Q. Has OnMobile Systems Inc. (OMSI) sold shares of the company on NSE?
A.Yes. On September 17, 2012, OnMobile Systems Inc. sold 14, 84, 026 shares of OnMobile Global at Rs 38.37 on the NSE. The current sale by OMSI has been predominantly prompted by a contractual obligation it had with H&Q, Asia Pacific (a PE fund, and another constituent of OMSI) on the outer time limit for an exit.
Mr. H.H. Haight, Chairman, OnMobile Global Ltd., has confirmed that Argo Global (the single largest shareholder and constituent of OMSI) remains committed to the long term prospects of the company.
Q. Is Argo Capital exiting OnMobile?
A. There were media reports that Argo Global Capital, the largest shareholder of the company, is planning to sell its stake. We wish to state that H. H. Haight, our Chairman who represents Argo Capital on the Board of the company, has denied this news and is not planning to sell any OnMobile shares. Argo Capital has no plans of exiting the company.
We have also shared his statement with the media who wanted clarifications on the matter.
Q. While the company has given updates on the recent events, for the sake of clarity please give a fresh update?
A. There were recent news around the alleged misappropriation of funds by the CEO, the consequential impact of this on the bank balances of the company and the need to restate the financial statements. We wish to state that there was no financial loss to the Company and the bank balances of the company are intact. There is no need to restate the financial statements.
The company came across three transactions that had been initiated under the advice of Mr. Arvind Rao which did not have adequate business justification. One of these transactions was with an entity related to Mr. Arvind Rao. The board initiated a special review of these transactions to get an independent view on whether the transactions were commercially genuine or were executed for the purpose of benefitting any particular individual or individuals.The review exercise was undertaken by Amarchand Mangaldas and KPMG and the final report was submitted by them on June 29 2012. This report did not establish any evidence of commission of any embezzlement or other offences by Mr. Arvind Rao or other employees of the Company. The report however concluded that (i)the terms upon which these transactions were proposed to be undertaken were not in accordance with market/industry practice and (ii)the manner in which these transactions were approved was in breach of the internal control mechanisms and work flow processes established by the Company.
Mr. Arvind Rao felt that as the CEO, he should have been more prudent in initiating these transactions and that he should have ensured compliance with established processes. Accepting responsibility for these lapses, Mr. Arvind Rao stepped down from his position as the CEO of the Company.
All the transactions that were reviewed as part of this special review have been cancelled and contracts for these transactions have been terminated. No payments were made for contracts executed with the entity related to the ex-CEO. We wish to reiterate that these transactions will not require a restatement of the financial statements of the Company and there is no financial loss to the Company.
Following the review by Amarchand and KPMG, the Board also took a decision to prohibit and unwind all related-party transactions for procurement of content and other material contracts. Fresh proposals for any other related party transaction now require specific Board approval. The Board is also currently in the process of reviewing vendor selection management processes and exploring means of further strengthening the internal controls.
We would also wish to state that if our ongoing audits and reviews of other contracts require us to make any disclosure, we will keep the shareholders appropriately informed.
Q. Are the Bank balances reported in the consolidated Balance Sheet as of 30th June 2012 genuine?
A. The bank balances reported in the consolidated Balance Sheet as of 30th June 2012 are based on bank statements and confirmations received from the various banks in India and other countries in which we operate. We wish to confirm that the balances are genuine and reflect the accurate position as of 30th June 2012.
Q. Does Mr. Arvind Rao still remain a shareholder in OnMobile Systems Inc.?
Q. Some of Mr Rao's personal holdings in OnMobile was pledged and invoked recently. What is the stake held by him and his immediate family members/entities controlled by him currently?
A. The Company does not have any control over the process of invocation of pledges. This is a decision that banks/lenders exercise at their personal discretion. Mr. Arvind Rao's stake is below 5% as of August 3, 2012.
Q. Was there a proposal before the Board at any time to acquire any of the companies co-owned by Mr. Arvind Rao?
A. No. The Board did not receive or consider any proposal of this nature.
Q. Is it true that companies owned by Mr. Arvind Rao were operating on the premises of OnMobile without paying rent?
A. These entities operated out of their own offices for the last few years; however their staff were using OnMobile facilities on an as-needed basis. We have ceased doing business with these companies now and these employees are not using our facilities any more.
