Blue Label Telecoms

Understanding material matters

Fluctuating economic conditions, including political, social and environmental conditions in South Africa and on the international front

These factors can affect consumer health, and in turn could have an adverse effect on revenue and profitability, in spite of the Group's historical resilience to adverse economic conditions.

It has been the Group's experience that the diversity of its mix of products and services and distribution channels has limited its exposure to economic downturns. Consumers appear to be unwilling to reduce spending on utilities, transport and airtime. In this regard the Group's products continue to be in demand and remain resilient to downturns. The Group is focusing on its existing platforms, both locally and internationally. Its vast geography of point-of-sale presence afford continuous opportunities to provide additional products and services to be expedited on these expanding points of presence.

Margin compression

The network operators determine the margins to the prepaid airtime distribution channel. The Group may not always be able to pass on to the retailer, merchant or customer any margin compression enforced by the network operators.

Management is confident, that based on historical trends, the Group will be able to continue to pass on any margin compression to the distribution channel. Any margin compression is also likely to eliminate inefficient distributors out of the distribution channel. In addition, the Group is constantly looking to introduce new product and service offerings at comparatively higher margins than its traditional business, through the leverage of its significant distribution footprint and merchant relationships.

Interest rates

Fluctuations in interest rates have an impact on the cost of Group borrowings.

Foreign exchange rates

Fluctuations in exchange rates have an impact on the results reported from, and any refinancing required by, associate and joint venture companies located in India, Mauritius and Mexico.

Non-compliance with legislation

Non-compliance with legislation applicable to the Group could lead to fines and negative reputational impact, i.e. POPI, CPA, WASPA legislation, Companies Act, Income Tax Act, Value Added Tax Act, JSE Listings Requirements, OHSA, BEE Act, Employment Equity Act, industry charters and scorecards.

Legislation that affects the Group is identified, analysed and categorised according to its impact and relevance. The process is ongoing in order to test and ensure total compliance at an operational level.

The compliance function is managed by Group Legal and Company Secretarial, as assisted by the internal auditor.

Ability to attract and retain skilled resources

The Group's future performance will depend largely on the efforts and abilities of its key personnel and employees. The existing Group Executive Management pioneered the mass prepaid market and established the Group's business model. The Group's future success will depend, in part, upon its ability to continue to attract, retain, motivate and reward personnel, including executive officers and certain other key and specialised employees. There is a dearth of suitable technical skills in the ITC sector.

The joint CEOs and co-founders are both substantial shareholders and are dedicated to the sustainability and growth of the Group.

Key members of the management team are bound by service and restraint agreements and in most instances they are shareholders of Blue Label via the forfeitable share scheme. Executive Management has implemented talent management and succession planning in key areas of the Group. Appropriate skills transfer activities are ongoing through on the job and other training programmes.

The RNC has approved remuneration policies which include long-term retention benefits, short-term incentives and an outperformance bonus. In addition, key components of the Group's remuneration policy include retention.

Increasing exposure to issues such as data security, breaches in technology security or privacy

As the bulk of the Group's inventory is of a virtual nature, defence against cybercrime is a top priority, as susceptibility to hacking and the penetration of firewalls and other defence systems are always matters of extreme concern.

The Group is dependent on the systems and platforms that it utilises to deliver its products and services, as well as management of its merchant base. In recent years, technology spend has been increasing in recognition of this key imperative, in order to support not only organic and acquisitive growth in the business (and the concomitant rise in the number and type of transactions processed), but also to improve system availability and resilience. This invariably includes a major focus on the security of all systems, both production and enterprise, in order to suitably detect and manage security threats, as well as the ability to recover from collateral damage that may be caused as a result of cyber security breaches.

Elimination of the middle man

In most industries a wholesaler is at risk of being eliminated from the supply chain if the supplier has the infrastructure and capabilities to supply the customer directly.

From inception, the objective of the Group was to become a one-stop destination for the supply and distribution of all of the mobile network offerings. This would provide both convenience and efficiency to the retailer and customer. Furthermore, the technology and footprint developed by the Group allows retailers to earn additional revenue by introducing additional products. This would make it difficult to disintermediate the Group.

No single network can offer this complete solution.

The introduction of the sale of prepaid electricity tokens and its phenomenal uptake in South Africa, strengthens the Group's foothold as a one-stop destination that is most convenient to the retailer. The Group's increasing bouquet of products and its neutral aggregation thereof will continue to ensure that its middle-man status as distributor is essential to the retailer and will remain entrenched. The Group will continually develop and upgrade new, innovative products to strengthen the foundation of its middle-man status. Many merchants have limited cash flow; however, utilising the Group's vending solutions allows them to vend products and services which they previously could not afford. The lack of affordability was due to various complexities, such as managing stock levels, obsolescence, pilferage at store level, the inability to order small quantities and access to limited stock ranges.

In addition the introduction of a growing suite of products necessitates that the Group not only excels in the sourcing, management and delivery of these products and the management of relationships in its merchant base, but simultaneously delivering an excellent supporting back-office capability – including the ability to deliver and manage reconciliation and settlement on behalf of its customers, extensive and professional merchant support services, and deep technology support for online and integrated systems. These competencies make it even more difficult for the Group to be disintermediated, because of the significant value that it provides to merchants, not only in the products and services that it delivers, but also in respect of the increasingly complex back-office support functionality required to deliver such services.

The Group is an aggregator and an enabler to both its customers and suppliers.

Without a distributor, every one of the four mobile operators and around 200 utilities across South Africa would need to deploy a device linked to technology at every merchant in the country, in order to provide the same access and level of service as that of which the Group has to offer.

In comparison to the amount of commission the mobile network operators afford the Group for distribution, it would be more costly to them and they would not be able to provide the same level of service if they were to do it themselves. In addition, the Group provides the capex, field support, R&D and call centre services to the merchant base.

Disaster recovery and continuity of business

The Group has developed proprietary technology supporting the roll out of its bouquet of products and services. Its infrastructure connects into some of South Africa's major banks, public and private utility companies and telecommunication operators. In addition, the Group switches both debit and credit cards, electronic funds transfer transactions and e-token products on behalf of the country's leading retailers and petroleum companies. The effective and continuous operation of this infrastructure is critical to the Group's service delivery.

Management recognises the importance assigned to IT in its corporate governance systems. The Group's business continuity and disaster recovery plan provides guidance for emergency and crisis management, business unit recovery and technology disaster recovery. The latter includes the restoration of IT facilities. The plan describes the IT framework and procedures to be activated in the event of a disaster.

The major goals of the plan are to:

• minimise interruptions and limit damage to normal operations;
• minimise the economic impact of the interruption;
• establish alternative means of operation in advance;
• train personnel on emergency procedures;
• provide for rapid restoration of service, ensuring availability/continuity of critical business operations; and
• communicate appropriately to relevant stakeholders.

Investments in Cell C and the 3G Mobile group

The investment of R5.5 billion in Cell C and R1.9 billion in the 3G Mobile group represent a significant percentage of the market capitalisation of Blue Label Telecoms.

The failure of Cell C would not only negatively impact the investment therein, but would have a compounded effect on the 3G Mobile group, in that a significant portion of its profitability stems from its trading relationship with Cell C.

In order to contribute to the success of Cell C, Blue Label has representation on the board of directors, which will afford it complete oversight of the performance of the Company and ensuring that the agreed strategy is adhered to.

The above contributions, combined with the major reduction in interest-bearing debt and foreign exchange exposure thereto, are all positive indicators for sustainable success in longevity.