Commentary

Basis of preparation

The condensed interim financial statements have been prepared in accordance with International Accounting Standards (IAS) 34 Interim Financial Reporting. The accounting policies and methods of computation are consistent with those used in the comparative financial information for the six months ended 30 November 2007, (which were prepared in accordance with International Financial Reporting Standards (IFRS) and the South African Companies Act).

Overview

The company’s performance for the six month period ended 30 November 2008 was sound. This was predominantly attributable to organic growth.

Although net attributable earnings of R198 million exceeded the earnings for the 2007 relative period by R184 million, equating to a growth in earnings per share from 3.47c to 25.86c (645%), the board of directors believes it is more appropriate to compare actual earnings to historical core pro forma earnings to evaluate the growth of the group. Core pro forma earnings exclude non recurring and non operational items that applied during the comparative period, and in addition assume that the listing and restructuring of the group took place on 1 June 2007.

The financial highlights and the underlying financial review reflect the comparisons accordingly.

• Revenues increased by R1.4 billion (23%) to R7.6 billion.
• EBITDA increased by R65 million (28%) to R296 million.
• EBITDA margin increased from 3.73% to 3.9%.
• Net profit after tax increased by R33 million (20%) to R198 million.
• Core net profit after tax increased by R35 million (20%) to R216 million.
• GP percentage increased from 5.94% to 6.92%.
• Core earnings per share increased from 23.58c to 28.18c.

The underlying report has been prepared on a segmental basis to provide shareholders with an enhanced perspective of contributions to profitability by the various operational divisions.

The segmental split is as follows:

South African distribution

• Distribution of electronic tokens of value encompassing prepaid airtime and starter packs, bill payments, prepaid electricity, prepaid insurance and redeemable prepaid vouchers for online products and services.
  

International distribution

• Replication of the South African distribution model internationally.

Value added services

• Telemarketing of cellular and financial services products, inbound customer care and technical support via four call centres.
• Marketing of location based products “Look 4 me” and “Look 4 help” (Vodacom) as well as “Where are U“ and “2 my aid” (MTN).
• Aggregation of localised content for mobile operators and third party clients.

Technology

• Development, integration and management of the group’s IT systems and technologies.

Revenue

South African distribution

This segment contributed most of the revenue. Prepaid virtual airtime sales comprised 75%, prepaid physical airtime 22% and prepaid electricity 3% of the revenue.

Revenue from prepaid electricity grew by an encouraging 200%.

International distribution

Revenue from this segment increased by R70 million (33%), of which R50 million (24%) was as a result of foreign exchange translations and R20 million (9%) as a result of organic growth in the trading divisions abroad.

Value added services

Total growth of this segment was R102 million (112%) of which acquisitive growth accounted for R35 million (38%) and organic growth R67 million (74%).

Technology

The focus on in-house technological support and product development and enhancement has resulted in a conscious decision to reduce services and support to third parties. This accounts for the decline in revenue from third parties by R4.6 million.

EBITDA

South African distribution

EBITDA margin of 4.19% represented an increase of 0.61% from 3.58%. This was as a result of increased revenue at higher gross profit margins exceeding the increase in overheads.

International distribution

The growth in EBITDA of R6.5 million was predominantly due to foreign exchange movements.

Value added services

The growth in EBITDA from R23 million to R47 million (101%) resulted from a combination of acquisitive growth (R8 million) and organic growth (R15 million) (65%).

The EBITDA margin declined from 25.87% to 24.56% in line with the necessity to enhance and expand existing infrastructure in order to support sustained growth in revenue.

Technology and corporate

There was growth in expenditure on technology and corporate of R45 million representative of the costs of enhanced infrastructure and administrative support systems and skills required to strengthen the platform for current and future expansion both locally and internationally.

The growth in EBITDA generated by the trading operations from R245 million to R363 million (48%) could not have been achieved without the necessary technical, entrepreneurial and administrative support aligned thereto.

Net finance income

Finance income

Finance income of R104 million was earned by the South African distribution division. Of this amount R14 million relates to imputed interest receivable on debtor balances in terms of IFRS with R90 million earned on liquid working capital.

pro forma finance income earned in the comparative period amounted to R104.6 million of which R6 million applied to imputed interest receivable on debtor balances in terms of IFRS.

There was therefore a decline in finance income of R9.6 million net of the above IFRS adjustments. This was due to the application of R293 million to piecemeal investments from January 2008 to October 2008.

Finance expense

Of the finance expense of R50 million, R48 million relates to imputed interest payable on creditor balances in terms of IFRS.

Share of losses from associates and joint ventures

Oxigen Services India Pvt (Ltd)

Oxigen Services India Pvt (Ltd) continues to incur losses, as anticipated in line with the cost of rolling out point of sale devices over a widespread area. Management remain confident in the prospects of this operation.

