 Biznews were thrilled to host an interactive webinar in our studios last week, in conjunction with Standard Bank Webtrader. Alec Hogg chatted with Brett Levy of Blue Label Telecommunications. A fascinating discussion between the two covered everything Blue Label, from the company’s inception, interest from Microsoft at BLU’s listing in 2007, their recent acquisition of RMCU and how it truly has opened the world up to the company – not to mention the importance of the ‘grey hair’ factor and where the lads’ prospects lie in the future. Incredibly transparent and illuminating conversation from Brett, this one is not to be missed. – CH
Mark was also supposed to be with us Brett, but you’ve had a tragedy in the family, thank you for coming.
Thank you very much for having me.
We have a lot to talk about; not just the financial results but why I like Blue Label so much. I think many other people who are now starting to see greater attractions in the Blue Label stock. Weâre going to go straight into it.
We have the facility to make this as interactive as possible. While youâre listening, if youâd like to post questions, just go for it. We have Stewart, whoâs sitting at HQ at Standard Bank Online Share Trading. Heâll be picking up the questions and putting them into a little box that Iâll see here from Biznews, and then weâll pose them to Brett. Iâll carry on with it and as the questions start coming through, weâll bring those through as well. We are scheduled to carry on for an hour. Weâll see how it goes. Perhaps weâll continue for that long. We might not do it as long â whatever. Weâll just see how the conversation goes. Gee Brett, thereâs enough going on in your company to keep us here for six hours.Â
All right, letâs go onto the first of the slides. I think thatâs the share price. If we go back to November 2007 when you guys listed, you came to the market at a price of R6.75. The shares shot the lights out on day one. A few days later, they got to an all-time high, which stood until recently and then it slid down. Letâs just go back a little bit. Seven years ago, you were in your early thirties and you decided to take this company to market. It was in the boom of 2007. There was a lot of excitement around it. Looking back, did you maybe overprice the shares at the time?
Just to put it into perspective, just to go back to the time; we were pricing the listing at R5.50 to R6.75 with R6.75 obviously, being the high. About a week before we listed, Microsoft decided to come into our listing. As soon as the market heard that Microsoft were coming into our listing, we became 10/11 times oversubscribed at the R6.75 mark.
Why did they want to come in?
They wanted to take their product to the prepaid, independent world actually, and theyâd headhunted us, quite strangely. Theyâd picked this company in South Africa, called Blue Label. We werenât listed at the time, so our exposure was already around the world. Their idea was to take products like Microsoft and Windows, etcetera, put it into a prepaid format and offer it into Cloud base, into the market. Today, we know of Cloud and itâs very popular but in 2007, it was obviously something new. Our partnership was really good. Unfortunately, it ended round about 2010/2011 (on really good terms, though) and that was just because the machine that is Microsoft couldnât deliver on a new market for them.
If we take your share price down to 2008, thatâs not unusual. What happened on the market generally was lots of excitement in 2007 and then a bit of a bust after the global financial crisis hit. All shares all over the world were affected, including yours.
I could be wrong, but in 2007, there were two more up days until the bubble actually hit, after the 14th of November and then of course, we went into this massive crash of 2008 where I think everyone was affected equally – I think everyone on the downside was affected equally, at least â and weathered through it. We put our heads down, did what we had to do, traded straight away at a much higher number and then came back. Ever since then, the share price being secondary for us, ground in a way in making sure we deliver to the market. Iâm sure the share price will take care of itself in the future.
I often hear CEOâs saying exactly that but actually, you watch the share price. Come on.
I used to, Alec. It used to bother me so much that I decided itâs better for my heart to not watch it.
I remember Bernard Cantor. After they listed Investec in 1985, for a couple of years it did nothing. He was so frustrated about it. I think you could have bought the shares at R2.00/R2.20. Of course, look at them today. Youâd know that thatâs the time to be accumulating the stock. Just going back over those six years, bringing us back to the present, things were okay and then towards the middle of last year, falling quite sharply. The share price was down to the R8.00 level and then you had the spike up to R10.00. That was around the time that you had an unsolicited bid. What went on there?
It at was the beginning of October last year. At Blue Label, weâd often get a lot of interest or people looking at us. This time, our Board felt that from a governance perspective that we needed to announce that there was a suitor looking at buying 100 percent of Blue Label. Itâs not out of the ordinary for Blue Label. This just took a bit of a different turn and thatâs why we had to announce it. It is important to note that Mark and I are not sellers. Weâre really not looking for a sale. This came out entirely out of left field, and through good governance, we announced it. The share price spiked up literally ten percent in one day and then drove from there. We found ourselves trading at a little bit less than we did before the announcement. In the markets, you get the people who react to it, but our long-term shareholder base has remained. Weâve just put our results out. Weâve seen quite a few of them and I think weâre building up quite a solid base.
What stake do you and Mark have?
Together, we have just on 24 percent.
And youâre not going anywhere. You were not prepared to sell. Was that the reason why the deal fell over?
Not entirely. I think there are many reasons why the deal fell through but very importantly, we would like to follow any deal that comes through Blue Label. We would like to see a bigger picture for us. Not necessarily financially, but weâd really like to take this business into the future. If it were a bigger company buying it, what role would we play in a bigger company? One thing we do have on our side is age and rather young management around us, and I think we have a lot to offer. Weâre going to be around for a couple of years and I think that will be a good thing.
Is that an advantage for a business like yours?
I think so because (1) you really have people with heart and soul in the business. You have people with big interests in the business from a shareholding perspective (not that we look at it from a shareholderâs perspective). Everything we do, we do in the best interest of shareholders because we do have a large shareholding and we have the shareholdersâ interest at heart. More importantly, people grew the business. We were the drivers. We were the storemen. We were the salespeople. Weâve been absolutely everything in the business, so the knowledge is great. What weâve really done well over the last five or six years â especially since we listed â is bringing what we call âgray hairâ. A lot of good experience, especially on our Board. A lot of good experience into management, and a lot of diversity. From the original five or six people who started Blue Label, obviously the good thing is that remains but everything around us is new.