Q. Is it true that Mr. Arvind Rao initiated related party transactions with Mobile Traffik and Riff Mobile? Did it come to light through the KPMG review? What action did the Board take after this was discovered?
A. Mobile Traffik and Riff Mobile have been supplying OnMobile with unbranded content since the year 2008. All transactions with related parties, including transactions with these entities have been undertaken by OnMobile in pursuance of applicable law. These transactions have also been adequately reported in the financial statements of OnMobile.
The special review conducted by Amarchand and KPMG focused on specific transactions which prima facie were undertaken without adhering to internal controls and without preparation of an adequate business case. One transaction with a related party formed a part of this review.
Strong alternate controls ensured that these transactions were identified early and were terminated.
Q. The MCA has said that it will start an investigation into the whole matter. Has the company received any intimation regarding this and is it co-operating with relevant government authorities?
A. The Company has received a notice from the Registrar of Companies (ROC), Karnataka under Section 234 of the Companies Act, seeking a response to the irregularities reported by sections of the media in addition to certain other routine clarifications based on their examination of the previous financial statements. We are cooperating with the ROC and will provide all required information.
Q. There were reports that the largest shareholder of the company is planning to sell its stake. We also hear that some other investors are joining hands to sell their stake to a large conglomerate. Comment. How much do these investors hold? How will this impact the company?
A. Argo Global through OnMobile Systems Inc (OMSI) and Mouli Raman (Co-Founder and MD) together hold about 40% of the company’s shares. These significant shareholders are completely aligned and committed to the future growth of the company. Some reputed FIIs and mutual funds also hold a significant stake in the company. The decisions of any other group of investors to accumulate shares will not trigger any change of control as the balance shareholding is fairly well distributed. However, we believe that many of our other investors are well informed and have been associated with the company for long. Basis our discussions with them recently, they continue to believe in the long-term growth of the company and fully support and endorse the company’s management and business strategy.
Q. We have been told that at least one Indian conglomerate is looking to bid for OnMobile for taking a control stake. Is this true? Have you been approached for this?
A. The company has not been approached for change of control. As mentioned above, two shareholders who hold about 40% of the company stocks have denied plans of exiting the company.
Q. The stock has been on a downward spiral relative to the Sensex for the last couple of years, in spite of a buyback. What do you think may be the reason for this? What measures are being taken by the company to improve its image among the investors and consequently increase its share price?
A. We cannot comment on the stock prices as there could be external factors beyond company specific issues that impact share price movements. India, which contributes to about 50% of OnMobile’s revenues, has been witnessing downturn in recent times due to policy issues, falling revenues per user and tapering mobile growth, lack of an open VAS ecosystem and regulatory challenges. During the same period, the company witnessed good revenue growth and continued to generate cash profits year on year. It initiated a buyback plan last September and also declared a dividend for the year ended 31st March 2012 basis its financial performance.
Over the years, we have built an enviable franchise, with innovative products combined with excellent customer servicing and a unique business model. We are optimistic about our potential and we are continuing to make good progress on customer wins and consumer traction. We have an excellent team, led by competent and passionate leaders, who have made all this happen and hence we strongly believe business will witness steady growth. We believe that seamless execution and focus on our people would drive the financial performance over a longer term. We are continuously looking at other value adding and growth opportunities for our stakeholdersand will update as we progress.
Q. What is the plan going forward?
A. Broadly, we see the following opportunities and challenges:
In other Emerging markets:
In advanced markets:
While the times are challenging and it will take a few months to settle down, after discussions with various stakeholders - Employees, Customers, Investors and Partners. After the recent events, we are confident that we can put this episode behind us and look forward to the future.
Customers: They have affirmed their faith in OnMobile as an organization, due to its depth in leadership, products and in many cases long history of mutually beneficial relationship.
Employees: Our employees are passionate about the Company and its potential and are determined to take the company forward. We are working on multiple fronts to retain and attract top talent, including attracting some high-performers who were earlier associated with OnMobile
Investors: Many investors,who we have engaged with in the recent past,are also fully supportive of the steps taken by the Board and Company to improve its governance mechanisms.
Our immediate focus areas for the rest of the financial year are:
Q. Please clarify the reason behind the YoY decline of net profit by 26 per cent. The company said that this was because of 'higher foreign/withholding taxes’. Do share the exact nature of the foreign/withholding taxes.
