asia and/or Africa forcing you to
    evaluate the future earnings and prospects and their general suitability,
    acceptability and feasibility. A big part of your assessment of acceptability is the
    risk factors involved.

•   Problems raising capital due to credit crunch means that Dizz is forced to
    abandon some markets. You have to say which ones and why.

There are often short term crisis twists that need addressing before the firm suffers
substantial disruption, cost or reputation risks

    •   PR problems such as allegations of unsafe or irresponsible practices

    •   IT crisis necessitating urgent investment or remedial action

There will be lower priority issues that need advice to be given and decisions taking

    •   Transfer of call centres to lower cost locations

    •   Downsizing or restructuring to improve efficiency and cut costs and needing
        careful change management

    •   Decisions on new sponsorship or co-branding opportunities

    •   Proposals for enhancements to IT security

There will also be ethical issues to identify, discuss and recommend ways to resolve.
Doing this well means you can be awarded up to 10 marks in the exam. The sorts of
things to expect are:

    •   Infringements of Dizz’s commitments on corporate social responsibility

    •   Allegations of criminality, fraud, bribery or corruption against Dizz or members
        of its staff

    •   Issues affecting the safety of customers, staff or contractors

    •   Discovery of exploitative working or pricing practices.


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A short text

There is no text book knowledge to learn for TOPCIMA. It uses the knowledge you
gained whilst studying the rest of the CIMA syllabus, especially the Strategic papers.

So between now and the exam you need to get practice against the clock in dealing
with the exam-day unseen material and writing your report. Very few candidates get it
right first time and practice, with feedback, does improve your chances.

The usual learning media providers who produce for the CIMA qualification also
produce mock exams based on the real TOPCIMA pre-seen material to make
simulated exams more realistic. Many colleges and training providers will use these
in classroom simulations of the exam day and take you through an approach.

The CIMA website has past papers and also the Post Exam Guides to tell you what
were the right and wrong approaches. I have indicated the relevant past cases at the
start of this article. You should look at these and use them for practice too.

Okay, its time for me to ring off.

Good luck!



Adrian SiMS* writes TOPCIMA materials for BPP Learning Media and teaches
TOPCIMA for BPP in Dublin, Luton and Milton Keynes.



Note: Apparent typos in surname are deliberate and more acceptable than one suggestion
that the article be called ‘Sims on SIMs’…..its bad enough having video games sharing your
name without that!!!




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