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CommentaryINTRODUCTION The Board of Blue Label Telecoms Limited (BLT) is pleased to present the pro forma results and audited results for the financial year ended 31 May 2008. The results surpass the unaudited pro forma and forecast financial information contained in the pre listing statement (PLS). NATURE OF BUSINESS BLT and its subsidiary and associate companies (the group) produce and distribute a wide variety of prepaid secure electronic tokens of value and transactional services. The group’s prepaid products and service offerings include prepaid airtime, prepaid electricity, bill payments, electronic funds transfers, loyalty programs, stored value cards, location based services and other physical and virtual prepaid electronic tokens of value. The group processes in excess of 500 million monthly transactions through several hundred thousand mobile and fixed points of presence. In South Africa BLT has in excess of 120 000 points of presence through which it distributes its products and services. Beyond South Africa, BLT has introduced and is in the process of introducing mirror images of its proven business model in a number of emerging markets, including India, Mexico and countries in Africa. In developing economies the supply of products and services through prepaid channels has become a significant mode of distribution. Logistical impediments to the physical distribution of products are surmounted through virtual delivery technology platforms. As the unbanked market does not have access to credit, prepaid electronic tokens of value have become the access point to previously unavailable first world products and services. THE MICROSOFT RELATIONSHIP BLT and the Microsoft Corporation (Microsoft) signed a strategic collaboration agreement in November 2007 to provide each other with mutual assistance in exploring new business opportunities and preferred partnership initiatives across the world’s emerging and developing economies. The agreement provides for an advertising revenue share model which is anticipated to begin generating revenue in the next eighteen months. During the year, Microsoft nominated Mr. Peter Mansour, a key member of Microsoft’s Unlimited Potential Group Inc., as its non-executive director on the Board of BLT. This appointment took effect on 22 May 2008. STRATEGIC INITIATIVES POST YEAR END Gold Label Investment (Proprietary) Limited (Gold Label), a wholly owned subsidiary of BLT, acquired an additional 3.85% of the shares in Oxigen Services India Private Limited (Oxigen). Gold Label now holds 38.85% of the shares in Oxigen with Microsoft holding 38.85% and the management of Oxigen holding the balance. Oxigen has recently launched OxiCash, a stored value “virtual wallet” that enables consumers to purchase prepaid products and services online or through Oxigen’s network which has in excess of 60 000 points of presence across India. OxiCash is an important step in the evolution of a full scale “virtual wallet” and money transfer offering that will be distributed via the mobile phone and accessed across any of BLT’s global footprint of touch points. Gold Label acquired a 17.25% interest in a United Kingdom based company called Smart Voucher Limited (trading under the name of Ukash). Gold Label also has an option to purchase an additional 32.75% in the company in the next three years. This company has developed valuable proprietary technology which enables the purchase of a prepaid voucher that may be redeemed for online products and services, and will be integral to BLT’s mobile strategy in the future. The company has a footprint in Western Europe and intends to expand into developing markets which have populations that are technologically sophisticated but are often unbanked. BLT has jointly established Blue Label Mexico, with Nadhari S.A. de C.V., a Mexican company that has expertise in the strategic and operational development of products and services within emerging markets. The establishment of a business presence in Mexico is an important step in the group’s goal of creating a transaction based distribution network in the emerging markets of Latin America. BLT has launched an innovative mobile service, known as mibli, based on a technology platform which creates a customer-focused mobile eco-system. An on-phone experience has been created that accommodates many different services (for example instant messaging, ticket and content purchasing, airtime top-ups, etc.) through a single application. The platform also allows retailers and service providers to bring their products and services to market through integration with a virtual wallet which is powered by Windows Live. By being Microsoft Windows Live enabled, mobile users access their virtual wallet, their mobile services and all online and transactional services through a single identity. PREPARATION OF PRO FORMA RESULTS In compliance with JSE Listing Requirements, the group has provided a reconciliation between the actual audited financial results for the financial year ended 31 May 2008 and the pro forma unaudited financial results for the same period. The pro forma financial results have been prepared to illustrate the impact of the group’s financial results as if the listing, restructuring and acquisition of minorities occurred on 1 June 2007. In addition, the pro forma results assume that the capital raised on listing was received on 1 June 2007, thereby impacting significantly on the group’s net finance income. PRELISTING STATEMENT The pre listing statement included the group’s unaudited forecasts of basic and headline