Cell C, a customer first mobile operator, released its annual results for the year ending December 2019. The latest set of results highlights that the turnaround strategy has delivered improved operational efficiencies with the positive impact of these changes flowing through during the latter six months of the reporting period. Comparing the first six months to the last six months of 2019, gross profit increased by 9% and EBITDA more than doubled to R1,7-billion. Excluding impairments, the mobile operator made a profit of R705-million, before interest and tax, in the last six months of 2019.
Cell C’s CEO, Douglas Craigie Stevenson says the green shoots of the turnaround strategy, which was implemented from March 2019 onwards, are now visible.
The turnaround strategy was focused on operational efficiencies, including cutting costs that do not translate into revenue generating opportunities, minimizing operating expenses and optimizing traffic. The second pillar is a network strategy which is an evolution of the capex intensive, high fixed cost infrastructure-based network to a variable cost opex model. Finally, improvement in liquidity and a new capital structure through a recapitalisation.
“Operationally the business is stronger and a successful recapitalisation will secure the long-term sustainability of Cell C.”
Financial and operating performance takes shape
Despite the tough economic conditions, Cell C maintained its revenue levels throughout the past year. Revenue for the full annual period up to December 2019, remained steady at R15,2-billion (2018: R15,67-billion) with service revenue, which contributes 94% to overall revenue, only dropping by 1%. The second half of the year was once again a better one for Cell C with mobile increasing by 4% and wholesale revenue was up by 17% (when comparing H2 to H1 of 2019).
“Although there was a decrease of 2,9m prepaid customers - a 21% drop - in the 12 months to 2019, the margin on our existing customers is better as a result of acquiring profitable customers and not signing on a customer at any cost. Revenue from equipment sales, on a year-on-year basis, was 27% down as we moved away from subsidising customers at all costs. This enabled us to build a quality customer base with better margins and quality of service,” says Zaf Mahomed, Cell C’s CFO.
Gross operating income was 9% up at R3,8-billion in H2 of 2019 (H1 2019: R3,5-billion).
More than half-a-billion Rand (R522-million) was saved during the past six months and operating expenses was 18% lower when comparing the first half of 2019 with the last, with operating expenses for H2 2019 at R2,4-billion.
“There were several contracts and transactions that were reviewed or re-negotiated in order to streamline the business and ensure that the costs incurred are business beneficial. For example the negotiation of the black liability realised savings of R177-million.”
An annual impairment assessment of fixed and intangible assets was concluded which resulted in an impairment of R3.2-billion. In accordance with IFRS, we could not consider the benefits from the recapitalisation and the extended roaming agreement. Full year’s operating loss was declared at R3,94-billlion (2018: R7,36-billion).
EBITDA jumped by 136% to R1,7-billion during the last six months (H1 2019: R734,6-million) as a result of the above.
“This is a turnaround of almost R1-billion which is very encouraging, bearing in mind we continue to operate in a tough economic environment with increased market competition and cash flow constraints.”
Commenting on EBIT (Earnings before interest & tax) before the impairment costs, Mahomed said the business showed a solid, positive R705-million in earnings compared to H1 which reported a loss of R35,6-million.
Cell C recently decided to review its operating model and organisational structure, specifically at a senior manager and executive level. This has resulted in highlighting a number of inefficiencies that are contributing to the operating and financial challenges the company currently faces. Consultations are expected to be concluded by the end of April 2020.
A network strategy that positions the operator for a shift to growth
Craigie Stevenson says, “This set of results is based on our old model, we are confident that a new way of business based on the extended roaming agreement with MTN will lead to even greater strategic clarity and operating momentum.”
“We are shifting from a build and buy strategy with high capital expenditure to a roaming model. By effectively managing traffic we ensure the network cost is aligned with the network revenue. It does not make economic sense to continue to invest in capital-hungry infrastructure and the business is now positioned to go into the next phase with our roaming agreement.”
Operational efficiencies and network strategy prepare Cell C for recapitalisation
Commenting on the future, Craigie Stevenson says that Cell C is now an operationally sound business that is financially viable and competitive. The business performance allows for a successful recapitalisation to take place with a sustainable debt profile. We are optimistic that the hard work of fixing the operations prepares us to conclude the recapitalisation and to continue to be a customer champion delivering innovative service offerings.”