Quite a significant number of companies here
are basically competing in a very small market.
How would you describe the market here? And how
successful has your company been so far?
Let me give you a little bit of a background
about our company in general. Our company, which
goes under the brand name "DUKAT" as
of two weeks ago, is a group of companies. We
try not to use the former names of those companies
any more since we launched the new brand. One
company is SILAC or, for British speakers - a
PTO, a local telecom company, that has over two
hundred kilometres of fibre underground in Almaty
and offers local numbers, local services, so where
you come to get your phone numbers from all your
local services in the city from. You can also
get international, but that is not big point that
they push.
That part of the business has been around since
1993. The original company was born out of something,
which in the former Soviet Union was called "ISKRA".
"ISKRA" was a private, a virtual private,
network voice for the government. The "ISKRA"
networks in various parts of the CIS have been
privatised and spun off. So that is where our
origins are. Through the history the ever since
the split, there is, probably, in business, at
least one other company, that can trace its roots
back to "ISKRA".
The second company was started as a joint venture
between "TELSTRA" and Kazakh telecom.
That one is for a long distance satellite network,
the main customers being the oil companies and
companies like that. Their specialty is fixed
lines and international calls.
When we started, also I think in 1993-1994, there
were not really a lot of options. And actually
now we compete on price and quality. We are one
of the few companies, or group of companies, that
have both possibilities to get down into the intricacies
of the licensing. The licenses for a local public
network and for a private network are very different.
And by having a group, where we can offer services
under one name, we are able to offer the whole
range of services, which are pretty competitive.
According to our research we are number two in
the country behind Kazakh telecom. The group as
a whole has about 15 million turnover last year,
just under 15 million. Our nearest competitor,
as far as I know, is "NURSAT".
About two years ago the EBRD came in through
a regional investment fund that they put as a
capital. Although in the registrar they have not
actually listed, they have a direct share holding.
So that gives us right now the best of both. We
have a very strong local shareholder and that
we also have the GIMPF, which is that local regional
fund, plus the EBRD. So we have the political
backing both from the local level and on the semi-international
level.
As you said, the group has both a local and
an international input. What are the particular
advantages, which those local and international
levels offer?
Well, if you are doing business inside of CIS,
you have been carrying it for a while, I think,
you are quite aware, that if you are doing anything
that the government would consider strategically
important and you do not have someone local, that
the government likes and trusts, that significantly
involved with your company, the government might
not look all that favourably, knowing you.
You have been here for 4 months. Coming in
to this new market, you came from Russia, you
brought with you a lot of experience. With this
experience, what are your first impressions of
the local market?
No, that is my impressions of Kazakhstan. It
is like I suddenly showed up in Russia X amount
of years ago. That's specifically within a telecom
sector. In other sectors, it may be different.
In certain sectors it may be ahead. In the telecom
sector I just see that where the technology is,
where the level of competition is. Getting back
to your first question, the market is not as competitive
as you may think from seeing the websites. I would
say that as real competitors or as real telecom
operators here I would count other than Kazakh
telecom, a maximum of five.
This not a growing number, and it is not going
to grow, because of a very simple reason. Look
at the concentration of people, look at the distances.
The barrier to entry here is extremely high. And
since there is a small amount of people and the
population is low, the control over certain laws
that the government wants to do to keep a status
quo is much more easily enforceable, than it is
almost in any place else on the planet. There
is big limits as in how do you get in and out
of the country telecom lines. Any country is in
the CIS and out, a lot of their de facto de regulation
is not because the government there had a properly
coordinated plan to bring in investment, simply
because technology got way ahead of were the laws
were and were the enforcement possibilities were.
By the time the laws and enforcement possibilities
got there it was already so to speak attacked
on the ground, there was nothing to do about it.