Smart Voucher Limited trading as Ukash

A minority stake in this United Kingdom based company was purchased in October 2008. The company has developed and distributes proprietary electronic pins which enable the electronic redemption of online products and services. This technology is of strategic value to the group. The Ukash application is an added value product which will be distributed through the group’s global footprint.

Core net profit attributable to equity holders

The growth in contribution to core earnings of R92 million (47%) from operations results from continued investment in technology and support service.

Corporate expenditure has increased in line with the costs of an expanding professional executive team and by the expenses aligned to acquisitive growth exploration and implementation.

The core earnings of R216 million equating to a growth of R35 million (20%) on pro forma was after adding back the amortisation of intangibles of R18 million to the net profit after tax of R198 million.

Dividends

The group will only consider paying dividends from the financial year commencing June 2010.

Assets

Total assets increased by R410 million (12.73%) to R3.6 billion from R3.2 billion at May 2008.

Non current assets

The net increase in non current assets was R60.7 million.

This was attributable to the following:

• Increase in property, plant and equipment of R26.7 million, mainly as a result of the purchase of point of sale devices required in both the South African and International distribution segments.
• A net decrease in intangible assets of R15 million due to amortisation.
• Increase in investments in associates of R61.3 million.
• A net decrease in unactivated starter packs of R12.3 million. Financial assets at amortised cost relate to starter packs which have been sold but not yet activated.

Current assets

Current assets increased by R349.4 million. The increase was largely attributable to the growth in cash and cash equivalents achieved as a result of profit generation and stringent working capital management.

Capital and reserves

The share capital and share premium declined by R24 million attributable to the purchase of treasury shares in terms of the group’s staff share incentive scheme.

The restructuring reserve of R1.84 billion arose in the prior year 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. Goodwill arising on transactions with minorities of R899 million is recognised against reserves on the balance sheet, as minority shareholders are treated as equity participants. This is in accordance with the economic entity method which was adopted by the group in the prior year.

Liabilities

Total liabilities increased by R224 million mainly due to the growth in trade and other payables, in line with the organic growth of the group.

Cash flow

Operating profit growth and the constant focus on stringent working capital management resulted in healthy cash flows from operating activities of R421 million. This manifests itself in the current ratio of 2 to 1 and the quick ratio of 1.7 to 1. Of this cash generated, R110 million was applied to investing activities.

Prospects

In spite of the global economic meltdown, the products and services provided by the group remain resilient. The group will continue to pursue the growth of its global transactional footprint as the foundation for the roll out of its expanding range of secure electronic tokens of value and allied services.

The group’s transactional point of sale (“POS”) and mobile systems and products and services are currently being integrated into Microsoft’s mobile and advertising service platforms. During the course of 2009, these capabilities and services will be rolled out into emerging and developing markets through Microsoft UPG (Unlimited Potential Group) and BLT’s global partners, utilising POS and mobile channels. This in future will translate into the monetisation of mobile and POS advertising in these markets.

The group has successfully grown its community based channels for the distribution of its products, including starter packs. The intention is to capitalise on this distribution base both organically and through the introduction of new channels.

A strategic relationship has been established with First Data Corporation, a leading global transactional switching service provider, in which cross pollination of relative networks is being explored.

Subsequent to the period under review Africa Prepaid Services, a subsidiary of BLT, concluded an agreement with Multilinks Telecommunications Ltd, a subsidiary of Telkom in Nigeria, in terms of which Africa Prepaid Services has been granted a service provider licence in Nigeria.

BLT has also acquired an effective 50.1% stake in Virtual Prepaid Network LLC (“VPN”) through its newly formed wholly owned subsidiary BLT USA Inc. VPN is based in New York and is focused on virtual distribution of prepaid international calling cards servicing mainly ethnic and emerging markets.

Review opinion

The results for the period ended 30 November 2008 have been reviewed by the company’s auditors, PricewaterhouseCoopers Inc. and the unmodified review report is available for inspection at the company’s registered office.

Appreciation

The board of BLT remains continuously grateful to its staff, suppliers, customers and business partners for their ongoing support and loyalty to the group.

For and on behalf of the Board

Directors:

L M Nestadt (Chairman)*, B M Levy, M S Levy, S Ellerine*, G D Harlow*, R J Huntley*, N N Lazarus*, J S Mthimunye*,
M V Pamensky, D B Rivkind, H C Theledi*, L M Tyalimpi*, P Mansour *#

(*Non Executive) (#American)

Company Secretary: E Viljoen

Blue Label Telecoms Limited
(Incorporated in the Republic of South Africa)
(Registration number 2006/022679/06)
JSE share code: BLU      ISIN: ZAE000109088
(“BLT” or “the company”)