Blue Telecom: Losses grow in India, Mexico; but flourishing in SA as Cell C grows at MTN’s expense

Blue Label Telecom reported some interesting results. While profits and headline earnings were up, revenues were down and the group reported significant losses in its Mexican and Indian operations. According to joint group CEOs Mark and Brett Levy, however,  the fall in revenues and ongoing losses in the international operations are not cause for great concern. The Levy brothers say that Blue is, in fact, doing very well, and it’s hard to gainsay them. Their global operations have the potential to deliver enormous returns in the long-term, and their domestic business looks solid despite the headwinds of rising termination rates. Definitely an interesting business, and one to watch. – FD

Blue label telecomsTo watch the interview on CNBC’s Power Lunch click here

GUGULETHU MFUPHI: Blue Label Telecom posted results today.  Joint Chief Executives (and brothers) of Blue Label Telecoms, Brett and Mark Levy join us for a look at their numbers locally.  Thanks for joining us gentlemen.  Just picking up on your revenue numbers – in particular coming from South Africa – those were definitely under pressure.  What’s causing strain there?

MARK LEVY:  I think if you look at our revenue, you have to look at the new types of transactions we’re doing.  Pin-less does not account for our true revenue, so our true revenue drop was only one percent, not four percent.

GUGULETHU MFUPHI: Pin-less is…

MARK LEVY:  Pin-less means s just the way we’re topping up a phone via the ion platform, rather than issuing a pin.  Normally, when you go and get a pin, you manually enter it.  With pin-less, we say ‘what’s your phone number’, enter it on the system and then it tops up via the actual mobile operator, directly to your phone.  Electricity is also done in that manner, so we don’t account for those turnovers in our turnover line.  That’s also why you’ll see an increase in our GP margins because of forced rate [inaudible 00:55] GP’s.

ALEC HOGG:   That’s more important, isn’t it?  Turnovers you can play with, but the money in the bank – you can’t.  You people coordinated quite well today.  I hope that it’s not showing that you support the Blue Bulls because they’re in trouble.  Okay, Blue Telecoms – the whole termination rates story – has that affected your business at all?

BRETT LEVY:  It hasn’t affected our business.  I think it’s playing out very interestingly in this space.  I think we put a little thing in our announcement just to say we’re watching this cautiously, just to see how it does play out.  I guess, in the next six months we’ll see where it ends up but for now…business as usual.  It hasn’t affected us at all.

ALEC HOGG:   But the reality is that it has to cut the cost of cellphone calls, which is clearly a big part of your business.  Will it affect you?  Will it hurt your profit margins?

MARK LEVY:  From our side, if a consumer gets more value for his buck he generally spends more.  This is the rate the mobile operators charge one another not what the consumer is going to pay.  Hopefully there’s downward pressure and allows him to pay…instead of 99 cents per minute…89 cents per minute, he gets more value for him money and maybe stimulates spend.

ALEC HOGG:   Mark, if you’re right then they’re actually wasting their time because the whole idea of driving down the prices is by reducing the termination rates.  That has been Alan Knott-Craig’s ambition.  Do you sell for Cell C?

MARK LEVY:  Sure.

ALEC HOGG:   How have they been doing?

BRETT LEVY:  Extremely well, actually.

ALEC HOGG:   What kind of volume growth, from where you’re sitting, because you see the real numbers.

BRETT LEVY:  I think we have a great indication of what they’re doing.  Just to tell you – as a whole in our business, if you compare to six months ago – Vodacom was around 51 percent.  It’s now at 50 percent, so…pretty neutral.  MTN’s interest certainly decreased from 36 percent down to 32 percent.  Cell C increased from 12 percent to 17 percent – so, quite a big increase – and definitely seen it come through without a doubt.

GUGULETHU MFUPHI: What about Heita, though?

BRETT LEVY:  Heita is making up one percent, the same as six months ago.  We are doing as much as we can for them, but from our side at least, we see it’s pretty neutral – no growth, no decline, and standing exactly where they were six months ago.

ALEC HOGG:   That’s fascinating.  It’s a great story.  Yours has always been a great story, but what must be starting to worry shareholders now, is what you’re doing in Mexico and India.  The losses…still manageable, but they’re growing.