Give you an example, Internet telephony, Voice
over IP (VoIP). Poor men were trying to complete
with a big telecoms company. In Russia no one
had a law against or for it for that matter until
at least the year or two after people start doing
it. And they came up with a law that did not address
all the concerns. By the time they get everything
there, there are so many companies and they are
such a big part of economy over there. If Russia
were to get serious tomorrow and close all the
VoIP, a lot of people would be left without service
and even the big guys, they join the bang like
they can realize it has to be in to start competing
in there. They gave more choices to the consumer.
And even the big companies that would have originally
supported the move making sure to be very controlled
already have tens of millions dollars invested
in this stuff. No one is going to close that.
Over here it is not the same. You cannot get in,
the barrier entry to start in this country. It
is extremely high. Kazakhtelecom and ministry
are very serious about controlling what they feel
is their interpretation of the law. And the number
of those operators that I mentioned has not grown
for five-six years according to my research. And
I don't see it growing.
In an emerging economy like Kazakhstan, the
infrastructure is not well developed enough to
offer every service that is available, and the
level of income in the country is comparably low.
Would you say that offering a wide range of choice,
such as services VoIP and the likes, are really
ready something that is worth offering?
Yes, absolutely. You have to be professional
in business. You pick and choose your services.
You make sure that you rolling it out on the scale
that is economically feasible. But with the advances
in technology almost any of those companies that
I mentioned should be easily be able to offer
range of value added services available in the
West or even in Russia. My personal opinion is
that if you know where to look at Russia's or
Moscow's potential level of telecom service: what
you can order and what you can get, quality, the
speed of services and stuff like that, is on par
with the rest of the world and in certain cases,
I would say, is even better.
Just realize one thing in the CIS, not just Kazakhstan.
There was a very limited amount of capital available
over here. All the people in the West or in Asia,
in developed markets, had access to almost free
cash with almost zero accountability. Literally,
I worked for a year and a half for the US company
in Europe, that was based in Belgium for year
and a half, for looking after continental Europe.
And I remember board members complaining that
the investment bankers had forced them to raise
so much money just to be visible, which they felt
they did not need and could not properly spend
once they had raise them they have not spend it.
And they would looked around - give me anything
on paper that looks remotely feasible, that can
get rid of this huge shank of the cash, that we
have in the bank after we raised three hundred
million dollars. We have to spend it.
As opposed to the fiscal responsibility in Russia
- that was not really the case. I started two
independent operators in Russia that are both
still working right now. There was no such thing:
I want market share, I don't have to worry about
profits. You had a certain amount of money to
start off with. By the time that that money finished,
you had better be independently capable of continuing
that business. And there was no credit from the
bank, which was difficult period. There was just
no way to even think about saying: "Well,
guys, we are going to have a market share and
because we are going to be able to sell it a high
multiple, we will eventually be able to pay you
back." Forget about it. These guys, in that
case their lack of progressiveness actually worked
in their favour. If you look at the amount of
bankruptcies in telecoms in Western Europe, in
Eastern Europe, in United States and so on, I
think you will find the percentage of the ratios
of bankruptcies in telecom is much higher than
in Russia, CIS.
And so with this knowledge, you arrived in
Kazakhstan. What company infrastructure did you
find within your own company? Are you satisfied
with its development so far?
There is always room for improvement. When people
are sitting not only in the CIS, but also over
here, they may have as probably what the CIS produce
is some of the better engineers in the world.
In high technology, if you go to the US, or to
the Western Europe, you will inevitably in any
technical department, development department run
at more than one person, that came out of here
not that long ago. I remember back in 1995 I had
to hire people in Moscow, that spoke a little
bit of English to be able to deal with suppliers
in the US or in Europe. These days I don't have
to do that, because I just call at the manufacture
whether it be SIEMENS, NORTEL or smaller companies:
"Give me one of your technicians that speaks
Russian". And there is always a choice of
many people.