How many people do you have now?
If you exclude the call centres and international, in South Africa we have about 900 people.
From five or six. How many of them do you know?
This is the sad part actually, because I knew all of them and made a thing of going for lunch with mostly everyone. Now, I try to make a point of going around the office and saying hello to everyone at least once a week, but the truth is that I know many faces and Iâm finding it quite hard to keep up with all the names.
With 900, no one can blame you for that. Just to remind you, you can actually pose your questions to Brett by filling it in at the area where you can even go into the chat area or you can go to where the message area is. Okay, letâs get into those numbers because the results were released last week.
After talking to you and Mark on CNBC, I got quite excited about it because of the broader trend. When you look at what our attendees are seeing on the screen here, itâs for the half-year to the end of November. The gross profit is growing. The GP margin is growing. Youâre now at seven-point-six percent. Itâs a whole lot more than selling cabbages at Shoprite, but itâs not a massive margin. A couple of percentage points or even tenths of a percentage point increase in your gross profit margin would have a big impact on the bottom line, I guess.
Absolutely. Weâre working on massive revenues. The revenue thatâs currently going through our books is about R45bn. What weâre actually show you is about R20bn so any single point is massive.
Whatâs the difference between the two?
One is what we call pinless top-ups, which means that you act as an agent and not the principal or the principal and not the agent. Essentially, the risk and rewards pass on to us where we actually buy the stock, bring the stock into our side, and then release the stock. We then bring in the revenue as well as the cost of sales itself.
Iâm sure many people listening have a very good understanding of Blue Label. For those whoâve just heard âhey, this is the stock that we should be looking at more closelyââŠÂ In a nutshell, what is it that you do?
The first thing that I really want to put out there is weâre listed as Blue Label Telecoms but weâre not a Telecoms company. I think itâs really important to stress that because sometimes weâre lost in what is happening in the telecoms world as such, and weâre really not affected, as the telecoms companies are. What we really are, is a financial/distribution house where we will digitise anything (in the prepaid ticketing world) and electronically, we will move it across countries and across the world, and make sure the product can reach the masses of the world and not be limited to just urban areas.
Explain that. Pay as you go. If I have a pay-as-you-go phone, is it a Blue Label Product that Iâm going to buy from the cafĂ©?Â
This is the most exciting part for me. If I can just summarise Blue Label quickly, it works like this. If I am the main guy (Vodacom, networks, municipalities, or Eskom), they turned around after all these years and said âhang on, guys. Weâre being silly. Why donât we push more and more product into the prepaid world? Weâre paid upfront for a product weâre going to deliver in the future. Generally, we charge a little bit more for the service because there is no loyalty to it. For the same service, it would be a bit more. Lastly, adding to the reason for it is zero bad debts because itâs prepaid.’  Subconsciously, youâre seeing this massive drive from all the players at the top, putting more and more products into prepaid.
They donât call it prepaid (especially across the world) because prepaid is unfortunately, associated as a poor manâs product. Thatâs how it was developed initially. Itâs really not a poor manâs product. Itâs a product for everyone. What youâve seen is this massive drive from the top end of more and more products going into prepaid. In the middle, you have the retailer/merchant whoâs said âhang on one second. How can this be? The most product that Iâm selling out of my store is a product I hold no stock ofâ. Imagine if you went to people years ago and you said âlisten, your #1 SKU in your store is going to be a product of which, youâll hold no stockâ everyone would have thought youâre a little bit crazy. People thought Mark and I were a little bit crazy, and they probably still do.Â
You have this massive pool from the merchant who wants more and more product in this prepaid virtual world because theyâre not holding any of the stock, and they can hold products across the board. They can now compete on an equal footing. Lastly, bringing this prepaid world together is âwhat is the customerâ because no matter where you are in the world, a customer wants to budget his/her life. They want to know at the end of the month that this is what theyâre spending for X, Y, and Z. No matter how hard you try in a post-paid world, itâs impossible because you overspend on your electricity. You overspend on your Internet.
Well, the banks give us credit cards.
Weâre all the same.
Thatâs interesting. If thatâs the case, then why arenât you really, really big in the online space? If itâs to do with the retail, online has always had virtual products whereas the retailer has SKUâs. Isnât this a massive opportunity?
The future for online, is massive. For us, we offer an online service. You can have everything that we talk about, online. The secret of what weâre trying to do is take the product to the unbanked or the badly banked masses of a country. When we started out, we said âhow come a person who lives rurally, doesnât want shack insuranceâ. They do want shack insurance. The reason why they didnât have what we consider house insurance is (1) they couldnât get it and (2) if they could get it, it was too expensive for them to pay for it, as they probably had to commute to do it. What weâre doing is weâre taking product to the masses of the world.
Youâre a distribution company, not a telecoms company.
Weâre absolutely a distribution company. Telecoms happens to be one of the products that we supply.
How do you grow as a distribution company?
With a distribution company, you have to concentrate on two things. 1. You have to continuously grow your distribution. 2. The key to it all is once you grow this distribution, itâs about sticking new products onto it. As someone said to Warren Buffett in an interview a couple of months ago, âwhy are you buying up all the railroads?â He said âIâm going to give you three quick reasons. 1. Once the first railroad is built, thereâs no room for the second railroad. 2. No matter what youâre in, thereâs always going to be a product that moves on my railroad from A to Z. 3. If I want to maximise profit, Iâve built it, itâs moving, and all I have to do is add carts onto the backâ. Thatâs Blue Label. We are a virtual railroad. Once you have our system in your store, thereâs no need for a separate system. Thereâs nothing more that it can do and nothing less that it can do.
How big is your railroad? How many stores do you have?
In South Africa, we have over 150 000.
What do they look like?
They range from Pick ‘n Pay to Shoprite/Checkers, all the way to a shebeen, spaza shop, Mom & Pop, or a merchant on the side of the road. Itâs vast.