MARK LEVY:  We indicated at our finals last year that we don’t anticipate profits in Mexico for the next year.  Remember, we’re rolling out something that’s unique in the world.  We’re rolling out 123,000 devices.  To put that into context, if you take one of the large banks in South Africa they probably have 40 to 50 thousand credit card machines out there, so the rollout is quite an expensive rollout.  Our view is ‘he who can influence the last mile’ because ultimately, we’re deploying devices in the last mile, we can load product on there, so it’s a twofold strategy.  India on the other hand – yes – it’s slightly disappointing in terms of the fact that we had anticipated making more money quickly.  We realise that the margin pressure in telephony came very quick and fast and we’ve transitioned our platform to be financial services, so we’re seeing domestic transfers.  It’s a 20 billion dollar industry in India.  We’re already up to 30-odd million dollars per month.  That’s a four billion rand domestic transfer system for us, so we’ve managed to evolve our platform.  Once again, the reason we were able to do that is we have points of presence already in the market.

ALEC HOGG:   Investors are looking at this and saying ‘okay, could this be another Tencent?  Could this be another transformative investment that you’re making over there, or is it just going to be incremental?’  Are India and Mexico – presumably – bigger markets for you than South Africa?

MARK LEVY:  We’ve been consolidating rands into dollars and losses.  When that turns, it’s going to create a huge difference in our financials.  Yes, I think it could be one of those sleeping giants, which actually makes a world of difference.  We changed communities.  We’re uplifting communities, teaching these moms and pops that they can survive in tougher times and so I do think it’s one of those to watch carefully.

GUGULETHU MFUPHI: Mexico: are you still bullish on that endeavour?  The last time I spoke to you, I think you said everywhere they sell bread…  Are you hoping to distribute airtime, as well as electricity there?

BRETT LEVY:  In Mexico, we’re very fortunate to have an unbelievable partner there in a company called Grupo Bimbo who is the biggest bread people in the world.  What it gives us, is access to 17,500 trucks per day literally calling on 750 thousand outlets per day, so from our methodology and technology, that sits in the background.  I know we’re making losses, but I can assure you, it’s well on plan to what we’ve been budgeting towards, so we’re very excited about it.

ALEC HOGG:   Grupo Bimbo.

BRETT LEVY:  Grupo Bimbo.

ALEC HOGG:   No relation to the bimbos in South Africa…  It’s a lovely cash flow: 740 million.  What happens to that?  Just unpack it really nicely.  That’s the cash you make out of your profits.  Where do you put it?

BRETT LEVY:  We’re obviously paying dividends every year, at a cover between two and four times earnings, so we’re always looking at round about 150 to 250 million going in dividends.  We did announce a really good acquisition that we did towards the end of last year, in December.

ALEC HOGG: Yes, it was at Christmas time.  You caught everyone by surprise on that.  You can tell us about that in a moment, as well.

BRETT LEVY:  It was just the Competition Board to go through, but really just going through the process.  We’re hoping to spend 300 million there.  It’s very big on the acquisition trails.  We’re still looking at it and of course, using our money carefully and wisely.  Leaving it in the bank at five percent…you’re really getting nothing after tax – call it 3.5 percent.  We’re therefore doing a lot more bulk buying with the networks, doing a lot more stock purchasing, and really using our cash cleverly at the moment.

ALEC HOGG:   RMC: tell us about that acquisition.

BRETT LEVY:  RMCS: there are basically two parts to its business.  One is that it has an exclusive contract with the EDCON Group, which gives us a great new distribution channel, gives us great access to 4.5 million credit customers that really play in our space entirely and we’ll have direct access to them.  Secondly, they play in a very big hybrid space, which is actually between the post-paid and the prepaid world.  Fitting directly into what we call acquisition trail, which is (1) earnings enhancing – definitely – already, (2) distribution – adding onto our distribution, and (3) product – they really fit in across the board when we looked for an acquisition, so we’re excited about it.

ALEC HOGG:   And the brothers are still pals…still getting on.

MARK LEVY:  For now…

GUGULETHU MFUPHI: Before you go, our Executive Producer Janine would kill me for this Alec, so I’ll be the good one here.  Your expectations for the Budget Speech coming out next week, from a corporate perspective: what are you hoping will be on Pravin’s agenda?

MARK LEVY:  From our side, education is of critical importance.  We’re looking at…in our business we’re battling to find decent skill sets in this country, so I know there’s lots of unemployment but we have to invest in ourselves too, to see change.  Healthcare for me…those ones really stick out like a sore thumb.

GUGULETHU MFUPHI:  Brett.

BRETT LEVY:  From my side, I think there are really many clever ideas on how we can do upliftment: one is government and one is companies.  I think that sometimes we’re doing it in the wrong places.  If we all really make a concerted effort to teach people how to fish rather than teach them to fish, I think we have a great chance here.

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