Nepal Telecom saw its net profit tumble 42 percent year-on-year for the fiscal year 2018-19 ended July 16, which it attributed to a steep licence fee, foreign exchange losses, and falling revenues caused by changing consumer tastes and preferences.

A consolidated interim financial report released by the state-owned telecom giant on Thursday shows that the net profit plunged to Rs10.20 billion in fiscal 2018-19 from Rs17.48 billion in fiscal 2017-18 after it was obligated to shell out Rs4.02 billion for the second renewal of its licence which had expired in 2014.

Things are not looking bright for the state-owned utility as it still has to pay around Rs16 billion in pending licence fees to the regulator, the Nepal Telecommunications Authority. And as the second renewal has also expired in May, there is uncertainty over fees for a third renewal.

“Despite a dispute with the regulating authority over the payment of Global System of Mobile Communication (GSM) renewal fees which had accrued on May 12, 2014, the company was obligated to pay Rs20 billion,” said the telecom service provider. “However, a government decision dated May 24, 2019 rescheduled the payment with the due amount to be paid in five annual installments starting from the fiscal year 2018-19.”

After the Cabinet directed Nepal Telecom to pay Rs20 billion in five installments in May, the employees' union of the telecom giant had demanded that the fee be withdrawn.

As per a statement released by the union, the company which has a paid-up capital of Rs15 billion—Rs5 billion less than the fee amount sought by the regulator—should not be subjected to such a huge fee as it will lead to a massive financial burden.

The state-owned telecom operator had received approval to sell GSM services in 1999. At the time, no fixed charges were set for approval and renewal fees, and the telecom company had agreed to pay the amount which would be paid by other service providers in the future.

In 2004, when Spice Nepal (now Ncell) began operations, it had agreed to pay Rs210 million for approval to run GSM service and Rs20 billion after 10 years for renewal. Since then, the same charge has been set as default fees for renewal of the GSM licence and Nepal Telecom has been subjected to it.

As per the existing provisions, telecom operators are required to renew their licences every five years after 10 years of operation.

“The issue of quantification of the GSM licence renewal fee that expired in May this year is not settled within the authority. So, the company renewed its licence by paying nearly Rs190 million and has amortised the cost accordingly,” said Nepal Telecom. “The fee liability (third renewal) if confirmed and quantified may result in further cost to the company and hence, the net profit after tax will be adjusted by that extent.”

The decline in net profit is also attributed to a fall in revenue as the telecom operator recorded Rs36.78 billion in total income in the last fiscal, a drop of Rs2.24 billion compared to revenues of Rs39.02 billion in the fiscal year 2017-18.

The decline, despite a growth in subscriptions, has been attributed to growing use of over-the-top messaging services like WhatsApp and Facebook Messenger over long distance and domestic voice calls, and slow growth of labour migration in key employment destinations. Earlier, long distance voice calls contributed a major chunk of its revenue. But times have changed.

“In recent years, due to the popularity of over-the-top services, the interconnection business was negatively affected, and the result of which is seen in the company's revenue from that service,” said Nepal Telecom while stating that it had taken measures to offset the impact of over-the-top services with new revenue sources.

“There is an industry-wide slowdown in revenues from long distance calls, which used to be a major source of income, mainly because of over-the-top services,” Dilli Ram Adhikari, managing director of Nepal Telecom, recently told the Post. “To offset the impact of over-the-top services, we are expanding our 4G network, particularly focusing on rural areas to meet mobile data needs, and replacing ADSL lines with fibre to the home connection.”

In the aftermath of dwindling profits, the company’s earning per share has fallen to Rs68.05 per share from Rs116.56 per share in a year.

The company, mired in fee burden and loss of revenue, is also facing the brunt of soaring costs and changes in the tax regimen.

In 2018-19, Nepal Telecom’s depreciation cost rose by nearly half a billion and it disgorged an additional Rs901.29 million in current tax expenses compared to previous fiscals as the corporate tax rate was increased to 30 percent from 25 percent, leading to a fall in tax adjusted profit.

And the company also suffered a foreign exchange loss of Rs153.79 million in the fiscal year 2018-19 against a gain of Rs635.55 million in foreign exchange in 2017-18.

The company’s marketing schemes have also added to its existing financial burden as it sacrificed a cumulative amount of Rs775.26 million on discount schemes on recharge card sales.