So these people have read and understand the
technology's possibilities. They are able to give
you model names and numbers. But since that hasn't
happen here and they haven't be able to look at
it and touch it and feel it, they are a bit apprehensive
or suspicious even - does this really work? Can
we really implement it or not? But as they are
good engineers - and by nature engineer means
that they are curious they like their toys, like
to play different things - I find the ideas ,
that I am bringing with me, my former experience
or the interchange them facilitating, because
I have a couple of my former colleagues from Russia,
from Europe already come down or set my guys out
there. And as soon as they see that yes, this
is not just a mirage, this technology does work,
they are back in my office even more gung-ho than
when I am getting this stuff implemented than
I was in the first place. "We saw it really
works, when can we buy it, where the financial
director, give us money, we are going to put this
in or we are going to have that".
And I am pretty positive about that. As long
as there is that facilitation of exchange of ideas,
that is going to happen in all the companies over
here, or at least the private ones. And I am going
back to my biggest competitor and pain in the
neck - NURSAT, but at the same time I do respect
them. They got a couple of new things, that they
implemented recently, which is - they are probably
leaders of the ISB market here for e-commerce.
They had a site up for at least a year - year
and a half now, where they have on line store,
that you can pay with credit card and get it delivered
- a sort of the local version of the Amazon. We
have some new stuff, some new piece of equipment
that may create some radical changes in our forward
moving strategy of how our networks are going
to look.
Clearly, we can understand from what you have
said so far, that you are leading the pack in
respect of innovations and success. But, how does
this translate in figures and numbers?
Market share is 85 % Kazakh telecom. That's what
I remember off hand. Of what is left over between
the rest - we have by number of clients, I would
say, by far the largest market share, but that is
concentrated 90% in Almaty. We have been only recently
moving to other regions. Currently in Western Kazakhstan
we got an infrastructure in Tengiz, in Atyrau and
in the middle or right after this summer we'll be
starting in Astana. And within this year we'll be
probably start in the Pavlodar region and Aktau.
We also have infrastructure in Aksay. Most of our
business as I said is more of the local business.
In Almaty if you look all the numbers here that
start 50, the local city numbers, including the
Hyatt and most of the other hotels in the city and
a lot of businesses and embassies. Anything starting
with 50 it's ours. |
We have just run out
of our first ten thousand numbers and we are getting
our next ten thousand shortly. In general, as the
telecom industry gets more mature companies start
ordering more telecom services. Significant amount
of our sales is additional sales to existing clients.
As they get bigger we grow with them. Or as their
technology needs grow bigger as they understand
things need to be improved.
Our turnover is just under $15mln. Our net profit
is of just over $2mln, and that is a net profit.
After having the EBRD as one of our major shareholders,
means if you do not take any short cuts and taxes.
I would say that being fully legal, transparent
I am sure we could have pay significantly less
amount of taxes, using various legal tax shelters
and stuff like that. We do not do that.
We are a profitable company. I think that this
year we are probably going to grow between 20%
and 30%, but that's only because since we got
the new investment and a little bit of fresh management
then, this year is going to be less about growth,
more about building infrastructure for new types
of stuff. I would say the real growth hasn't come
in, and will end of Q3, beginning of Q4 for this
year, for next year. I am building out additional
cities; I am adding new equipment to be able to
provide new types of services. We bring a new
services and we want just roll it out without
testing and create a focus group, because you
change it, you adapt it, then you roll it up big
time.
This year the company is spending close to half
a million dollars in marketing. Until this new
shift in the company, I think the average year's
marketing expenses, including business cards and
down to everything, had been to average of 60
thousand dollars per year. The company, because
of our market share, has no reason to even bother
with marketing. We are changing that because of
the market, which requires that. Even though the
competition is not twenty-thirty companies, but
the other companies are starting to move also.
One of the biggest catalysts to waking us up
was the fact the Kazakh telecom has opened two
subdivisions that have a fewer amount of autonomy.
They are going after the same target market as
we do, which is the businesses and residential.
And they have had a certain amount of success.
