Segmental review

South African distribution segment

This segment distributes prepaid products and transactional services to the South African wholesale and retail consumer markets. Key products are prepaid airtime and prepaid electricity.

The priorities remain to expand footprint, driven through a co-ordinated approach across numerous subsidiaries and brand names, and to leverage intellectual property and technology platforms to support sustainable growth. The product development team continues to create proprietary e-tokens and distributes third-party tokens of value for the prepaid market.

This year, a greater emphasis was placed on providing more convenience to the customer. As an example, kiosk environments are expected to offer more facilities, with the unmanned self-service model gaining popularity as retailers aim to reduce queues. Touch screen solutions (at manned kiosks) are also in demand, given their greater flexibility over standard POS devices, as they can offer increased processing speed and a greater variety of products and services.

Each company in the segment is responsible for ensuring customer maintenance, site expansion and growth of new products and services. Once again, moving additional products through the retail environment has positively impacted sales. Blue Label is constantly engaged in increasing its channels to market through new retail and corporate relationships.

This year, new branding and a Blu Approved accreditation campaign commenced roll-out across the group. Blu Approved is a neutral aggregator of all Blue Label products and services. It is also the group’s visual representation of its footprint and points of presence. Blu Approved serves as a stamp of approval and authenticity, which acknowledges that Blue Label endorses the products and services offered as well as provides accreditation of the merchant. The brand encourages consumers to use an approved merchant where they can be sure of receiving a full bouquet of prepaid products and services. All Blu Approved merchants are equipped with in-store point-of-sale material and window decals to clearly identify them.

In order to accommodate these shifts in market dynamics, the South African distribution segment was restructured as of 1 June 2010 and now comprises:

The Prepaid Company (“TPC”)

Established in 2001, TPC was the original company spearheading the group’s entry into the prepaid airtime industry. TPC wholesales virtual and physical vouchers to all major chain stores in South Africa. With the introduction of e-tokens, this base was extended to include cash and carry operators and independent retailers.

TPC is the leading distributor of prepaid products for all SA network operators. Distribution of all virtual products and starter packs is facilitated, managed and maintained by proven technology developed in-house, which ensures purchasing efficiency, distribution and inventory control. Relationships with each of the major network operators is key to the success of the business and this year renewed vigour was put into ensuring solid relations are backed up with sound service, including being the preferred technology partner, value added solution provider and product developer. TPC is the major contributor to group revenue and profitability, and undertakes:

The Post Paid Company (“TPPC”)

TPPC was established in 2004 and is 75% owned by Blue Label. It markets Vodacom postpaid cellphone contracts (airtime and handsets) and various insurance related products to customers via outbound call centres, including group owned Velociti, as well as through its own 60 seat call centre in Johannesburg.

Blue Label Distribution (“BLD”)

During the year BLD consolidated its different business units and customer bases and also built on its technical competencies to increase product offerings. This also created a platform on which to test new ideas and solutions.

In support of BLD’s main activities – sales, operations, customer support and technology – independent customers are increasingly demanding additional and complementary services. These new products and services, and improved technology solutions, are significant contributors to current growth. The focus in the year ahead will be to upgrade business tools for improving customer tracking and tracing systems.

BLD accounts for:

Cigi cell

Cigi Cell, with its B-BBEE partner, distributes virtual prepaid airtime and electricity through a broad network of channels, primarily through retail outlets and forecourts of the major oil companies. Its market covers approximately 1 700 such outlets. Cigi Cell is the custodian of the group’s contracts with various utility suppliers and in turn procures and supplies prepaid electricity on behalf of all companies within the group. Recent contract awards indicate that Cigi Cell is emerging as the market leader in the prepaid electricity field.

Crown Cellular

Crown is a wholesale and retail distributor of physical and virtual prepaid airtime, starter packs and electricity sales in the informal market. It services independent retail stores and a number of stores within stores in the Metro group. These are duly branded “Blu Approved” in alignment with the new branding.

Bela Phone Company

Bela offers a competitively priced international calling card and is available at several national retailers and throughout most of the independent retail footprint. In May, a further “white labelled” solution was launched with Edcon through its 1 100 stores under their brand “Ring the World”. A recent development with Neotel will provide their users with low cost local and international calling rates. This takes the form of a public international payphone as well as a consumer product.

Product overview

Prepaid airtime

Prepaid airtime continues to generate the majority of this segment’s profits. Growth in airtime sales were volume related and entirely organic. The business model is based on purchasing airtime with volume discounts from each of the network operators and on-selling at a margin. Long-term and renewable contracts underpin the relationship with each of the networks.