earnings of R144 million, core earnings of R234 million, pro forma earnings of R250 million and core pro forma earnings of R340 million. These forecasts equated to basic and headline earnings per share of 26.30 cents, core earnings per share of 42.68 cents, pro forma earnings per share of 33.61 cents and core pro forma earnings per share of 45.81 cents. TRADING STATEMENT On 14 July 2008 the group issued a trading statement announcing that it expected to exceed both the forecasts presented in the prelisting statement pertaining to basic and headline earnings at a range of between 20% and 30% and the pro forma forecasted basic and headline earnings at a range of between 7% and 12%. The final audited results equated to an increase of 25.5% in earnings and an increase of 7.9% in pro forma earnings. The actual core earnings of R270 million and the pro forma core earnings of R371 million equate to increases over forecast of 15.5% and 9.0% respectively. The pro forma core earnings are the true measure of the group’s sustainable operating performance. The pro forma core earnings per share of 48.40 cents compared to the relative forecast of 45.81 cents represents an increase of 5.7% over forecast. BASIS OF PREPARATION The group financial statements are prepared in accordance with and comply with International Financial Reporting Standards (IFRS), the Listing requirements of the JSE Limited and the South African Companies Act 61 of 1973, as amended. The consolidated financial statements are prepared in accordance with the going concern principle under the historical cost basis as modified by the revaluation of certain assets and liabilities where required or elected in terms of IFRS. The accounting policies and methods of computation are consistent with those used in the comparative financial information for the year ended 31 May 2007. As a result of the group’s restructuring, its comparatives have been restated using predecessor accounting principles, a complex accounting treatment. The accounting principles applied result in an extensive restatement of comparatives. Shareholders are therefore advised to exercise caution and should read the final results as reported in conjunction with the pre listing statement, when attempting to make year on year comparisons. FINANCIAL REVIEW Income statement The group’s reported results for the year ended 31 May 2008 reflects actual group revenue of R12.55 billion (pro forma – R12.93 billion), EBITDA of R328 million (pro forma – R347 million), net profit after tax of R181 million (pro forma – R269 million) and core net profit after tax of R270 million (pro forma – R371 million). In order to accurately reflect core and pro forma core earnings for the full year, the group has added back previously disclosed nonrecurring and non-operational items of R57.6 million relating to a management bonus settlement, R9 million relating to the termination of a commission agreement and R22.9 million (pro forma – R34.9 million) relating to the amortisation of intangible assets that arose as a consequence of purchase price allocations calculated in terms of IFRS 3: Business Combinations. Revenue Comparing the actual results with the predecessor value audited 2007 results, revenue of the group increased by R3.65 billion (41%) mainly due to strong organic growth and continued escalation in consumer demand for prepaid airtime. Gross profit margin The group’s trading environment is characterised by high volumes and relatively low margins, resulting in a gross profit margin of 5.34% for the period under review. This compares to 4.78% achieved in the previous year. NET FINANCE INCOME The company earned net finance income of R46 million compared to a net finance expense of R38 million in the prior year. Assuming the group had listed on 1 June 2007, net finance income would have increased by a further R87 million. Finance Income The group’s finance income for the year was R193 million earned from the residue of funds raised on listing. R16 million of this amount relates to imputed interest receivable on debtors balances in terms of IFRS. Assuming the group had listed on 1 June 2007, finance income would have been an additional R46 million. Finance expense The group’s finance expense for the year was R148 million. R101 million included in the amount relates to imputed interest on creditor balances in terms of IFRS . Assuming the group had listed on 1 June 2007, its finance expense would have been reduced by R43 million as the group would have settled its interest bearing debt at that date. Net interest paid of R17 million, originally budgeted for, did not materialise due to predecessor accounting principles. In terms of these principles the shareholders’ loans and non-core receivables assets are assumed to have been settled on 1 June 2006. Share of loss from associate A loss amounting to R19.7 million is attributable to Oxigen Services India. Other associated companies prior to listing generated positive contributions of R 2.3 million. Effective tax rate As a result of certain non-deductible expenses, the group’s overall effective tax rate for the full year was 30%. Dividends As per the group’s previously disclosed dividend policy, BLT will only consider paying a dividend from the financial year commencing 1 June 2010. Balance sheet The group’s strong balance sheet is attributable to good trading results and stringent asset and treasury management. The group is highly liquid and well positioned to support the funding of potential acquisitions without impairing its working capital requirements. ASSETS Intangible assets Intangible assets are made