Power cuts, Cell C impact SA's Blue Label Telecoms earnings

South African company Blue Label Telecoms' full year earnings have once again been negatively impacted by its investment in local mobile operator Cell C, as well as rolling blackouts that plagued South Africa over the past year.

Johannesburg-listed Blue Label published its results for the year ended May 31, 2023, which show that core headline earnings per share (a key profit measure in South Africa) dropped by 62% year-over-year (YoY) to 45.55 cents per share (2.39 US cents per share).

However, if you exclude "extraneous contributions" primarily linked to a recapitalization deal for Cell C, core headline earnings per share would have increased by 9% YoY, to 104.83 cents per share (5.63 US cents per share).

Cell C's drag

The elephant in the room on Blue Label results day is always its troubled investment in SA mobile operator Cell C.

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. However, the telco has faced serious financial challenges and spent about four years working on the second recapitalization as a way 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 holds a 49.53% stake in the telco.

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

Blue Label Telecoms Joint-CEO, Brett Levy told Connecting Africa in an interview after the results presentation on Wednesday that this was still the plan, and it was moving forward to gain the regulatory approvals to up its stake in Cell C.

He wouldn't give an exact percentage the company was aiming to buy but said anything above 51% would do the trick.

"I think at the moment, there's no number to be honest, it's really just about control. Let's call it 2% from where we are now. If it's 1% or 2% or 10%, I think it's the same result. You're not going to get more for taking 10%. So, I don't think it's about a number. I think it's more about the principle, and we are going to go ahead with it and hopefully it runs smoothly, and we can close this out in the coming future," he said.

Levy said Blue Label will need regulatory approval from both the Independent Communications Authority of South Africa (ICASA) and the Competition Commission which it will be applying for shortly.

On Cell C's profitability going forward Levy said he is "cautiously optimistic."

"I've done it wrong in the past, to be honest, by being overly optimistic. I think that Cell C does have a place to play, I think we really do understand the market. I think we're more optimistic now so let's play it out, let's do it cautiously and there is no reason why we should not finally do what we've promised in the next 18 months," he said.

"Although we've had these hardships, we have had the ability to build a very powerful brand [in Cell C] and of course we need to consolidate and use it to the best advantage we can. I think the successful thing for Cell C was the recapitalization. I think there is a lot of work to be done and we are ready for it. It's not going to be plain sailing into the next year for Cell C, but I think we know what we need to do and how to do it," Levy added.

Power outages hurt merchant sales

Scheduled power cuts by state-owned power utility Eskom – known as load shedding – have become a major issue in South Africa and telecoms operators are being forced to look to alternative power solutions to keep towers and other connectivity infrastructure powered during blackouts.

Blue Label acknowledged that load shedding has been a significant challenge for the company and has negatively impacted the sale of prepaid electricity, prepaid airtime, starter packs and its call center operations, all of which are significant revenue streams for the group.

"The total impact for the group was around R80 billion [$4.3 billion] of gross profits, so obviously, as a whole, it had a big effect. If I break it down, we had 305 days of load shedding last year, which equated to 32 full days. So literally, we had no electricity in this country for 32 full 24-hour days. So, you can only imagine the impact that it has across the board," Levy explained.

Levy said there was a smaller impact on the networks side because for the most part operators are geared to be ready for power cuts.

"Where the real impact takes place is at the small and medium enterprise (SME) level, and at the merchant level. They're not geared for it. So as soon as the load shedding came on, they couldn't transact. When load shedding was really bad, they actually didn't reopen their stores. So that impact has been felt. I think that impact on this country was really big," he said.

"One of the things that we did to mitigate it, and it really worked well, was we afforded more credit to all of our smaller merchants. In essence, we know that load shedding is coming, so we give them the ability to download product before and then it allows them to transact during load shedding. So, we are doing our little bit and it's definitely helped," he explained.

According to Blue Label Telecoms, South Africa had 305 days of intermittent power cuts last year, which equated to 32 full days without power. (Source: Blue Label Telecoms)

Levy added that the past year has been tough for the business, and he expects the year ahead to be equally challenging. However, he believes there is some good news on the horizon, and a feeling of optimism is returning to South Africa as people learn to just live with power cuts.

Despite the challenges, electricity revenue generated on behalf of the utilities increased by 3% YoY even though the net commission earned (calculated based on a kW/hour usage) declined by 16%.

The group is testing an "electricity advance" product which is similar to the "airtime advance" products that telcos have found success with – offering airtime on credit which users pay for later. Levy said Blue Label has been running a year-long proof of concept for the "electricity advance" product and is about ten months into the trial.

"We are transacting and it's working and it's a very exciting product," he said.

Core business grows

When you exclude Cell C, Blue Label's core businesses have shown consistent growth in revenue, gross profit and core headline earnings per share for the year.

Blue Label's revenue was up 6% to R18.9 billion ($1 billion) and gross profit grew 19% to R3.48 billion ($187 million).

A big part of Blue Label's business is selling prepaid airtime and electricity, as well as ticketing and gaming vouchers, and the "pin-less top-ups" on some of these products are not recorded in the overall revenue numbers but only in terms of profit.

When including these "pin-less top-ups," prepaid electricity, ticketing and gaming, the effective increase in gross revenue would also have been up 6% but the revenue amount is far higher at R76.8 billion ($4.13 billion) for the year.

One success area was Blue Label's gaming business – which essentially sells vouchers for online betting and gambling platforms. Gross gaming revenue rose 72% YoY, to R3.6 billion ($193 million).

"The gaming segment has been phenomenal to watch and I don't even think we are a year into this product. It runs through a voucher which is called BluVoucher, which is the unique voucher to us. I reckon in the next 12 months, we'll be doing R1 billion [$53.7 million] a month. Our actual product BluVoucher, which consolidates a lot of different online services into one, has been a very good product and gaming itself has been extremely successful," Levy explained.

Additionally, gross ticketing revenue increased by 156% to R1.1 billion ($59 million), primarily from revenue generated through commuter bus channels.

"Our ticketing side has had a really good year. Our technology has taken a massive leap, we are really ahead of the game on technology. We're doing really well now on transport ticketing. We've also entered into the travel market with Ticketpro Travel. We've already secured some really nice contracts and it's really a nice portal that allows you to do everything yourself," he added.

On the transport side, he said the group has designed a tap-and-go ticketing system that it hopes to roll out across South Africa's transport systems. It has already begun trialing the tap-and-go technology on the bus system in Soweto, Johannesburg.

"In essence in a perfect world you would have a Blu Card, and that Blu Card will get you onto the Gautrain, a taxi or bus. I guess that's the golden goose down the line which is in the pipeline," he concluded.

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*Top image is of Blue Label Telecoms Joint-CEO, Brett Levy. (Source: Blue Label Telecoms)

— Paula Gilbert, Editor, Connecting Africa