During the year, as was expected, the major networks increased prices, which were absorbed throughout the distribution channel. Customers are, however, expected to look for added value in respect of service, call centre support and facilitation of loyalty, couponing and rewards programmes, each underpinned by a single interface system, robust technology and user friendly reporting platforms. Also this year, agreements were reached with Neotel and 8ta to provide prepaid services on their behalf.

Prepaid electricity

Prepaid electricity commissions received increased by 79% to R61 million from R34 million. This equated to turnover generated on behalf of the utilities of R3.4 billion, up from R1.9 billion in the previous year.

Unlike prepaid airtime, the face value of electricity is not included in the revenue reported, but is confined to the commission earned thereon, which averages approximately 2% on such sales. The group’s market share of third party electricity is expected to continue to grow as Eskom, the utility providers and municipalities roll-out increasing numbers of prepaid meters. Through agreements with Eskom and major municipalities, such as Ethekwini, Ekurhuleni, Cape Town and Tshwane, the single most comprehensive prepaid electricity supply pipeline has been created in South Africa, available both on- and off-line through our proprietary UniPIN voucher.

Lotto

A technical support arrangement with Gidani, the licensed operator, enabled integration of their products into on-line banking channels managed by FNB. Blue Label remains committed to growing access points for Lotto, in order to make it even more accessible to end-consumers.

Transport ticketing

Prepaid bus ticketing has been made available to commuters in the Eastern Cape. The model eliminates ticketing fraud and removes the cash receipt function from bus drivers, placing it with vending merchants. This has created a benchmark for discussions with other transport companies for a reload/prepaid ticketing system. The off-site Gautrain Gold Card, available via standard vending machines, continues to gain acceptance, as new sectors on the train’s widening network are opened and as consumer up-take of the service grows.

Ukash voucher

This type of prepaid digitalised cash was introduced from the International segment to the South African market, where it sells mainly through Pick n Pay and Shoprite.

Bill payments

Agreement between Spar and third party bill payment facilitators (ie SAPO) allows the consumer to settle utility bills and the like at the retailer’s till point. Additional bill payment points are being rolled out through kiosk type environments, as well as through check-out tills and independent retail environments.

New products and services

Blue Label’s entry into financial inclusion markets commenced this year. Following an agreement with Vodacom and Nedbank, outlets for the trade of m-pesa vouchers were established. Uptake has been slower than expected, as educating consumers on mobile banking principles has been a necessary forerunner to the process.

To date, over 300 outlets are active, which represents about 20% of applications received. With an overall market size for m-pesa outlets believed to be between 25 000 to 40 000, registrations are likely to accelerate once electronic record keeping to facilitate FICA requirements and integration to retailer systems are introduced.

Expressions of interest have come from several retailers and financial institutions this year, attracted by the group’s ability to provide more than airtime and electricity offerings. Market requirements are now extending to products such as bill payments, event and transport ticketing, payments of fines, financial services including money transfers, integrated recharge (PINless recharge or direct top-up), Electronic Funds Transfers, mobile wallets, mobile couponing and facilitation of loyalty programmes, as well as web-based solutions.

Blue Label’s ability to provide an array of products and services through many different customer facing devices, supported by a single integrated back-end, has proven to be a significant differentiator in the market. Over the past year this strength has been enhanced with the introduction of more mobile solutions – for retailers (mobile merchant) and for consumers (mobile wallets). This improving symbiotic working relationship between the SA distribution and Mobile segments has increased the group’s overall offering and provided a more comprehensive business solution to retail partners.

International distribution

The strategy of the International distribution segment is to pursue growth opportunities across the group’s global footprint by systematically rolling out multi-secure electronic tokens, in replication of the South African distribution segment model.

Oxigen Services India

Oxigen is an electronic distributor of recharge vouchers and prepaid subscriptions for mobile and satellite TV. Other transactions facilitated include prepaid railway, airline and bus ticketing, cellphone vending, financial services through no-frills kiosk banking, as well as bill payments for mobile, landline and utilities. Oxigen is evolving to fulfil its vision of moving from a prepaid recharge platform to becoming a versatile payments’ solutions provider, which besides its traditional businesses, will include mobile wallet, international remittances and cash cards.

The company was incorporated in August 2003. For the financial year, Blue Label and Microsoft each held 37.22%, with the remaining 25.56% owned by local management. In June 2011, Microsoft sold its investment in equal share to Blue Label and local management.

