Headwinds hit South Africa's Blue Label Telecoms

South Africa's Blue Label Telecoms faced some headwinds over the past year and although some parts of the business are doing well, it reported profit declines for the year ended May 31, 2024.

The company's results are always tricky to assess because at face value group revenue declined by 23% to R14.6 billion (US$825 million).

However, the company is always quick to explain that this revenue number only includes gross profit earned and not gross revenue for its "pin-less top-ups", prepaid electricity, ticketing and universal vouchers which are big business for the company.

If you input the gross revenue generated from those products the revenue actually grew by 16% to R89.3 billion ($5 billion).

Gross profit, however, decreased by 5%, to R3.3 billion ($186 million), but Blue Label said the decline was mitigated by an increase in the gross profit margin from 18.41% to 22.57%.

The group's electricity business saw revenue generated on behalf of utilities increase by 12% to R36.2 billion ($2 billion) and the net commission earned, mainly calculated based on a kW/hour usage, increased by 5%.

Meanwhile, the gross revenue generated from universal vouchers increased by 341%, from R3.6 billion ($203 million) last year to R15.9 billion ($898 million) this year.

"This was driven by the continued traction of BluVoucher sales as well as the onboarding of a new financial institution onto the platform," the company said.

Additionally, gross ticketing revenue increased by 36% to R1.5 billion ($85 million), primarily from revenue generated through commuter bus channels.

(Source: Blue Label Telecoms financial results for the year ended May 31, 2024)

Speaking about the company's focus in the 12-months ahead, Joint-CEO Brett Levy said that there will be a lot of concentration on sales, its distribution networks, as well as product growth and new product launches.

"I guess it's more of the same for us, because it's starting to come together nicely for us. So, nothing crazy," he said.

"Blue label doesn't need more customers. We've got lots of customers, about 35 million to be exact. What we need is our customers to use more of our products. We don't need more distribution, we've got a lot of distribution," Levy told journalists on Thursday.

"Our general strategy, which is quite simple, is we want to bank the unbanked and we want to make every single product and service available to absolutely everybody in this country. It doesn't matter what LSM [Living Standards Measure] you are, it doesn't matter where you live, it doesn't matter what you can afford, and it really doesn't matter how you want to pay," he said.

Headwinds hit earnings

Despite the leadership's positive outlook, group's earnings before interest, taxes, depreciation, and amortization (EBITDA) declined by 18% compared to the previous year, to R1.2 billion ($68 million), excluding the positive contributions of R20 million ($1.1 million) in the current year and negative contributions of R146 million ($8.3 million) in the prior year.

Of this decline, subsidiary Comm Equipment Company Proprietary Limited (CEC) – which manages the postpaid bases of local operators – showed a negative impact of R368 million ($20.8 million), while the remaining group operations contributed an additional R110 million ($6.2 million) compared to the previous year.

Levy admitted that CEC experienced a challenging year in a difficult credit environment. In early 2023, CEC became aware of increased credit defaults in the market, which was indicative of the South African credit environment. It tightened its credit policies and scorecards from May 2023 with further tightening from September 2023.

Core headline earnings for the year ended 31 May 2024 amounted to R679 million ($38.4 million), compared to R402 million ($22.7 million) the year before.

Blue Label said that the low headline earnings last year were primarily associated with the recapitalization transaction of mobile operator Cell C, which the group is heavily invested in.

Cell C's drag on Blue Label

Overall Levy said that Blue Label's total equity investment into Cell C to date is standing at around R7.5 billion ($423.7 million).

In August 2017, Blue Label bought a 45% stake in Cell C for R5.5 billion (about US$420 million at the time). But, by the end of 2019, it had to write down the value of its entire investment in Cell C to zero.

Blue Label's investment was part of Cell C's first recapitalization. But the telco has faced significant financial challenges and spent about four years working on the second recapitalization as a way to reduce its debt and help stabilize the company.

The second recapitalization of Cell C was finally concluded in September 2022, after which Blue Label effectively owned 49.53% of the operator.

In February 2023, Blue Label said it had intentions to take a controlling stake in Cell C so it could have more impact on the operator's strategy going forward.

The group plans to up its stake to 53% but it is awaiting approvals from both South Africa's Competition Commission (CompCom) and the Independent Communications Authority of South Africa (ICASA).

Levy said that there will be ICASA public hearings on the deal on September 19, 2024.

In April 2024, the CompCom recommended that the Competition Tribunal approve the proposed transaction, with some conditions. The Competition Tribunal matter is expected to be heard near the end of October.

Six months ago Levy had said he hoped to get the approvals in the next six months, but the process has dragged on.

"It's taken a lot longer than we thought. I personally thought it was much more straightforward," Levy said.

Cell C's turnaround on course

Cell C's impact on Blue Label's results has been evident over the years, as the mobile operator struggled through revenue declines.

Cell C CEO Jorge Mendes said the operator's stabilization and turnaround efforts were now driving topline growth and small gains were made in recent months.

Cell C did not disclose its full financials as part of Blue Label's results, but said that revenue for the past year had grown by 2% and service revenue was up by 4%.

"I think the biggest challenge we've had as Cell C is having a perception of a bad quality network. So that's something that we have to address right from the get-go. Just contextually, we've moved from 5,500 of our own base stations. We switched off our own radio access network. We now have a virtual radio access network with partnership agreements. So, we now have access to 28,000 base stations," Mendes said, adding that Cell C had seen a significant improvement in its network since this change.

This was part of a strategy to not spend money on infrastructure and rather become a wholesale buyer of network capacity and infrastructure services.

In early 2021, Cell C began migrating its customers to roam on MTN and Vodacom's networks and in June 2023, it deactivated its physical tower network.

Cell C CEO Jorge Mendes. (Source: Cell C)

Cell C's total subscriber base at the end of May 2024 was around 7.7 million, which is a stark contrast to its height of around 21 million users at the end of 2015.

Since then its subscriber base has been slowly declining while rivals like Telkom SA have been growing, with Telkom taking over Cell C's place as SA's third biggest operator in early 2020.

"[Looking at] where we were in years gone by, absolutely we have to grow [the subscriber base]. Our market share is still in the sevens, and I think we need to aim for a much higher share of revenue and subscribers," Mendes told Connecting Africa in an interview.

He explained that in November 2023, the company did a cleanup of its prepaid numbers because it found it was double counting some of its mobile virtual network operator (MVNO) customers and prepaid customers.

"So, actually the revenue generating customers are fairly flat. Nothing has gone backwards. It's more a cleanup of the actual subscribers. We're hoping that that's the last of it," he said.

Part of Cell C's resurgence strategy is improving network quality, offering competitive pricing and improving products and services.

"I think we're now starting to do the front-foot stuff and going after subscribers, because we're confident on the quality of our network and our pricing…and we've managed to get revenue from our existing customers and stabilize all of that," he added.

Over the past year Cell C's prepaid revenue has grown 5%, wholesale revenue was up 20% and prepaid broadband revenue grew 11%. Prepaid traffic on the network also grew 30% and wholesale traffic shot up 76%.

— Paula Gilbert, Editor, Connecting Africa