What does that shebeen owner get for selling prepaid airtime that youâve provided him with, to Cell C?
Firstly, weâve given the independent market a chance to survive. I think I need to explain that more because this is very important. If you donât take the independents such as the Mom & Pop or spaza shops and give them technical power; in a number of years, they will diminish. You have these great, big companies like Shoprite or Walmart who are really doing an unbelievable job by opening up on every corner, offering consumer champion stuff, and doing a really, good job. If you donât give technical power to these stores, they canât compete on baked beans or bread because they buy ten loaves compared to one million. If you give them technical power, they can have the exact same range of products as Shoprite. They can sell at the same price (if not better) and therefore, grow. This is what youâre seeing in the Blue Label world. What do we give them? We give them technical power through a hardware device, to which weâre agnostic. Itâs all about whatâs good for you as a store. How it connects must be good for you as a store, so it varies â via satellite or via GPS.
What does it cost to install that?
We subsidise it for a lot, but it can cost anywhere from R1000.00 for the device and installation, etcetera, up to a freestanding vending machine, which costs R30k or R40k.
Where do you find new outlets? One would presume that 150k is a big chunk of the outlets that are available in South Africa.
Thirteen percent of our world is what youâd consider formal, similar to Shoprite et al. Eighty-seven percent of our world is what we consider the independents. Thatâs the Mom & Pop/spaza shops. There are millions of these stores.
Theyâre popping up all the time.
Yes, they pop up all the time. It all depends on the type of device you can deliver from a cost point of view. More important than the cost is the service point of view. You have to be able to deliver different kinds of hardware devices and service levels in order to make one of our merchants (who is a customer) do R2000.00 in profit in the same way as a customer who does R100k. Thatâs the balance of what you do.
Brett, itâs quite a simple business model, then. You get mass distribution and products that you put into that distribution chain. Clearly, as we look at that graph again â the gross profit, the GP margins â itâs showing us that youâre moving into the right direction. There has to be a balance, though. In the insurance industry for instance, they know that their cost of acquisition can be higher than what theyâll get back in year one, for example. However, if theyâre doing a 20-year product then much of that margin goes straight to the bottom line in years two, three, and four. Is it similar with you?
It is similar but our wait is far shorter. Our ROI, it changes, but itâs between eight and ten months on the device. Remember, all of that is sunk around the telecoms sector. No matter where we are in the world, we sink the entire cost around telecoms and as you add these new products, they sink directly to your bottom line because the infrastructureâs paid for already.
Well, the railroadâs there.
Moving on to the hard numbers for a while â the income statement â this was for the six months to the end of November. You can see in there that the GP margin (7.63) is slightly down on the last year but nothing really, to worry about. I guess the bottom line â the real number there â is that 284,000 headline earnings as against 246,000. We can really become bogged down in the numbers, but the 15 percent growth is the number which, if you want to be fixated on anything, that would be the one. Is that where youâre pegging yourselves now, into the future?
It sounds like your kind of business model. Fifteen percent could become much higher if you turned off a few taps here and opened some elsewhere.Â
Weâre very excited about the future, Alec. Weâre in an industry, which is really growing. When we started, we had to wait for products to load onto our system. Now, itâs a matter of us choosing what we believe are the right products because thereâs just so many of them. From a distribution point of view, we have one of the most comprehensive distribution channels anywhere in the world if you compare us to absolutely anybody. When we listed in 2007, our GP margin was below four percent. Itâs now sitting at over seven-and-a-half percent.
Can it go much higher?
As we add our new products, it will continue to go higher.
Theyâre coming in at a very high margin because you have a railroad in place.
Theyâre almost coming in at 100 percent margin. It doesnât matter if we make one percent, five percent, or ten percent. Itâs almost 100 percent because of that. Secondly, the barrier for entry in the independent world is much harder. When youâre dealing in the formal world, itâs much easier for people to compete. Our model is simplistic, but the actual methodology and the years it takes you to set up in an independent, rural world is really, our strength.
What would it cost you to replicate?
One-hundred-and-fifty-thousand points in South Africa alone would cost us over R1.5bn, and approximately five or six years to get to the same position.
If you had R1.5bn elsewhere to put into that, itâs still going to take you five to six years. You canât find a competitor springing up tomorrow.
No. Our competitors are different (and we do have many of them), but theyâre more regional-based. What we find ourselves doing is fighting in different regions and different products. Take KwaZulu-Natal. Weâll have a very strong competitor who has cornered two or three thousand merchants in KwaZulu in solely electricity and airtime. We very rarely fight about the whole basket of fruit countrywide, but regionally and product-wise, we fight all the time.
All right. Well, weâll get into acquisitive growth in a little while.
Letâs just look at the balance sheet now, which is looking pretty strong, except when you go through the cash number there â cash and cash equivalents. Youâve gone down a lot in the past year. My apologies. There we go â 31st of May: R1.2bn as against R388m now.
We call it cash and cash equivalent, which is our stockholding. For us, stockholding is equivalent to cash. Thereâs no difference. Any stock that we hold can literally, be liquidated within days (two to three days).
Turned into cash.
Turned into cash at any time.
Would that include airtime that youâd bought from Vodacom, for example?
Absolutely. We bulk purchase. This is one of the things that we do to improve our margins continuously. We hold stock because remember, our customers pay us cash before delivery. They give us money. We open up these vaults. We donât know what theyâre going to pull out, and they pull out randomly. We have to make sure we hold every single product 365 days/year.
You do have inventories there, as well. Whatâs the difference between that cash and the inventories? R1.8bn of inventories.
Correct. Weâve transferred our money from cash into inventory. If you go to the previous six months, youâll see that inventory was sitting at about R1.2bn/R1.1bn and youâd obviously, have our cash sitting at 800/900/R1bn. All youâre seeing is a conversion from cash into inventory. Itâs a direct line to look at each other.
Theoretically, when interest rates go up, that should help you.