During the financial year, the deployment of POS devices and the expanding business correspondent initiatives continued to be the main drivers of the business. Sales revenues for the financial year increased 24% at static gross profit margins of 2.25%.

Currently there are approximately 450 000 POS devices deployed throughout India. Oxigen, with about 90 000 POS terminals, with another 30 000 being deployed, is in a strong position to facilitate the introduction of new products and services, as well as mobile and data processing.

Design and development of more efficient POS terminals has progressed and a new terminal prototype, called OxiSmart, was recently launched. The new ultra-low cost GPRS POS terminals and low cost GPRS Modem (USB Dongle) convert a phone line terminal to a GPRS enabled terminal. This will lead to an improvement in transaction reliability, scaling up and revival of under-performing retailers and accommodate low trading merchants. The new devices should pave the way for an expansion of footprint over the next few years, in support of which infrastructure has already been strengthened.

The company’s efforts for continuous innovation in the banking channel culminated in September 2010 with the launch and activation of 150 (out of a planned 20 000) Customer Service Points (CSPs). These are our existing web-enabled Oxigen retailers, appointed as CSPs enabling them to carry out banking transactions on behalf of the State Bank of India (SBI). One of the immediate uptakes has been in domestic remittances. The company has already enrolled and enabled more than 900 CSPs.

A principal feature of the web-based, no-frill, kiosk banking system is that it reaches the unbanked population across India, helping them open accounts with minimal documentation, while biometric readers record the account holder’s fingerprints in order to facilitate secure banking transactions. The company has opened kiosk banking at 500 outlets in rural areas. Primary services include cash deposits and withdrawals as well as money transfers to other SBI accounts. Clients can also access vehicle/home loans and loans against property and gold, obtain NSC/KVP certificates (Government Securities), invest in mutual funds and activate different current accounts, term deposits and recurring deposits at each location.

The market continues to expand, affording opportunities for Oxigen to remain one of the leaders in the industry. Over the next few years dependence on mobile recharge is expected to reduce in return for the rewards expected from the mobile payment’s space, where Oxigen is well placed with first mover advantage through its diversified solutions and hardware offerings.

The Reserve Bank of India renewed Oxigen’s approval of the OxiCash Prepaid Card, thus providing another show of confidence in the prepaid payment and settlement system.

Product deployment now includes one-time purchase cards with multiple recharge options across bus and airline ticketing, direct TV top-ups, insurance, calling cards and car rentals, mobile services such as sms packs, phone back-ups and Nokia online music. In a recent development, Oxigen was appointed national service provider to Nokia Money, enabling a prepaid mobile wallet to be offered. Oxigen online services, like mobile recharge/TV recharges, are already integrated into the Nokia Money mobile wallet.

The business outlook continues to hold promise.

Blue Label Mexico

Blue Label Mexico commenced trading operations in August 2009. The current ownership structure is 40% Blue Label Telecoms Limited, 40% Grupo Bimbo SA de CV and 20% Nadhari SA de CV. The business model in Mexico is underpinned by a number of agreements with sales and distribution channels, independent sales organisations or ISOs, service providers and key mobile network operators. Products on offer include PINless recharge, direct top-up and payment of services.

Trading conditions were adversely impacted in the early part of the financial year by network downtime caused by severe flooding in Mexico and the unreliability of the Seacom underwater sea cable between Mexico and South Africa. As a result, platform infrastructure was established in Mexico, where it is now fully operational.

In February 2011, a strategic investor, Grupo Bimbo, purchased 40% of Blue Label Mexico by subscribing to a fresh issue of shares, resulting in Blue Label diluting its holding from 70% to 40% and local management’s holding from 30% to 20%. Grupo Bimbo is the largest bakery business in the world and operates one of the most extensive physical distribution networks in Mexico. It also has a presence in 17 countries in North America, Latin America and Asia. In the framework of the new structure, terminals will be rolled out to Grupo Bimbo service locations to support their operations, as well as enhance competitiveness of their independent store clients.

At year end some 5 000 devices were active in the market and this is expected to grow in the year ahead. Mexico’s geographic location makes it an important springboard for prepaid and remittance markets in the United States and Latin America. Blue Label Mexico has exclusive rights to use Blue Label Telecoms technology in these two geographies.

Africa Prepaid Services Nigeria (“APSN”)

Blue Label has an effective ownership of 36.72% in APSN, through its 72% shareholding in Africa Prepaid Services. In 2008 APSN concluded a 10-year agreement with Multi-Links, a subsidiary of Telkom South Africa Limited, to service its entire distribution channel in Nigeria.