One of the reasons why they are successful is
that although there is a certain amount that law
requires them to allow me the access, one of the
other things they do is as soon as I send an application
to connect point A to point B, the next day they
got a whole team of sales people down at that
place. This is really cost effective. They don't
have to spend a lot for marketing. They just wait
for me or any other of the companies.
Within this group, including the EBRD, are
you also interested in other partners to join
your group?
Not necessarily at the moment. Let's put it in
this way. You are a businessman, you realise that
even if you are not looking for an offer, when
someone comes up with the right offer. Why not?
In EBRD there are similar investments that they
do through GIMPF, they usually have a between
three - five year access strategy. They have been
in for two years. Just according to the investment
plan the EBRD probably wants to get rid of its
stake. Not because I want to get rid of them,
but because they want to get rid of me, because
they are a huge organisation. Less than ten million
dollar investment to Kazakhstan really does not
show up on anyone's radar screens there. The program
says that within five years we have to exert that
means within five years they will exit. Part of
my job is yes to look for someone who help them
exit, but it is more to help them to get their
return on investment than to give me an injection
of capital. If we need to raise money for our
balance sheet, we have that equity right now of
somewhere under ten percent, which is pretty outrageous
for telecom companies. The very conservative value
of our company right now is at least twenty, possibly
up to twenty-five. And the only debt that I have
on my books is a short-term one million dollar
credit line loan. I don't have any other debts
as of today.
If we look at the geographic location of Kazakhstan
it is quite strategic. Is it somehow important
for the long future of your company?
Using the Czech Republic strategic location,
which is very similar to Kazakhstan, bridge between
two different regions. You've got a whole bunch
of borders around here. And Barents Communications
Eastern Europe actually made quite a bit of money
of that one just by buying a rights of way or
actually laying the fibre across all the borders
and just making cross border deals. Theoretically,
you can do the same thing here, except for one
major problem. I can drive from one place in the
Czech republic to the other in a couple of hours.
In Kazakhstan it takes me a couple of days.
It is not economically feasible, coming back
to the barrier of entry. It's not economically
feasible to build the backbone network over here.
There are only three companies involved in building
a backbone network, one of them is Kazakhstelecom,
the second one is Transtelecom. That is the railway
thing. And the third one is KazTranscom, which
is also relatively government owned, just like
the other ones, which deals with the telecoms
that is associated with the oil pipelines. So,
Kazakhtelecom is involved in that not because
it is economically feasible for them, but more
because that Kazakhtelecom has to be involved.
Economically you do not really want to do it.
Along with the gas pipeline or the railway, the
national power might be getting into the game
at a future date. They just started late.
But still just the distances and what you are
going to get out of that? The pockets of population
are so low. Now it is going to be subsidised.
And the prices on bandwith are so low on the world
market. I do not see how you could economically
justify building a major back network in Kazakhstan.
Period. Not now not in five years.
While listening to you I heard several countries.
I heard Belgium, Czech Republic and Russia and
Kazakhstan. So you have got quite a bit of international
experiences. With this in mind, I am really interested
to know your professional background. And also
how you think this background helps you at you
current position in Kazakhstan?
I have Masters Degree in Law. Actually I studied
in Israel. After that I got to Russia straight
after the University on non related to telecom,
non related to law, just more on Soviet Union
opening up now. That time it was still Soviet
Union. There was a humanitarian group, who said
"You are willing to come here - we'll give
something interesting". And I got involved
in a food production project, which I ran and
build up from something, that has been subsidised
by a small community to being something, that
instead of cost centre would become a profit centre
for them. And just because my hobby was always
in computers and technical, I got into telecom
more by accident than by anything else. I needed
it for my own self. The food production had got
efficient enough that I had to spend very little
time. We had a team, we had everything. Everything
was working like a clock. I was getting bored.
So the communications that I had arranged for
my own needs, I started selling it on my spare
time.
