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Cell C reports improved interim results

‘We’ve seen that the prepaid offering gives a lot of value to the customer; and really for us that is our focus … and of course making sure that we are profitable’: CFO Zaf Mahomed.

FIFI PETERS: Cell C came out with its numbers today. It reported a return to pre-tax profit of R148 million in the six months to June. This follows a loss of R7.6 billion in the same period a year ago. While the mobile operator did grow its subscribers over the period, adding 15%, to [reach around] 13 million, revenue was lower and so were its operating profit margins.

To dial into the numbers for us we’ve got Zaf Mahomed, who is the CFO at Cell C. Zaf, thanks so much for your time. It’s been a while. Can you just characterise the period for us, and what the impact of Covid-19 was on your business?

Read: Cell C shows improved performance as it eyes recap deal

ZAF MAHOMED: Good evening, Fifi, and good evening to your listeners. It’s been a very tough trading environment. As you would have seen from our revenue numbers, they’ve come down a bit. I think for us the focus has really been on profitability in a tough trading environment. You would have seen that, despite the drop in revenue Ebit was up as was Ebitda.

FIFI PETERS: The fall in revenue is a bit surprising for a player in your sector. You essentially provide the services that have kept us connected throughout this period of lockdown – from working from home to studying from home, to eating from home, to shopping from home and the like. Why were you not able perhaps to benefit more from what has happened as a result of Covid-19 and the push in demand for telecommunication services?

ZAF MAHOMED: When it comes to what we call our Home Connecta Flexi product, we were already at 600 000 customers on the last date in March. We’ve already seen a huge pickup in that product. It’s priced really attractively that offers value to the market. So we’ve seen an uptake through lockdown, and lockdown has been good for that product in particular.

So what we did was we had a portfolio change in terms of our product mix. And so our post-paid base has moved over to CDC and although we are still the agent that revenue has dropped off. We tried to make sure that we add value to the customer with the right product, which means not [offering] heavily subsidised mobile phones. That’s the primary cause for the drop in the revenue.

But this was hosted obviously through the broadband product, which is the Home Connecta, and that’s why we were able to shift our portfolios to take advantage of a very tough environment, but also demand for that product.

FIFI PETERS: It’s been a couple of months since your June year-end, so can you just tell us what the picture is looking like right now in October, and how many of those challenges that were with you over the interim period, correction there on my part – not your year-end, your interim period – how many of those challenges are still with you today?

ZAF MAHOMED: The challenges remain. I think you’re seeing a distressed consumer and that the economy is very tough out there. We were ahead of the curve in terms of moving to prepaid, in particular, because I think prepaid affords people a lot more value than a post-paid contract. You’re don’t actually have any heavy subsidy on the phone, for example. So we’ve seen a big shift towards prepaid. We’ve also seen a big shift to prepaid broadband.

So for people working from home, working from anywhere, we have the advantage of a mobile product. A mobile product means that you’re not fixed to a modem, which means ‘work from anywhere’ can work for you as an individual, or if you work with an SMME, for example. The challenges have continued in the economy. We try to make sure that our products are relevant to the customer, and that’s why the portfolio change has ….

In the interim we’ve made sure that we cut our cloth to fit. So you’ve seen a massive drop in operating expenses because of this portfolio shift in our product, as well as the change in our business model.

FIFI PETERS: You have added new customers over the period. You’re now sitting at around 13 million. Can you give us a profile of these new customers – where they came from?

ZAF MAHOMED: Well, the bulk of that change came through on prepaid. So our prepaid customer base, what we call the AC prepaid base, has gone up from about 8.4 million customers to 9.6 million. And then the broadband product that I was referring to, that’s come in already at 159 000 customers. It’s already at 600 000 as at the end of last month. You can see that portfolio shift – a lot of it is in the prepaid space.

FIFI PETERS: You did mention the debt that still remains on your balance sheet that you have cited as a big concern still for the group. Just give us the numbers here. What’s the size of the debt presently, and what are the plans to bring it down?

ZAF MAHOMED: I think the first thing is that we sit with loans and borrowings of about R8.2 billion; that’s down from R9.7 billion in the comparative period. The reason for that is the change in exchange rate. We’ve got a US dollar-denominated loan. We also have the lease obligations in terms of our lease obligations of our power portfolio to remain; that’s come down from about R4.3 billion to R4 billion. So those are the two big items in terms of the value.

What we’ve tried to do is focus on profitability and building a sustainable business, because that is what is within our control. The recapitalisation will take care of the balance sheet, and our focus has really been on making sure that we are as profitable as possible, and making sure that we are fit for purpose so that when the recapitalisation does happen we are ready to go from that point on because our working capital will be sufficient to fund the business going forward, and we won’t have the massive debt that we’ve been saddled with for a long period of time.

