SmarTone, the fourth-ranked mobile operator in Hong Kong, faced a difficult fiscal 2013-14 with both profit and service revenue dropping and customers slow to migrate off legacy unlimited plans to tiered ones.

Its profit for the year ending June 30 slid 36 per cent to HKD537 million ($69.2 million) and EBITDA was off 14 per cent.

Blended ARPU fell 11 per cent, which SmarTone CEO Douglas Li said was caused by lower-priced 3G speed-capped plans and the move to SIM-only plans.

Li said that there are some signs that rates are strengthening, but the operator “continues to face challenges monetising rising data usage”.

Executive Director Patrick Chan said that the migration to tiered pricing has not been as good as expected.

“In fact, it’s been quite disappointing. A lot of customers are holding on to their old plans, and when their contract expires they aren’t signing up for new contracts and are continuing with their old unlimited data plans. The number on unlimited plans is higher than we’d wish,” he said.

On the positive side, overall revenue was up 10 per cent to HKD10.3 billion, connections increased 3 per cent to 1.88 million, and the company will pay out 60 percent of its H2 profit with a HKD0.13 dividend (HKD0.31 for the year). And its postpaid churn rate was steady at 1 per cent.

But the positive revenue number, driven by a 22 per cent increase in handset and accessory sales, Li said masked a service revenue decline of 4 per cent. This was caused by customers moving to lower-priced SIM-only plans from handset-bundled packages (leading to lower handset subsidies) as well as a small decrease in roaming.

He noted that margins on handsets and accessories are falling.

After heavy investments in its 4G network, CAPEX for fiscal 2013-14 was down 22 per cent to HKD934 million, and is set to decline another 9 per cent next year to HKD850 million.

Looking ahead, Chan said he sees the potential for additional cuts in CAPEX, “but they won’t be material, barring the significant need for a technology upgrade”.

Operating expenses were up 3 per cent as a 2 per cent fall in staff costs was more than countered by higher office/retail shop rents and increased network costs to handle rising data usage and improved network quality.

Li said an 18 per cent jump in fixed asset depreciation from its increased investment in 4G over the last year was offset by lower handset subsidy amortisation (down 17 per cent). Overall depreciation and amortisation was down 5 per cent.

The company finance costs rose 45 per cent as it secured long-term funding for its spectrum renewal in 2016 and CAPEX requirements. Li said with 80 per cent of its debt fixed (average rate of 3.54 per cent), it is well protected from interest rises.

SmarTone has a 15 per cent market share and 22 per cent of its connections are 4G, according to GSMA Intelligence. Market leader HKT/CSL (which recently merged) has a 36 per cent share, with 32 per cent of its connections 4G.