Absolutely. Then weâre going to have to work out if itâs better to leave money in the bank or alternatively, to do our bulk buying and early settlements. When we listed our company, 55 percent of our profits came from interest received and we received over 12.5 percent in the bank. Today, we receive on six percent and less than five percent, so the entire model of our business has changed.
All right. Itâs a nice, strong balance sheet. Itâs very easy to see there.
In addition, in cash we laid out about R700m/R800m last year as well, in two acquisitions. Via Media and RMCS was about R500m, and dividends of just over R200m, so we laid out R700m/R800m cash.
Weâre going to talk about RMCS in a little while because thatâs quite a serious acquisition for you. Letâs just go through the cash flows as well.Â
You can change the numbers, except in your balance sheet and your income statement. You can fiddle around a little bit with your headline earnings, but cash is cash and as far as the cash is concerned, cash utilised by operations in the past six months to November 2014 was in fact, negative. Can you enlighten us on anything there?
That was exactly, the change in the inventory â one very big bulk purchase, which we did in that timeframe. The RMCS transaction took place, which was R314m (a big one). Via Media was R150m acquisition and dividends, all in those six months. One thing about this business is that itâs a very cash-generating business. We donât build assets such as bay stations, for example. We start the month with R1.00. We end the month on R1.50 and itâs really, expressed in cash.
Okay, letâs move onto that RMCS
Youâve mentioned it a couple of times now â your biggest acquisition to date.Â
By far, yes. It was a really big acquisition for us (R314m), which took us a lot of time â about two or three years â for this deal, from beginning to end. When we look at the deal it must obviously, be profit-enhancing for the company. That goes without saying. More importantly for us is the strategic fit of these businesses; what products and services we can put into the existing business, and of course, what products and services we can take from their business and put into the rest of our businesses.
You bought it on the 1st of April 2014, so theyâve been in the accounts for the full period to the end of November â the six months. What kind of contribution?
Right on target. Actually, a bit ahead of what we expected, and we believe it will grow. We believe that into the future, this department/division inside Blue Label will be one of our biggest divisions.
Why?
It is entirely the back-end of what we do in the retail section. This is not for independents, it’s more for the formal retail. What they offer is great products and services, which sit in the back and where traditionally, we are the technology in the middle (and call it the front end) we can now offer many products and services from the back-end call centre/technology side that sits in the platform on the back.
Like what?
For example, we can offer something thatâs really going to be a big one for us, which is Money Transfers. We could go to the likes of Spar for example, and you can give them a whole white label solution from beginning to end, to do Money Transfers. Obviously, youâll always need the bank so itâs not a banking license at all, but you can drop the product into Spar and say âfrom tomorrow, you can transfer money to and from a Sparâ. More importantly, we want to become the first aggregator to move outside of a closed environment. When you go to a Spar, Shoprite, or Pep now, Money Transfers is limited to the environment youâre in, and itâs for all the right reasons. If they can limit it to the environment it means more feet into the store. More products. Theyâre all done for the right reasons. However in our world, what we want to do is we want say to you âAlec, do you want to walk into a Spar? Go and put your money into a Spar, and take it out of a Shoprite, a corner cafĂ©, or out of a bankâ.  Once we can open-loop this, Money Transfers will become very interesting.
It will indeed, but we have Mpesa. How is it different to that?
Mpesa is a great example, because we are neutral aggregators so we really donât mind what it looks like. It can look like an Mpesa. It can look like a White Label product. What we want to be is the cash in/cash out outlet. This summarises it.
If Iâm from Nqutu in KZN, which is fairly rural, and I have a brother in Johannesburg, and he would like to send me R200.00, the ideal here would be he could go into a Spar and deposit the R200.00. How would I be able to pick it up in the area in which, I live?
We would tell you that you could go to any one of our informal retailers.
It could be the local spaza shop.
There are 130,000 of them around the country.
Iâm sure there would be a few in Nqutu.
Correct. Weâre going to give you the option of multiple options. I know that sounds a bit silly, but we donât limit you to only walking into X and do it because once you limit someone you obviously limit the capacity for growth. What weâre going to offer the Mpesaâs etcetera, is mash cash in/cash out outlets so that what you (Vodacom) have to do is make sure your brand is out there. Whoever wants Money Transfers goes for Mpesa. What weâll do is be the walk test. No matter where you are in this country, youâll be able to do cash in/cash out.
This is made possible by the RMCS acquisition.
RMCS is one part of it, which is this technology â Money Transfer. The second part of it is actually, the main part of Blue Label, which is the distribution channel. What weâre doing is in our acquisitions, weâre now just trying to pick up strategically, the different components that complete the full circle for us.
My apologies. I should have taken those phones off the hook before we started. On this line too though, which is very instructive, is the way that your different shares of the cellphone companies have been changing. November 2013, you were at 50 percent of Vodacom. It stayed the same all the way through, but Cell C has gone up 17, 19, 21 percent â whereas MTNâs shares are 32, 29, 27 percent and Telkom is very small (a slug there). If one has a look at that graph, the black graph, the Cell C graph, has been growing. The yellow one, the MTN graph or share of the pie has been falling. Why is that?
First of all, just to put it out there, this is obviously what is happening inside Blue Label. It is not the market itself. Itâs really the share, whatâs happening inside us and, I guess, itâs a relationship with suppliers…
But it is also reflective of the market place. We know that MTN have changed their South African CEO not too long ago. This would be consistent with, perhaps your experience.
I think youâre right. I think, in the past it was definitively reflective. I think in fairness to MTN theyâve changed their CEO and theyâve changed a lot of things theyâre doing and I wouldnât write them off just yet. I think theyâre coming back hard and I think theyâre going to give this a big run for their money. In fact, I think if we sit here 12 months from now, and looking at this pie-chart again, I have no doubt that, there is not going to be one number thatâs the same. I think thereâs going to be so much change.
But whatâs going on with Cell C, though in your case, itâs been growing very strongly.
