Blue Label Telecoms

The Joint Chief Executive Officers' report

Blue Label is a “magnet for foot traffic”

 

For over 16 years, Blue Label has delivered on its strategic objective of distributing electronic tokens of value in emerging markets. In a targeted approach driven by data analytics, we continue to expand our range of products and services while increasing our distribution footprint through a vast network of POS devices and electronic wallets, enabling consumers to transact conveniently.

Physical and virtual tokens are delivered through the deployment of various technologies embedded in our technical vending solutions. We liken our distribution methodology to a virtual delivery system, whereby our sophisticated proprietary technology is the carrier enabling such transactions. Incremental costs are minimal, as the heavy lifting to establish the distribution network is already in place, resulting in profit margins filtering directly to the bottom line.

In deployment campaigns, we observe merchants benefit through increased turnover of our products, as well as those of others from the moment our POS device is installed. The longer duration that a device operates in the market, the more transactions it records and the less churn is encountered. Hence, we are a 'magnet for foot traffic' – be it in South Africa, India or Mexico.

In South Africa, the Group distributes a range of offerings, including prepaid airtime, starter packs for voice, data consumption and content downloading; a complete range of tier one to tier four hardware devices, such as branded and unbranded, new and refurbished handsets and tablets; finance for the mobile device element of postpaid and hybrid contracts; prepaid electricity and water e-tokens; ticketing for the events, sports and transport sectors; as well as fintech and value-added services, such as debit and credit card acquiring, bill payments, Lotto, money wallets and transfers and other value-added services.

This variety and depth of digital products and services, along with merchants and consumers increasingly adopting more tech savvy practices, places Blue Label at the convergence of the next Industrial Revolution.

Blue Label complements its distribution by embracing the retail channel in serving consumers in 'the last mile'. The relevance of this is that the operator of the last mile of the channel determines merchandising practices and pricing, as the POS terminal is located in this part of the channel and in most instances is placed there by Blue Label.

How we operate

The distribution model is based on strategic partnerships between ourselves and our suppliers and customers which are underpinned by long-term contracts. These inevitably evolve into constructive relationships where customers in our ecosystem become our partners. The integrity of these relationships enables the model to continuously develop and evolve.

Blue Label derives income from three main pillars: the sale of commodities (such as airtime, electricity and ticketing), annuity transactions (from our starter pack base, location-based services, content and other subscription services) and interest earned on any surplus cash generated.

The discount structure is based on long-term contracts with network operators and other product and service providers, which cover payment terms, annuity and commissions receivable. Discounts received are shared with merchants in the distribution channel as an incentive to distribute our merchandise. In turn, the Group channels merchants' feedback and manages all their field support requirements, in addition to supplying products, services and marketing materials, as well as looking at building their future needs.

Group performance

Group earnings continue to increase organically, primarily attributable to the South African Distribution segment raising its contribution to core headline earnings by 19%. Group core headline earnings increased by 17% to R801 million.

Group revenue remained static at R26.3 billion, congruent with an escalating shift in consumer buying patterns from traditional purchasing of airtime to that of "PINless top-ups". Only the gross profit earned thereon is accounted for in revenue, as opposed to the gross amount of such transactions. On imputing such amounts the effective growth in revenue would have equated to 7%.

Gross profit increased by 19% to R2.2 billion, in line with an increase in margin from 6.98% to 8.26%.

In measuring performance, we place reliance on gross profit as a growth metric rather than revenue. A further example of our preference for measuring gross profit is in our accounting treatment of prepaid electricity, PINless airtime and water sales. We act as the agent on behalf of utilities, as only the commission earned on these sales is included in revenue, and not the product's face value.

South Africa's core business

South African Distribution segment is the predominant contributor to Group profitability. Revenue remained consistent at R25.8 billion. However, revenue generated on "PINless top-ups" increased by R2 billion to R6.1 billion, equating to an effective growth in revenue of 7%, as only the commissions earned thereon are recognised.

This year the management team was enhanced by the appointment of experienced professionals in distribution.

International segment

The investment in Oxigen was initially of a long-term nature as it was expected to emulate the business model of the South African distribution operations. However, its profile has changed from that of the traditional Group business model to one of generating growth in the market value of the investment with a view to unlocking the Group's share thereof. With the advent of its change in focus to financial services through wallet subscription, it is no longer strategically aligned with the other business units of the Group and is unlikely to generate profitability in the short to medium term. However, the market value of the company is expected to increase in conjunction with its growth in wallet subscribers. This in turn creates the potential to unlock the investment in the future and the Group is pursuing this new strategy with respect to its investment in Oxigen.

