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Cell C on the road to recovery

Friday, 27 September 2019

Thursday, September 26, 2019 Cell C turnaround initiatives reflect an 18% increase in EBITDA during the past three months. The country’s third largest mobile operator released, in addition to its annual financial results up to end May 2019, another quarter of results up to end August 2019, highlighting the effect of the new management’s strategic activities.

Last quarter performance to end August 2019

The last quarter - post its annual reporting period - shows that its service revenue, also known as customer spend, improved during the last three months leading up to August 2019 at R3,68-billion for the quarter, and the impact of the management’s focused approach on operational efficiencies reflected an improved operating margin and stronger EBITDA at R1,042-billion.

Other indicators over the last three months were:

  • Year-on-year quarterly service revenue, otherwise known as customer spend (June-Aug 2018 vs June-Aug 2019) grew by 2%;
  • Year-on-year quarterly gross margin down 9%;
  • Year-on-year quarterly EBITDA was 18% higher.

Cell C’s CEO, Douglas Craigie Stevenson says that he is confident that Cell C will stabilise and recover to the benefit of its shareholders, consumers, staff and the local telecommunications industry.

“Our turnaround strategy is focused on ensuring operational efficiencies, restructuring our balance sheet, implementing a revised network strategy and improving our overall liquidity. Cell C has a real opportunity to address its historical performance through a focus on operations that will restore shareholder value. We are convinced that our wide-ranging operational initiatives will position Cell C for long-term success.”

Cost cutting initiatives

Some of the initial changes, include:

  • Reviewing the channel options for the ‘black’ streaming service – which will ensure a saving of R120-million annually with additional savings expected as Cell C continues to right-size this business unit;
  • Rebalancing its traffic and retail products – Cell C removed non-profitable products and increased its focus on retail product pricing and wholesale pricing;
  • Implementing a cost efficiency programme across all expense lines in the organisation – the current run rate of over R864-million, with more anticipated will result in these savings reflected in future results;
  • Shifting service revenue back to growth – this will be achieved through a more focused approach on profitable products and re-energising its distribution channels.

Income statement

For the annual period ending May 2019, Cell C released the following annual key performance indicators:

  • Service revenue was up by 4% to R14,2-billion (2018: R13,5-billion)
  • EBITDA decreased by 19% to R3,39-billion (2018: R4,18-billion) due to the expanded network roaming agreement;
  • Low capital intensity of R1,9-billion – 12% of revenue – due largely to reduced network capital expenditure
  • A net loss, after tax, was declared at R8,03-billion (2018: loss of R656-million).

The net loss after tax includes impairments to the value of R6,275-billion. We performed an annual impairment test on the carrying value of the property, plant, equipment and intangible assets (Cash generating unit “CGU”) during the 31 May 2019 period. The impairment was calculated at the higher of fair value less cost to sell or the value in use. The impairments assumptions were made on the cash flows which were limited to the generation of cash by the CGU with no regard to new technology, expansionary growth or the pending recapitalisation transaction. The exclusion thereof are requirements of IAS 36 (Impairment of Assets). It should be noted that future impairment assessments may result in the reversal of impairments recognised in this period.

Zaf Mahomed, Chief Financial Officer of Cell C says the financial performance for the past year up to May 2019 has been below expectations. “The 2019 financial year has been characterised by slow growth, a volatile Rand against major currencies, service issues relating to load shedding and a continuing slowdown in the economy, which resulted in a decline in GDP in the first quarter of 2019. Consumer purchasing power has weakened, which together with reduced disposable income contributed to a lower than expected financial performance of the company. “

Despite the new regulatory and legislative framework pertaining to data expiry and out of bundle usage, implemented with effect from March 1, 2019, we are still growing revenue.

Total revenue of R15,4-billion (+1%) has increased year-on-year, mainly due to growth in the contract (+6%), broadband (+20%) and wholesale (+14%) segments. However, the performance was offset by the decline in prepaid revenue (-1%) due to a decline in the prepaid customer base (-4%) and a decline in equipment revenue (-25%) due to an increase in subsidies driven by the market. 

There was a slight drop in total subscribers by 2% to 15,9-million while the Average Revenue per User (ARPU) of contract customers increased by 11% to R253 per customer.

“Cell C has taken active steps to reduce its focus on pure revenue and subscriber growth to focus on profitable, long-term growth in prepaid and contract segments.”

The cost cutting initiatives were not yet reflected in the past annual period, so direct expenditure increased by 11%, mainly as a result of the increase in roaming costs. The roaming agreement was finalised in August 2018, which contributed 32% of the direct costs incurred. The lower than expected revenue and the unexpected increase in roaming costs, pushed Cell C’s annual gross margin down by 5%.

EBITDA was 19% lower at R3,39-billion (2018: R4,18-billion). Net finance costs were down by 44% to R2,15-billion, mainly as a result of the lower finance costs on long term debt and a reduction in forex losses.

Balance sheet

Net debt, excluding finance leases, increased from R7,44-billion to R8,24-billion, which was driven by the increased capital expenditure and working capital drawdown facilities.

“Networks will be a utility in the future with one or two mobile infrastructure providers per country and it does not make economic sense to overbuild on basic infrastructure. Against this background, we are in negotiations for an extended roaming agreement which will enable Cell C to manage its network capacity requirements in a more scalable and cost-efficient manner. This will also provide access to current and future technologies.”

Liquidity platform

A consortium of local banks committed to provide a liquidity platform that will allow for the recapitalisation of Cell C. In addition to the new funding facility, lenders have extended the maturity of an existing R1,175-billion funding facility which would have matured in August 2019.

Mahomed added that Cell C remained focused on restructuring the balance sheet and optimising the business for long-term competitiveness.

On the corporate governance initiatives, he was comfortable that the new performance-based approach ensured active steps throughout the business to align to King Code IV. 

Prospects and the year ahead

Craigie Stevenson says that by executing on its focused turnaround plan, Cell C will dramatically improve its financial profile and deliver a streamlined business.

“The focused company strategy and correctly capitalised balance sheet will lead to better leveraging of our assets. The South African mobile market is in a mature phase and the long-term growth of the industry in general, and players such as Cell C in particular, will be determined by the ability to deliver innovative service offerings while assessing over-investment in capital hungry infrastructure.”

“We believe in Cell C’s long term prosperity, and I’m confident the we will get there. We have a customer base of almost 16-million customers, a distribution network of over 240 stores countrywide and a strong brand that has been recognised as one of the top 30 valuable brands in the country.”

“Our strategy is aligned with this and the new Cell C management team is focused on the journey to turn Cell C into a profitable, innovative player in the local telecoms industry. The last three months have already showed early signs of recovery – our earnings are up, our margins are stabilising and there is a strong focus on ruthlessly cutting additional costs out of the business. We are leading the way in building a recharged Cell C that creates value for its stakeholders.”

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