FIFI PETERS: Can you give us more details on the recapitalisation – how much you’re looking at here, and when it is likely to happen?

ZAF MAHOMED: In terms of the recapitalisation, it’s an ongoing discussion that’s been happening with one of our big shareholders, Blue Label, which wants 45% of Cell C. I’m pleased to report that Blue Label has secured funding. We updated the market in August that they had secured funding from various banks.

We have made progress in that this is a great positive first step for our recapitalisation. Just to emphasise, it is only part of an overall process, because we are also in between negotiating with a bunch of creditors and lenders in that process. Of course we’ll update the market as that process unfolds. But bear in mind that’s a very complex restructure and a complex recapitalisation involving multiple jurisdictions and multiple currencies.

I think that it’s easy to get distracted by the recapitalisation, for us actually the focus is on making sure that we run a profitable business that’s sustainable for when the recapitalisation comes.

FIFI PETERS: And then how far are you from profitability?

ZAF MAHOMED: The initial numbers that you would have seen – really it’s on the Ebit line that we would focus because, as that Ebit line, for example, we did R736 million. Below that obviously we’ve got finance costs and foreign-exchange gains and losses, which really get sorted out with a recap. But at an Ebit level we made R736 million of Ebit for the six months, compared to a R5.3 billion loss in the comparative period last year.

FIFI PETERS: All right, Let’s talk about your position on the debate around spectrum that’s currently in the market. Major players are at war with the regulator over a whole host of issues from how the spectrum auction will be carried out to the removal of the emergency spectrum that was given over the past 18 months or so as a result of the lockdown. What is Cell C’s position?

Read: Icasa has erred on temporary spectrum withdrawal

ZAF MAHOMED: In the first instance we didn’t apply for emergency spectrum. We have 5 500 sites with sufficient spectrum, and it would have been disingenuous for us to go and apply for emergency spectrum to try and make money out of that. That would have been offside, I think. We focused on our existing spectrum. The emergency spectrum didn’t really affect us, so we’re not in that.

In terms of the bid for the new spectrum, we are in that process. We have applied and when that process unfolds we’ll be able to apply for our slot of spectrum, depending on how that process unfolds. Spectrum is really important, and it’s really important that that is accelerated. We think that that can unlock a lot of value, particularly for mobile network operators, and you would have seen some reports from the other networks.

Our view is constructive engagement and that’s what we really are after, in terms of dealing with Icasa and the industry.

FIFI PETERS: As we wait, though – because the wait for the spectrum rollout has been quite a long one and has constrained quite a lot of growth in the industry, as said by many players, including yourself – what will growth look like in the interim for Cell C?

ZAF MAHOMED: We are on our path to grow our network. Currently we have just over 7 500 sites. By the end of 2023 we’ll be able to hopefully report that we’ll be on 12 500 sites, which is a massive increase in terms of our network reach and capability – as well as the quality of the network [which] would improve with that time. We will be focusing on that and making sure that our business model of having what we call a radioactive network, that’s managed. So we don’t own towers or rent towers. That will be a managed service provided by MTN. And so over the next two years our focus is on transition.

So for us, again, [we’ll] focus on profitable customers, making sure that the product is right for the consumer. We’ve seen that the prepaid offering gives a lot of value to the customer – and really for us that is our focus. And then of course making sure that we profitable, so each time that we report our results, [we’ll be] making sure that we grow our profitability and keep doing the things that make our business profitable. I think once that’s done and the recap is done, we’ll be in a much better position to take advantage of further growth going forward.

FIFI PETERS: There was a time when Cell C was a very easy takeover target for those looking to grow through acquisitions in the market. I’m just wondering what the situation is looking like now. Have you had to fend off any potential suitors in the past period?

ZAF MAHOMED: We’ve had one or two enquiries, but we’ve referred those to the shareholders. This is really a matter for the shareholders to deal with. Again, our focus is really on the business. I think perhaps you should ask those shareholders the question.

FIFI PETERS: Are you able to tell us where those one or two enquiries came from?

ZAF MAHOMED: I wasn’t a party to that. That was all done at shareholder level. We passed on all those enquires. Recapitalisation would be a shareholder matter.

FIFI PETERS: Just lastly, these one or two offers – in which period did they take place?

ZAF MAHOMED: Oh, they were a long time ago when we first started the recapitalisation process.

FIFI PETERS: So nothing in the past six months?

ZAF MAHOMED: No.

FIFI PETERS: Okay. Thanks so much for your time. We’ll leave it there. Zaf Mohamed is the CFO at Cell C.

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