The performance of APSN was adversely impacted during the first six months of the year due to falling demand owing to ongoing negative commentary by Multi- Links over its uncertain future. In November 2010 Blue Label cancelled APSN’s contract arising from Multi-Link’s repudiation of its obligations under the contract and instituted arbitration action to recover losses suffered consequent to the cancellation of the contract. Arbitration proceedings are on-going. Taking cognisance of Blue Label’s effective minority stake in APSN and after duly evaluating the investment, strategies and funding requirements, a commitment was made to sell the majority of the assets and liabilities prior to financial year end. The sale was concluded in June 2011. Core headline earnings for the year declined to a R18.3 million loss (previous year R49.1 million profit).

Ukash

The 15.75% strategic investment in Smart Voucher Limited, trading as Ukash, and based in the United Kingdom, was acquired in 2008. Ukash is an international developer of prepaid cash voucher technologies allowing it to supply end-users with prepaid (Ukash) vouchers, which effectively digitises cash. It is a global e-money network enabling consumers to turn their cash into an e-cash voucher so that they can pay, play and reload online. Ukash is patented, proven and fully scalable.

Ukash continued its expansion in new and existing markets this year, adding issuing sites in Argentina, Brazil, Mexico and New Zealand. Ukash is now available at
420 000 locations across 51 countries on six continents. Redemption values increased by 71% year on year on volume increases of 84%. Blue Label’s share of historical losses of R8 million turned around to a share of profit of R9 million.

During the year, three new products were launched, Ukash Neo (prepaid virtual Mastercard), Ukash Air (mobile airtime top-up) and Ukash Payout. Management was also strengthened over this time. In April 2011, Ukash was the proud recipient of the 2011 Queen’s Award for Enterprise in the International Trade Category. This prestigious award recognises UK businesses which have achieved substantial growth in overseas earnings and outstanding levels of commercial success.

SharedPhone International

SharedPhone supplies SIM card mobile payphone software and hardware solutions, which is particularly practical in rural areas, as it allows vendors to provide public telephony services, as well as the ability to sell prepaid airtime from mobile phones through a mobile payphone reimbursement system. This facilitates the sale of prepaid products and services such as airtime, electricity and insurance.

Revenue declined from R39 million to R29 million, due to a lack of repeat international orders from the traditional payphone markets, as voucher denominations reduced and cheap entry level handsets became readily available, ultimately reducing the attractiveness of a payphone product. This necessitated an impairment to goodwill and intangible assets totalling R8.4 million.

Technology

The Technology segment is responsible for the group’s core technology systems. Its objective is to develop, deploy and support the technology platforms across the group and at a number of third-party partners. The group’s infrastructure connects into some of South Africa’s major banks, utility companies and telecommunication operators. This segment also switches both debit and credit card electronic funds transfer (EFT) transactions and e-token products for some of the country’s leading retailers and petroleum companies.

The core technology service offering includes:

The strategy of the Technology segment is to:

THE KEY OPERATIONAL CAPABILITIES INCLUDE:

Distribution platforms for e-tokens of value (including AEON Online and AEON EVD (AMS)):

The group’s technology operations, development and support were refocused during the year, following the restructuring of the South Africa distribution segment.

The migration of customers onto AEON continued, with further rollout of EFT services by TJ. Volumes throughout the entire environment continue to increase significantly – more than 10% growth through Postilion alone was recorded during the last quarter of the financial year. This dynamic environment requires that the core architectural framework is reviewed and updated regularly.

Over the last six months, an initiative has ensured that enterprise (i.e. non-production) systems are consolidated and optimised. As a result, network-device/ element configuration management and control has been outsourced. Network and Security policies, as well as core network architecture and deployment guidelines, continue to be set by the CIO, but are actively implemented and managed through a co-source model i.e. high-level oversight and control exercised by Technology, with implementation, operational support and monitoring implemented by the outsource partner. This includes all network and intrusion – detection and prevention operational support. These changes comply with the group’s Technology governance and risk management requirements.

In addition to these platform and systems enhancements, the group has actively engaged in deploying and managing infrastructure and services within cloud environments. This initiative is accelerating and anticipated to be production-ready with cloud infrastructure in place within Amazon EC2 during this calendar year, servicing Mexico’s high availability requirements. As the roll-out of POS devices in Mexico continues to gain momentum, the migration of the infrastructure has been largely completed, with Technology providing operational and project support by redeploying key individuals to Mexico.