up of a goodwill and intangibles relating to acquisitions as well as non-tangible assets acquired during the normal course of business. In terms of IFRS 3 pertaining to business combinations, the intangible elements comprising goodwill and intangibles in respect of acquisitions have to be determined and allocated. The group’s carrying value of these acquisitive intangible assets as at 31 May 2008 was R193 million. The majority of these acquisitions emanated from the conversion of investments in previous associate companies to wholly owned subsidiaries as a result of the restructure of the group immediately prior to listing. The useful life of the majority of these assets (excluding goodwill) is five years, which will be amortised accordingly. The goodwill element of intangibles was R266 million, relating to the acquisition of subsidiaries in respect of which the group was not transacting with minorities. BLT has changed its accounting policy with regard to accounting for transactions with minorities. This differs from the group’s disclosure in its PLS. BLT has adopted the Economic Entity method, which is consistent with the requirements of IFRS 3 Revised (Business Combinations), and IAS 27 Revised (Consolidated and Separate Financial Statements). Under this policy, goodwill of R899 million, arising on transactions with minorities is recognised against reserves on the balance sheet, as minority shareholders are treated as equity participants. Investments in associates The group’s investments in associates of R81 million represents the carrying value of its investment in Oxigen India. As at 31 May 2008, BLT held 35% of Oxigen which is included in the carrying value. Restructuring reserve The group’s restructuring reserve of R1.84 billion arose as a result of the restatement of group comparatives as required in terms of the principles of predecessor accounting. This reserve represents the difference between the fair value of the entities under the group’s control and their respective net asset values as at the assumed restructure date of 1 June 2006. Cash flows The negative cash flow generated from operating activities of R20 million is after applying funds to increase net working capital by R280 million to support of the continued growth of the group. Cash flows from investing activities of R405 million relate to the acquisition of minorities on listing of an amount of R209 million, acquisitions post listing amounting to R140 million and the net movement in loans to associate companies amounting to R57 million. Cash flows from financing activities of R662 million is due to the group’s successful listing resulting in the raising of cash totaling R1.3 billion. Of this sum approximately R600 million was utilised to repay the majority of the group’s interest bearing debt and R39 million for the payment of listing costs. The group remained cash positive throughout the year with R1.3 billion on hand at year end. Audit Opinion The results for the financial year ended 31 May 2008 have been audited by the Company’s auditors, PricewaterhouseCoopers Incorporated, and the unqualified audit report is available for inspection at the company’s registered office. Prospects The group is financially sound. It is well positioned to grow its global transactional footprint and to roll-out its proven business model in emerging markets through both organic growth and strategic acquisitions. The group intends to diversify its product offerings and income streams, through, for example, the inclusion of revenues from advertising and money transfers. The group will continue to grow the markets in which it operates with the introduction of innovative and varied prepaid and transactional products and services as well as lifestyle oriented products that promote convenience and accessibility. Key strategies aimed at enhancing the group’s share of total local prepaid average revenue’s per user have been identified. The group’s proprietary technologies are constantly being improved and developed to ensure that the group has the competency and capacity to expand its transactional footprint and to roll-out its product offerings and services in emerging markets. Corporate Governance The Board and senior management of BLT subscribe to the governance principles of King II and are developing governance structures based on the recommendations and underlying principles of the King II Code of Corporate Practices and Conduct. The directors recognise the need to conduct the group’s business with integrity and according to sound corporate governance principles. During the first months of being a publicly listed entity certain of the key recommendations of King II have been implemented however the company continues to strive to be fully compliant with King II. Annaul General Meeting BLT’s first annual general meeting (AGM) will be held in Johannesburg on Wednesday, 12 November 2008. Further details on BLT’s AGM will be included in BLT’s annual report to be posted to shareholders on or about 13 October 2008. Appreciation The Board of BLT would like to thank BLT’s staff for their commitment and hard work over the period under review. The Board would also like to thank BLT’s many suppliers, customers, business partners, advisors and shareholders for their ongoing support during the year. By order of the Board
Directors: LM Nestadt (Chairman)*, BM Levy, MS Levy, S Ellerine*, GD Harlow*, RJ Huntley*, NN Lazarus*, JS Mthimunye*, MV Pamensky,
DB Rivkind, HC Theledi*, LM Tyalimpi*, P Mansour*# Company Secretary: E Viljoen Blue Label Telecoms Limited
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