And, one of my customers was interested in this,
and we picked it up from there. At one point of
that shareholder and I had a difference of opinion
where to take the business further. The management
team and people that I put in place still work
there till this day. It is very profitable. They
sold out recently to IDT in the US. And after
things went OK with the second one, I decided
that, being an American, but having all my working
life in Russia, I need a little more of international
experience. And I got a job with the US Company,
but being based in Western Europe. I stayed in
Western Europe for year and a half to two years.
And I felt that my interest really lays more in
emerging markets.
It was more exiting. Also emerging markets require
that if you want to do something, the western
outlook helps but only if you do not have a problem
moving between cultures. So I have gone from the
US culture to Middle East culture, to a Russian
culture. I am pretty used to this already. And
the most interesting offer that came out was being
the CEO for Eastern Europe for an American company
that I knew. I knew them, because they were my
competitors in Moscow originally. So I came to
Czech republic, build up a business over there.
And being interested to shareholders I got a good
buyer, got a good price, but the people that have
actually bought were not the people, that I felt
that was going to be able to work with well. And
I went back to Russia.
Yes, on Russia I guess I came in a little bit
late, on the end of that .com boom. But I did
start a web based .com business. I think the main
difference is that it started in the beginning
of 2000 and it's still in business and it's working
at the on line trading floor for VoIP minutes
that operators can go into and in real times trade
traffic. I sold out off that in the end of last
summer. And out of the blue I got contacted referring
this opportunity over year and I thought about
it.
How ambitious are you here now?
I do not know if we will ever get to the turnover
that Kazakh telecom has, simply because they are
government supported and government owned for
that matter mostly. But I think that our profits
can go eventually as high as theirs. I think we
will always be ahead of them technically and service
wise, simply because they are a big state owned
company and we are not. It is increasing market
shares, it is increasing turnover. When you are
number two and your number one is Kazakh telecom
your ambitions have to say: "I am going to
be number one". Might make a good print,
but it is not realistic.
But I think that over the next two years to easily
to double our turnover is definitely realistic.
With all of that, we are keeping a proper equity
ratio, proper profitability. We are not in the
former western game of I want eyeballs and I want
market share, and I will do anything and I could
not care less about the profit. And IPO, if you
would ever be looked at would not be the game.
Free money so to speak, would be looked at from
a purely financial perspective, from business
perspective is the cheapest way I can raise capital?
Baring in mind how much capital I want to raise
in the first place. You don't want to raise too
much capital. You don't want to raise too little.
So right now we have a couple of offers on the
table to issue bonds. If you let us a little bit
early to go public on the Kazakhstan stock market,
we'll start offer bonds that will give us a competitive
interest rate, more flexibility, and interest
rate in the cash, loaned from the bank. And then
after that the next step will be probably to issue
share on the Kazakh exchange. But again only if
I feel we need that cash, only if I feel that
we are ready to invest and that will give me the
proper return on investment.
Final Question. You are basically talking
as a representative of the international business
community here in Kazakhstan. Having this in mind,
do you have the final message for investors thinking
of coming to the country?
What we have to offer, not getting in to the technical
details, is no less than any type of service that
they are accustomed to back home, wherever back
home may be. We can offer that whole range. What
I would say as far as investing over here, it is
the potential returns that any emerging markets
are very high. Potential risks are very high. Any
of them will have to do with regulations and laws
that may be a bit fuzzy. And before you come in
and dump a large investment over here, you better
know exactly what you are getting into, who your
local partners are. If you are coming here without
knowing your local partner and without having very
good references, people that have done business
with them for many years and know exactly, what
to expect. If you only have good references to a
partner and they say that 'I am doing business with
this guy for ten years and never had a problem',
they are either very naïve or just lying. Rather
hear the bad potential things about the partner
or make sure of both. You know your risk. No matter
what any ministry is going to tell you anywhere
over here in the CIS, there is a risk associated
with these countries and there is a good reason
for it. You can make unbelievable returns on the
investment if you know what you are doing. And you
can loose your shirt. |