Blue Label Mobile

Blue Label Mobile provides a complete mobile transactional ecosystem and services-provisioning platform, delivering mobile-centric products and services through any mobile channel (eg smartphone, WAP, Java, SMS, USSD). Products include mobiWallet, mobiMerchant and mobiSecure, as well as mobile couponing, loyalty and Near Field Communication (NFC) solutions. Blue Label Mobile is also SA’s leading location-based service provider, offering safety and security, tracking and informational products for individuals and companies. Additionally, it is a wireless application service provider (WASP) and top-5 aggregator. Blue Label Mobile is the provider of South African and African music and digital content to major mobile networks. Its services are provided directly to B2B customers as well as to the group for inclusion in their product/service bundling. On a core headline earnings basis, the Mobile segment made a R15.6 million profit, up from a R1.9 million loss in the prior year.

blue label one trading as Mobile Services Company (“MSC”)

MSC is Blue Label’s mobile services business, aggregating transactional products and services (such as airtime, electricity and others) and those of third parties. The services are available through a number of channels, stand-alone Java applications, WAP, web and SMS. This reaches a wide range of customers including B2C, B2B and B2B2C using the same infrastructure and interfaces.

This has been a period of integration and stabilisation as the focus has shifted towards providing mobile solutions directly to Blue Label’s channels and to various B2B2C opportunities. This year MSC launched a fully-featured mobile wallet – mobiWallet, which allows customers to make payments, deposit money, shop for goods and services, make withdrawals, participate in loyalty and reward schemes and perform person-to-person money transfers, all from their normal handsets. The mobile wallet architecture is more than a micro-transaction account, as it provides customers with a full set of tools for managing interactions by integrating various layers, such as rewards, pre-paid and banked transactions, together with fully secure and cost-effective messaging and alerting capabilities. It also provides secure and appropriate management of personal information, integration with location-enabled value-add services, and the ability to link all these elements together in a fully integrated way.

Cellfind

As Blue Label’s WASP and Location-Based Services (LBS) provider, Cellfind continues to derive annuity incomes through the Vodacom and MTN location services as well as WASP aggregation businesses.

Cellfind’s investment in developing generic interfaces to its location services allows both easy and expanded consumption of services through its own products and those developed by partners using the same interfaces. Cellfind provides the billing and management processes to monetise these services.

Agreements were concluded with Nashua Mobile and Autopage Cellular to provide direct billing to certain contract customers. Cellfind developed and launched a generic panic (assist) button, which can be white-labeled or integrated into third-party systems, with full Call Centre and/or emergency assistance services if required. Customers include major companies in the health care, security and mining sectors.

Cellfind is focusing on lower risk models, such as corporate or B2C products, and seeking new revenue streams, while restructuring to improve efficiency, product mix and costs. The product range includes brands such as Look4Help, Look4Me, Look4Me for business, MTN WhereRU, MTN 2MyAid, miTraffic, 911 Alert, Look4Music, messaging and generic panic buttons, prepaid messaging web interface, LBS Accuracy, miPayslip, Willsure and Disaster Recovery.

Content Connect Africa (“CCA”)

CCA is the premium supplier of on-deck African music content to both Vodacom and MTN. During the year downloads fell significantly due to ongoing restructuring of the platforms at the major network operators. Efforts were directed to building-up the catalogue content base and securing additional digital distribution partners, and, in turn footprint, across numerous countries, in particular in Africa.

Blue Label Solutions

This segment specialises in marketing predominantly cellular products and services through outbound telemarketing, as well as providing inbound customer care, technical support and data and analytics services, particularly to group companies. The segment managed a remarkable turnaround this year, achieving R7 million in core headline earnings, compared to a loss of R7 million in the previous period. The following entities are housed in this segment:

Blue Label Data Solutions (“BLDS”)

The efforts over the past two years to build sustainable relationships with clients and entrench direct marketing strategies into their businesses culminated in a successful year, marked by revenue growth of 160%. BLDS consolidated operational processes during the year and maximised resources without increasing headcount. A number of high-profile opportunities have been entrenched in ongoing campaigns, positioning the company well for the future.

CNS and Velociti

The CNS Call Centre has been scaled down to a call centre facility operation to third parties. The 700 seat Velociti Call Centre had another challenging year, characterised by fewer campaigns and shrinking margins, as seen throughout the industry. A number of recently launched campaigns are proving profitable, following management’s innovative diversification of the business model.