I think Cell C, what they did is with their 99 cents, and they led it, they became the consumer champion. If 99 cents was the right amount or not the right amount, letâs put a pin in that. I think, really what they did is they went out there. What networks generally did in the past is we werenât exactly sure what we paid or what we didnât pay, rightfully or wrongfully, so it was just the way they marketed it.
Cell C came out 99 cents; it almost became the consumer champion for the consumer out there. I think it took a lot of market share. It definitely took a lot of market share. The question really, now, is where Cell C takes it from now. Also a great CEO there, just putting it out there. I like to call JosĂ© a street fighterâ, which means that Cell C would come in from the streets, at the bottom. Theyâre going to put up a very good fight and theyâre going to. If anything, I can tell you that the consumer is currently, absolutely, winning.
We know the consumer is winning but we also know that Saudi Oger, the owners of Cell C, have appointed Goldman Sachs to try and find a solution to this never-ending cash that theyâre throwing at the company. How are you reading that?
I think, straightforward, I think the networks, Vodacom, and MTN need Cell C to remain in the form it is actually, and let Cell C have its market share in peace. The reason why I say that is, you know, I guess the last thing that South African networks want is for an overseas, call it a Chinese Telecom, or Indian. Iâm not saying they will win or lose but…
Or Korean.
Korea comes into this country and then, all of a sudden weâre not at 99 cents because theyâre used to being at ten-cents a minute, and then this whole thing is on its head. I think for the consumer and for Vodacom, and MTN and for Cell C, if it can sort of stay in the same format it is, so maybe Cell C is looking to sell off a piece. Iâm not convinced that theyâre trying to sell off all of it. I think Cell C has come a long way from 24 months ago and I think itâs got a lot to offer, so weâll see how this plays out.
What about for Blue Label to be very specific here. With the decline in the âper-minute chargesâ, and the way that Cell C has churned up the market, has that been bad for you? Given that if youâre selling something that is worth two Rand and now the same thing is worth 50 cents, your margin must be squeezed.
We work on ARPU, which is total spend, so currently the average pre-paid user uses about R70.00. If you go back a year ago, for a R70.00, for arguments sake, they could make 50 phone calls a month. Now, for their R70.00 they can make 70 phone calls, so weâre not affected at all yet. When we will be affected, and Iâm not sure if weâll see it soon or in our lifetime, is if one of our consumers can spend R40.00 and talk as much as they want, because they work on a Rand spend, where theyâre not getting as much talk for their Rand yet. So, does it happen one day that the networks come out and say âokay, boys R40.00 talk the whole month,â we will definitely be affected.
Negatively.Â
For now, weâre not affected at all. In fact, what you see, because they can spend a little bit more; you actually see in the bottom end, ARPU has increased slightly because now they can make 120 phone calls instead of 70. Now, theyâll spend R73.00 instead of R70.00, so you actually see a bit of a positive uptake in the bottom end. Obviously, in the top-end, for you and I, in the post-paid world, which we donât do. Our bills have halved, and weâre still talking as much as we want, and I think this is where the real affect from the networks is coming through.
Is data finding its way into the bottom end?
Absolutely and quickly, but what really spurred this on, is youâve already seen a Smartphone at about R500.00/R600.00. They say now that theyâre going to launch Smartphoneâs at R300.00/R400.00 and subsidise them down, so as you get these Smartphoneâs cheaper and low-end. So youâll see our normal, traditional phone in the next 24 months will probably finished or obsolete, and it will be replaced entirely by Smartphones, and then youâre going to see data. I donât think data can ever take over voice because voice is just so massive, so it is compensating the growth, data, not to the limit theyâre losing on voice, but you are seeing this massive uptake everywhere on data.
So itâs a new product for you.
Itâs a brand new product. Youâve seen the networks launching these data bundles, which is great for us. Great for our customers, where we can sell data as a recharge voucher, so now it is not our normal voice vouchers. It is now data, so data, for us, is total upside.
How big might data be in your universe?
Let me explain it to you the same way that Alan Knott-Craig Snr once put it to me, which I thought was just a great explanation. He said, âIn the voice world, eventually you get tired of talking, and you put down the phone. In the data world, you can surf as long as you want to, for as many hours as exist. You wonât get to one-millionth of what you can do, so the size of the data world, compared to the voice world, is a thousand, or a million times bigger.â In our world, what you are hoping for is that all phones are replaced by Smartphones – that we’ll get to a place where voice is a set price, and all the rest is data. I think it will happen, and I think it is happening. Itâs a matter of how soon it happens and where it settles. For us, I think, what ultimately happens is that 90 percent of our customers have X amount of money, call it R7.00. Across the world, the ARPU you would be looking at is between six or eight dollars, and it settles there. If it is all consumed by voice or by data – whichever one it does – thatâs where itâs going to stick.
Well, thatâs one of the big bold points. Another huge one, potentially for you, is prepaid electricity.Â
You donât have to tell anyone in South Africa how this market is exploding. Lots of people still not paying for electricity at the moment, but the municipalities are trying to change that. And then you guys come into the picture.
This one, when we started this, four-and-a-half years ago, our revenue in our first year was R3m. Our revenue for the half year was R5.3bn, so youâre looking at going from R3m to R11bn in five years, which shows you that when you plug the right product into our machine, the growth is abnormal. Weâll go through other products because electricity is not the last. There is more coming, like electricity. Whatâs great about electricity is the country sits on about nine million meters. Government has stated clearly that in the next five years they want to get to 18 million metres. We all know that there are massive collection, bill problems across the country. It doesnât matter from which Municipality. Everyone is converting to prepaid, and not even the collection.
We, as consumers, want much more control. We know that in the city there are a lot of billing problems, problems that can be solved automatically with prepaid. The cost is the same, so thereâs no problem.  It can be managed very easily. You can get an SMS when your electricity is down, top up via the internet. You donât have to do it prepaid. In the Western Cape, it doesnât matter if you buy a house for R100k or R50m, you donât even get an option anymore in some areas; houses come with prepaid straight away. We are going to see an explosion.