A. It is not appropriate to compare Q1 2012 tax rates with that of Q1 2013, as most of the foreign taxes (especially of Latin America) got accounted in Q42012 when we reported a very high tax rate (primarily on account of a catch up). If you compare the effective tax rates of Q4 2012 with that of Q1 2013, you will find that the rates have dropped. We also have to understand that taxes withheld in many countries where we operate our branches or subsidiaries cannot be set off in India. There is no specific geography or country that contributes to the higher tax rate. We are looking at structuring our operations to be more tax efficient.
Q. What is OnMobile’s international revenue versus domestic split?Why doesn’t the company give details of its Indian and international operations separately? How are investors and analysts, who follow the stock, expected to understand the profitability and inherent strength of the business model?
A. International revenue was 56% of the total revenue for Q1.
We have consistently maintained that our consolidated financials reflect the best representation of the combined results, as many costs are shared across all geographies. Further, we also need to keep in mind the competitive environment and customer sensitivities. However, we do internally track the contributions from all geographies, to monitor performance.
Q. As the company seems to be making rapid strides in the international markets, does it mean that it has lost out to competition in the domestic market and would thereby be focusing primarily on international markets for its future growth?
A. It is true that OnMobile’s growth in the recent quarters has been primarily driven by international revenues,but the domestic revenue saw a decline mainly due to escalating cost pressures in the telecom sector. In India, the changes in TRAI and operators' policies, lack of sufficient new product launches and lack of an open ecosystem have impacted the industry at large, even though we see a lot of opportunities from consumer standpoint.
Q. What are the updates from OnMobile on product deployments front, especially international?
A. We are continuing our focus on deploying RBT and voice services in the emerging markets. We are targeting OnCloud solutions for the European and North American markets.
Q. How many countries have been covered in Latin America so far as per the Telefonica deal?
A. OnMobile RBT services have been launched in 14 countries of Latin America and we are witnessing good consumer traction. Uruguay was the last one to go live in May 2012.
Q. Will the LATAM deal with Telefonica improve net operating margins of the company given the high tax rates and upfront fee (UFF)?
A. Operating Margins for Latin America (after UFF amortization) over next 3 years are expected to be in the range of other emerging markets because
The tax rates do remain a concern but it will get addressed over a period of time.
Q. There were recent reports on the Tanzanian government raising concerns over OnMobile’s operations and OnMobile being asked to curtail its operations in the country. Comment.
A. Our operations in Tanzania have not been affected by any stricture of the concerned Telecom Regulatory Authority and we continue to serve our customers there. Based on advice from reputed counsel, we are of the view that white-labelled VAS players, who are not dealing directly with the end subscribers, do not need an operating license. The onus is on the operator. We are in touch with the regulator and if they believe that we need a license, we will comply with the same.
Q. What are the reasons for a series of recent high profile exits from the company?
A. The Company has and continues to make efforts to attract and retain the best talent in the market. The recent exits had been for personal, professional, performance and cultural reasons. Some were linked to senior employees moving on to entrepreneurial ventures or other corporates in search of better prospects, while some were due to changes in work culture. We are focusing on retaining and acquiring top talent, including some of the high-performers who were earlier associated with the company.
Q. Is there a plan to revamp the company's management team and to put a new one in place? Mr Raman has been designated as interim MD. Is the board looking or a full time external or internal candidate to be a full time CEO?
A. The company has mandated a search for a new CEO. There are no plans to revamp the management team. However, the company will continue its efforts to attract the best talent in the market and will hire personnel who will add value subject to operational needs and business requirements. The Company is also looking at expanding its Board and induct more independent directors.
The Company is investigating the possibility of certain vested interests making concerted efforts to malign the Company, its Board and management team, by providing unsubstantiated information to sections of the media. While the company has been taking steps to engage with the press by clarifying the factual position and refuting rumours and allegations, we urge all investors to reach out to the company directly wherever required and not be swayed by such propaganda. We also believe that these vested interests, who are in the possession of confidential information of the company obtained through unscrupulous methods, have been reaching out to some shareholders without realizing the legal implications of sharing such information. We wish to assure all our shareholders that we maintain the high standards of transparency and will proactively share all relevant information on an ongoing basis.
Watch this space for more views from OnMobile!