Blue Label Mexico's losses continued to decline, with the Group's share thereof reducing 42% to R37 million, mainly underpinned by higher blended gross profit margins.

Vertical integration of our ecosystem

Blue Label's model of distributing virtual goods and services across multiple economic sectors affords it access to vertical integration possibilities in its ecosystem. Our strategy is to combine or link appropriate opportunities into a richly networked ecosystem.

Integration creates further scope for design thinking alongside existing operating processes and systems. Integration also brings together a number of different players, which are now able to serve markets in ways previously beyond the capacity of a single organisation. The ecosystem's diversity and collective capability to learn, adapt, enable, disrupt and innovate are key in determining its further successes and sustainability.

Acquisitions

Blue Label delivered two landmark transactions subsequent to financial year-end:

Cell C

The R5.5 billion funding of Blue Label's participation in the recapitalisation of Cell C was funded through a hybrid of our own cash resources and the placement of shares. Implementation of the acquisition was effective on 2 August 2017.

Our rationale for the vertical integration with Cell C embraces three main pillars:

1. Creating value as a free-standing entity;
2. Ensuring longevity of our existing trading relationship with Cell C; and
3. Commercial synergies, as Blue Label becomes a service and product provider to Cell C across multiple shared services arising from the alliance.

3G Mobile

In August 2017, Blue Label announced the acquisition of 3G Mobile, a distributor of the major tier 1 and 2 mobile device and handset manufacturers, such as Apple, Samsung, Huawei, ZTE and Nokia. Through 3G Mobile's wholly owned subsidiary, Comm Equipment Company, it offers financing for the mobile handset element of postpaid and hybrid contracts.

The R1.9 billion acquisition cost was structured in two stages. Initially 47.37% was acquired for R900 million. The remaining 52.63% will be acquired for a further R1.0 billion, subject to the fulfilment of conditions precedent in relation thereto, the completion of which is anticipated to be in early 2018. Of the initial purchase price, R250 million was applied through vendor placement of shares, and the balance of R650 million will be payable on 28 February 2018.

Our existing handset and tablet business comprises both low-cost smart phones and certified pre-owned mobile handsets. By vertically integrating with 3G Mobile, we are now able to offer a complete range of handsets and tablets.

Blue Label's success going forward will be characterised by management's execution capability in aligning, integrating and extracting operational and financial metrics from these significant investments.

Evolving our digital presence in Africa

The recent acquisition of 3G Mobile instantly augmented Blue Label's footprint across the continent. When coupled with Blue Label's merchandise available through its Mobile segment, countries now served include Botswana, Cameroon, DRC, Ghana, Guinea, Lesotho, Mauritius, Mozambique, Namibia, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe, in addition to core businesses in South Africa.

Technology and big data

The Group's distribution capability is underpinned by its sophisticated proprietary technology platforms. Technology is both our cornerstone and competitive advantage. Its robustness can be attributed to its adaptability to ever-changing demands, complemented by a thorough deployment methodology. It is product and hardware agnostic, a neutral aggregator, capable of plug 'n play, proven, scalable and does not outsource its ongoing development.

The advanced level of our technology platforms has enabled the introduction of modern products and services, such as prepaid electricity and water, and the proprietary UniPIN, which is the offline solution to an online problem. Other capabilities include our online wallet and sophisticated ticketing engine.

The Group continues to accumulate merchant and consumer transactional big data mindful of its obligations in terms of POPI and the CPA. Data scientists aggregate, process and analyse vast sets of information gathered from across the Group and our partners. Insights from these records enable us to form a single, content-rich profile per customer, which in turn creates multiple cross-selling and up-selling opportunities throughout the Group. We are now able to identify unique characteristics and traits, which allow us to mine data intelligently and more effectively, thereby enabling us to focus on specific market segments with unique and differentiated products. This targeted approach is especially relevant in the main market segment, where the typical consumer is unbanked or badly banked and therefore does not qualify for credit. Our sophisticated technology enables us to build a thin file or "cash" risk profile for each consumer.

Marketing

Our marketing approach focuses on delivering technology, products and services, as required by merchants and consumers. Extensive research, project work, pilots, trials and perception studies are utilised in identifying opportunities in order to entrench our distribution footprint in formal retail, independent, petroleum forecourts, corporate and rural areas.

Brett Levy		Mark Levy
Joint Chief Executive Officers

23 November 2017