Where are we in the cycle? I donât even think we are halfway. I think we are just beginning, we have seen 18 percent growth in the last six months, 20 percent the whole of last year, and 33 percent the year before. You really are going to just see this thing growing in hard double digits, for the next four/five/six years, for sure.
When you say that in the Western Cape you donât even get an option in certain areas. Do you have the option now in the commercial heartland, in Johannesburg, to go prepaid rather than them being billed every month?
Not in all areas but in a lot of areas we do. I suggest to listeners to check whether you can or canât, but youâll find that in most areas in the heartland of Johannesburg, you can already replace it.
How big a share of this market do you have?
This is a hard one to tell because itâs broken up into about 276 Municipalities, of which Eskom is about 50 percent. The other, call it 275 municipalities are the other 50 percent, so it is impossible to get individual stats. I would imagine that we sit at around 40 percent.
As your market share?
Yes. The opportunity, and the growth rate for us here is obviously immense.
What about other utilities, water, an obvious one?
The next big one thatâs coming, alongside electricity is water. Every household that has electricity, we assume will have to have water, so if there are 18 million electricity meters, there are definitely going to be 18 million water meters. We are currently engaged in trial periods with a lot of Municipalities, and are already doing a couple of million a month, so the uptake is much quicker than electricity, it is one to watch for the future.
Obviously Constitutional Laws are in place stating that certain amounts of water are required to be given free to each household, which will obviously be governed by councils and by municipalities, which is important for us by the way. We donât tariff, so we donât decide on electricity bills or amounts. We are merely a means of distribution. Water is coming,  I think it will do so rapidly. It took us four or five years to get to where we are with electricity, given the same time period, we reckon it will take half as long on water; two or three years.
The key point here is, again going back to that railroad metaphor. Youâve got the distribution outlets in place and you could roll it out quite quickly. I suppose the alternative has to be; what about online? What about if Google decides to move into your field? Is that not a vulnerability?
First of all, just to put it out there, the margins that we keep at the end of the day are one, one-and-a-half percent. The majority of the margins, which are kept by the merchants, which is still not massive, its three/four/five percent. So, anyone who wants to compete with us in water, and wants to roll out a device just for water. Can you imagine rolling out this whole device and saying, âIâm going to make one percent on water?â You would go bankrupt in the first six months. It doesnât work, so this add-on, of this railway definitely works. Â
Yes, online will exist. The two problems with online is, number one, people donât do credit sales on online, so everything on online has to be via EFT and has to be cash, obviously limiting the risk. We supply a lot of online people, because you might be Google, online, youâve got a choice. Come to Blue Label. Let Blue Label make its mere one percent, and weâll link you into 276 Municipalities, 400 water places, so on and so forth, ticketing. Or, would you really want and go and link into every single Municipality every single telco has to take away the one percent that Iâm making? It will probably cost you more, so when you actually break it down eventually, and see what we keep,  We have very different conversations with networks and with them. I think everyone is content with what we make. We do all the R&D. We do all the hard work, the sales people, the distribution, and in the end we keep our one or two percent per product.
Because youâve got scale.Â
Correct.
Moving offshore now, India. That famous story that if you can sell one can of Coke to everybody in China or, for that matter, in India; youâd obviously never have to work again. A similar story here. Youâve been in India for a while now.
We had our ten-year anniversary last year, February, a really interesting time. I know people say ten years, but we finally turned the hockey stick in India.  ndia is becoming very exciting for us. We showed a loss of R700k for the half-year, but it was more of an adjustment. Weâre creating profit. We are profitable now and, once you turn this hockey stick it becomes very interesting.  Whatâs really interesting is that we found our electricity in India in Money Transfers, so we did the same thing. We built our distribution on the telcos. The margin there is crazy what they charge but weâre the number one wallet like Mpesa, we compete with Mpesa and Vodafone in India. Weâre bigger than them. We are up to like $3m at $100m a month already, in money transfers. This is a potential market of about $100bn a year, $70bn being cross-border.
So youâve already got the money transfers working in India. It shouldnât be too difficult to plug it back in at home.
No, weâve got it. Obviously, different countries vary due to legalities across border or local. A lot of countries have got a problem with âcash-inâ. A lot of countries âcash-outâ, depending, so your barrier for entry, first of all is the legalities. Especially if it is across border.
But how big is your railroad in India? How many distribution outlets do you have there?Â
Almost exactly the same as South Africa, just over 150.000. India though, the potential for this railroad is immense.
And the competition must be more.
The competition is much more intense. Quite strangely enough, in our world, once again in India we havenât come up against the globular competition. Once again, individual. In this money transfer space, I can tell you the competition is going to be rife and is going to be obviously, immense. We are ready for it.
Oxigen India, our company, is leading it entirely. Weâve applied to become our own, itâs like a money transfer bank. Itâs like a mini bank in India now, so a lot of positive things coming out of India and looking really good for us.
How often do you visit?
Mark and I used to go really often, like five or six times a year. We now try between us to go three or four times a year.
And your management team there?
Our management team, once a month, are either in India and Mexico, depending who, either from a sales or from a technical but we are almost in either Mexico or India once a month.
Youâve mentioned Mexico. Letâs move onto that one now. How long have you been operating there for?
Just on five years, five or six years, but five years. Taking a bit longer. Losing a little bit more than we anticipated. The vision and the strategy exactly the same as South Africa and India, of build this distribution channel. Unfortunately, we havenât found our second line there, like money transfers or electricity. It will come though. So yes, we lost an additional R50m in Mexico for the six months. We ended up, our share, losing R45m but right on strategy, you know. It is taking us a bit longer. We have had a lot more pressure. The problem there on the telcos is 70 percent of the market is dominated by one network.
Exactly.
Is he not getting competition now?
And thereâs a big change in competition, started in January of this year. I think AT&T has bought two of the smaller telcos. They look like they are going to own 12 percent. The Government ICASA similarity – theyâve put big laws on inter-connect there, that they have to take down their market share to under 50 percent. All of these things are really good for us, you know. Youâve got to believe in the vision of what we do.
Youâve got to believe in the strategy of building this distribution, and the product will come. I know Iâm making it sound easy but every single product and service in the world, if it can, will be offered through a prepaid mechanism. It doesnât mean it will be only. It will be offered, and I can assure you, every human being on planet Earth, will be transacting in, at least one prepaid mechanism. They donât even realise it. When you are in America and you say to them, âyou are going to be on prepaidâ. They say, âneverâ. We said, âokay, letâs start with the simple ones. Do you have an Oyster Card?â âYes, of course. Thatâs a Metro; I put my $100.00 in at the beginning of the month. I can go on any train.â âThatâs prepaidâ. âDo you have an iTune card?â âYes, thatâs prepaidâ.
Seventy-six thousand outlets.
In Mexico.
In Mexico, and whatâs the potential there?
Hundreds of thousands. Our partner there is a company called Grupo Bimbo. The biggest bakery in the world, just a little stat on them; 17-19 000 trucks in Mexico alone. They call on 750k outlets a day, so we have a partner there thatâs just unbelievable. A great partner as people, as well as a company and, potentially with them, there are 19 Latin American countries. So Mexico, for us, is a start. It is definitely not the only one.
How long have you been with Grupo Bimbo?
For five years.
All right, so youâre getting to know each other pretty well.Â
We are getting to know each other.
Just to close off with, the prospects – Blue Labelâs prospects. Weâve spoken briefly about Oxigen India. TicketPro, we havenât touched on that yet.
This is our next one. This is a big category ticketing. It fits into three different parts of ticketing. Your game ticketing, so typically you call it rugby/cricket. Transport ticketing, call it bus/train and then event ticketing, so under those three categories, if you break it down further, ticketing is a very big category.
All prepaid again.
Absolutely prepaid. Weâve got a company called TicketPro. The name that most South Africanâs know is Computicket in South Africa. There is definitely a place for a Computicket and a TicketPro. Once again, why is Blue Label going to play a part in this? One, because we have thousands of outlets that will offer ticketing. Whereas now, generally if you want ticketing youâd have to go to a Computicket, which is found, generally in a Shoprite and there are a lot of them, 600/700, so thereâs no shortage of them. But if we can open this up to four or five thousand, not limit you to a Shoprite because thereâs not one in your area, so weâll say to you, âweâll give you Shoprite as wellâ because weâll happily to obviously supply Shoprite, but give you much more option of where to go.
Then of course change ticketing, and this is a major thing. Right now, when you go and see a game or whatever, you buy an elongated ticket. You go to the game; absolutely no one knows who you are. We want to change it to a card-based ticketing system, under NFC, where it is tap and go. The only difference now is that we understand you, so youâll have one card for, it doesnât matter what ticketing it is, from train, bus, events, One Direction or going to see a rugby game. The only difference is the next time you click on to go into a Blue Bulls we say, âAlec, thank you. We see you’ve come to three out of the last nine games…â
Do you want to buy some horns?
How would you like to go? Â Weâre giving you ten percent off horns. Go there. It really just becomes loyalty.
I can see that youâll be selling a lot of horns to those guys at Loftus, into the future. Generally speaking and it is quite nicely articulated in what weâve been discussing and on this card here, but in every business, you have to be aware of where your threats are (where your competitors lurk). In Blue Labelâs case, youâve made a compelling story and many investors like to find the right long term trend, get aboard and let it ride. But what keeps you awake at night? What should concern those people who are buying your shares today?
The first thing that really keeps me up at night is people. I think weâve got a controlled growth of Blue Label. Weâve got a controlled resource of Blue Label that we donât find ourselves spread out too thin, too wide, and make fundamental mistakes that we just donât need to make. And, of course, as you grow, to find the right expertise in different areas, you know, specialists.
When we started, we were specialists in everything. Now, when we launch ticketing we get a specialist who just understands ticketing, he lives and breathes it, so the first thing for me is people, and it is something that, really I watch consistently. Especially personally. Then, of course, youâve got the networks. Youâve got to give the reason to networks. Weâll call it the âbig guysâ, and not just call them networks. Youâve got to give them reason to survive forever. Youâve got to give them reason for needing you and wanting you.
Then, of course, our competition is large because weâre playing in such a large space; our competition are nothing to sneeze at. If it is ticketing, weâre up against Shoprite and Computicket.
Deep pockets and deep resources and clever people. Weâve got piles of questions that have come in here, so Iâm going to start throwing a few at you and letâs try and see how many we can get through. What is the sustainability of the business model, given advances in tech and, as more people move from unbanked to banked?Â
Thatâs a sustainability model entirely for us. Itâs the whole thing about the World Bank. Youâre going to only have X amount of bank branches. You are not going to see more bank branches. It is more about who can bank these under-banked people in a different mechanism, and thatâs what we do. Weâre going to send you to one of our merchants. To one of our Spars, if we can just call it that. We are going to make sure that you can bank because FNB, for argument sake, have a thousand banks. They canât roll out ten thousand banks. Theyâre going to use us to go further and deeper, so the more people get banked the better for us. We want to be, as I always say, the âcash-in and cash-outâ continuously.
Robert wants to know if your retailers are holding stock. And as they sell, and what you supply? Â
So different models. Youâll have some retailers who actually, physically hold stock and then youâll have certain retailers that work in this cloud, so they hold zero stock. The first customer comes in and says, âhi, can I have a bus ticketâ? Hits something on his till, then out comes a bus ticket. The next one says âVodacomâ â out comes…so we hold 100 percent of the stock, and then they just pull down what they require.
So they donât actually need to hold, as you said earlier on.
Zero stock.
Be specific now, this question is, who are your competitors, local and global?
So, fortunately in Mexico, we are one of the very few who are doing what weâre doing, so in a virtual world, we havenât come up against competition yet. In India, our competition is the likes of Mpesa, and Vodafone, so our competition on the telcos had died down. Our real competition is coming from the money transfer world, which is all the banks and all the networks, so real competition in India, but we find ourselves positioned really nicely there.
In South Africa, our competition is very similar. We are competing against the banks. Weâre competing against the networks. Weâre competing against the chain stores; the chain stores in this country are extremely powerful in what we do and of course, the banking from the likes of, call it FNB, who is playing a very big space in giving you a tablet if you buy data from them. Our competition exists everywhere.
I think competition is good and thatâs not coming from an ignorant or a naive point of view. We like competition. It keeps us very focused and we come from a different place entirely, you know. Weâre working from very rural out, moving ourselves in. Everyone who we compete with is moving from in, and moving out, and it sounds subtle but it is a massive difference.
Brian wants to know how you market machines to rural markets.
We have one of the most comprehensive sales forces, we believe, in South Africa. It is called a âfoot-soldier modelâ, of which we have over 200 trucks and about 6 000 foot-soldiers who continuously work for us. What they do is theyâre on the streets. They are educating. The average sale that we can do with a person takes between one and eight minutes, so a lot more time. We see four-and-a-half million individuals, on a monthly basis. This is one of the massive futures for Blue Label. For us to add on products and now to sell financial services or banking products. We are dealing with South Africa on the streets and we are dealing with people, and the opportunity for us to sell here is immense.
Telkom Multi-Links, whatâs the real story there?Â
No real story, other than itâs behind us, you know. We fought, as did Telkom obviously, for many years. We spent a lot of money fighting and really, with the new management of Telkom we were eventually able to all sit around the table. It was pretty hard before this management came. They had a lot of change of management. There was no one for us to sit with and, I guess in November/December, we decided we needed to move on. Weâve got so many good things going for us. We really do and we donât know how long this case will be, another four or five, or however many years. We sat around the table with them and we agreed to move on. They moved on their way. We moved on our way and, most importantly see what we can do with them in the future, and see what we can take from each other, doing good business. Rather than being in this endless battle that we all know who makes the money.
The lawyers.Â
Moving on, back to your financial statement. Rodney wants to know about joint losses referred to in your financial statements. What are those?
Joint losses would be from, so when you talk about India…
Share of losses from joint ventures.
Correct, so when you look at our associates, we bring in India and Mexico, and Ukash as an associate. We donât bring them on a revenue line or consolidate them, so when you look at it, youâre looking at the consolidated number of our Mexico losses. Our India losses or profits and, of course our Ukash profits.
All right, so going from 33 million to 49 million, those losses is not an area of concern for you at this point. Thatâs within budget.
Thatâs the 15 million extra we lost to Mexico, basically.
Okay, Alan Dee asks why Mexico? I think youâve spoken about it a lot and maybe you want to add.
So, very interestingly, when Microsoft found us in 2007, the two people in Microsoft are Mexican, by origin, and after we did the deal with Microsoftâs consent, they came to us and said, âwe love what you do, do you mind if we roll this out in Mexico?â We said, âThat will be great.â Obviously 120/150/180 million people. A great market for us, plus a corridor between America, for money transfers, which is massive and set up with them. After we set up with them, we then did a deal in South Africa with Premier Foods in 2006/2007, so we understood how very powerful the distribution channel of bread is. We found the bread people, being Grupo Bimbo, and thatâs how it all came together for us.
Thereâs a question here about the balance sheet. Why are intangible nett assets and goodwill so high? How do you break them down? This is from Robert de Vos.
Robert, weâre going to have to put a pin in that because it goes into a bit of detail but Iâm more than happy, if you want to contact us, for us to give you more details.
R1.3bn from R1bn.
Correct. It has to with our starter pack bases and how we bring in the intangibles of our connections of our starter packs, as well as the bases we bought, play a massive part in this.
Right, weâre coming to the end now but there are a few more questions Iâd love to take. Elaborate on âsettlement risk from a timing point of viewâ as there are thousands of small outlets. Is it instantaneous?Â
What does that mean? Sorry.
When one of the small outlets taps into your back-end and sells the product, does it go straight into your bank account?
Okay. Correct, so we take zero risk. It actually works on a âcash before deliveryâ basis, which means you have to sit in a credit balance, in order to transact. So it doesnât…
So they prepay you too?
Correct.
Nothing wrong with that. I can understand that. And is there interest deeper into Africa?Â
Not at the moment. We have had our experience in Mozambique, very good, sold it off to our partner. We were then in the DRC and we were doing really nicely, but it became very difficult for us to operate there and actually gave up the DRC to operate in Nigeria, which of course ended in the Multi-Links problem. But weâve got our hands tied with South Africa, India and Mexico, and weâve got Grupo Bimbo, who has his 17 or 19 bakeries across Latin America that if we are going to do anything, weâre going to follow them. They really would like to rollout more. We are talking about a massive business. We want to get Mexico right and then we can roll it out tremendously, so unless something really comes across in Africa, no.
The final question, if Bitcoin goes mainstream, or an equivalent to Bitcoin, how would this affect your business?
Another product for us to sell, so we donât mind if itâs a Bitcoin. It doesnât matter what the voucher looks like. What we would do is we would dispense as Bitcoin. Weâd give you an ability to buy it and where to cash it in, so bring on Bitcoin. We would love that product.
Brett Levy itâs been such a pleasure chatting with you today. Thank you very much for coming through to our studio. For talking to the team, well the Standard Bank Online Share Trading clients. Itâs been a lot of fun.  I know you usually have your other partner. Interesting, you and Standard Bank, is the only listed companies I know that have got joint CEOs. Must be something in that hey. But I guess it is easier for you than Sim and Ben, from your perspective. Youâve kind of grown up together.
We just want to be a mini-me of Standard Bank.
Yes, I guess everybody wants to but Brett Levy, thank you, and I think on behalf of everybody who joined us today, and who will be watching this, thanks for being so open and discussing it with us.
Thank you.
Well, going back to Stuart at Standard Bank HQ. Thanks Stuart, lots of interesting questions. Fascinating insights from Brett Levy. I look forward to our next one.
Thanks Alec, cheers. Good-bye everyone.
