Integrated Annual Report 2020

The Prepaid Company is the leading distributor of prepaid airtime and data on behalf of the main South African mobile network operators. It facilitates, manages and maintains the distribution of airtime, data and starter packs. Relationships with each of the network operators are crucial to the success of the business.

The Prepaid Company is responsible for supplier agreements and procurement on behalf of the Group, including wholesale and community sales, starter packs, handsets, tablets and fulfilment of bulk airtime printing capabilities to its merchants. The wholesale market is declining in excess of 5% per annum as customers are changing their buying habits from the traditional airtime purchases to Pinless top-ups.
The COVID-19 pandemic has accelerated this process with the move away from traditional wholesale markets as customers increasingly opt to purchase through digital channels. From an internal perspective, much of TPC's traditional formal retail customer base is now being managed by Blue Label Distribution (BLD), as the Group focuses on customer centricity.

TPC's approach is to continuously focus on efficiencies, gross profit margin accretion and to assist BLD in expanding its informal market channel by specifically concentrating on community channels, stokvel groups, churches and BLD's hub and spoke strategy. We are able to design bespoke incentivisation products for these communities that offer value for money and assist in decreasing churn.

BLD provides electronic products and services throughout South Africa through its extensive distribution channels. These encompass, but are not limited to, banks, retailers, spaza shops, informal traders and petroleum forecourts. We aim to stimulate and contribute to financial inclusion by providing convenient digital transacting solutions to all.

Our technology provides our customer base with an efficient and user-friendly interface, enabling the sale of products and services through the integration of various hardware solutions. These devices and integrations allow for the continued growth of an ever-expanding base of products, as well as functionality which is constantly refined to empower traders into the future.

Penetration into the informal market continues to be a driver of growth. Aligned to our aspirations of financial inclusion, we are intent on continuing this penetration in an expedient and controlled fashion. BLD registered a 58% growth in new informal traders for the ended 31 May 2020.

As a further key driver of sustainability in business, BLD is firmly committed to upskilling and competence development of its trading base. With each device placement, traders and staff are trained and allocated fit-for-purpose marketing material aligned to their chosen product set.

The resultant quality in execution is evidenced in trader revenue growth up to an average that exceeds key competitors within the market. The 2020 financial year has seen strong growth of financial services products within the informal market, with a continuous shift from traditional retail outlets towards digital channels such as banks.

Our commitment to customer service is paying dividends. We have full line of sight of the challenges that they face and we continue to address such challenges on an ongoing basis through our insourced Customer Interaction Centre. The Centre provides intelligent analysis of trading patterns and usage, allowing us to identify further opportunities for growth.

BLD will maintain this focus on growing product throughput and improving customer service in 2021. The business unit is able to take advantage of the new technical platforms provided by our information technology division that embed Blue Label's entrepreneurial culture and agile practices and improves our ability to execute on strategic growth objectives. Increased scale and agility allows for delivery across multiple channels, while expanding our base of customers. It also enables us to continue to offer additional products and services more rapidly. BLD continues to drive a growth mind-set while remaining true to our customer-centric approach.

Ticketpro is a vital element in securing distribution contracts. The ability to offer our customers access to exclusive transport services, sporting events and entertainment is exceptionally attractive to merchants in terms of being a "magnet for foot traffic" to their customers. Ticketpro was on track to have its most profitable year during the 2020 financial year, until COVID-19 struck, crippling this specific industry. Despite this major setback, Ticketpro has utilised the time to rebuild and technically develop new and improved systems and infrastructure. We will continue to expand the ticketing footprint in South Africa. Ticketpro has also launched an online streaming events platform, namely COVID Zero, in order to maintain relevance and to provide artists and fans with a platform to share and enjoy such content safely. COVID Zero empowers entertainers and raises funds for charities to provide less fortunate South Africans with face masks, hand sanitisers and food parcels.

In November 2020, we intend to launch South Africa's first truly all in one fan-based "experience" platform – innovating the event industry. We will provide:

• Online streaming
• Cashless payment solutions
• Wireless event-based connectivity
• NFC transport technology, ensuring safe and secure commuter travel

In total, Ticketpro has more than eight new innovative products on its platform and we look forward to the end of COVID-19 and being able to assist in entertaining all South Africans by providing expanded "ticketing" services for large public sporting and entertainment events.

Cigicell provides municipalities in South Africa with revenue collection and revenue assurance solutions.

Revenue collection

Cigicell is the leading distributor of prepaid electricity and water tokens in South Africa. It also offers municipal customers the ability to pay their rates and taxes or traffic fine accounts via convenient retail and banking channels. In the 2020 financial year Cigicell increased electricity sales by an impressive 13% to R22.7 billion. The COVID-19 lockdown assisted in stimulating electricity sales as more people worked from home.

Revenue assurance

Cigicell also offers financially distressed municipalities across South Africa a revenue assurance ecosystem, which encompasses a variety of solutions including debt funding and funding of metering infrastructure requirements. Cigicell prides itself on an efficient treasury function to support its projects on a national basis.

As we sign on more municipalities around the country, we will reinforce our service levels by hiring highly skilled metering specialists and relationship managers, in order to ensure that we maximise the potential of our solutions for all our customers. Municipalities are confident that they are receiving the best advice available and trust us to collect, protect and enhance their revenue. Cigicell employs local semi-skilled and skilled people in the targeted municipalities, thereby positively impacting the local economy. Cigicell is continuously advancing its business processes, software and hardware to complement its processes, focusing on efficiency, sustainability and scalability.

The Comm Equipment Company (CEC) provides funding for the handset element of Cell C's post-paid subscriber contracts. All monies from the Cell C customer, including service revenue, interest charges and handset fees are paid into an escrow account. After subtracting the CEC interest charge and handset fee, the remaining revenue is remitted to Cell C. Cell C is responsible for any bad debt that may arise. CEC provides a similar service for the funding of DStv decoders.

In the 2020 financial year, CEC decreased its interest- bearing borrowings by R950 million to a balance of R716 million as at 31 May 2020.

Glocell Distribution was acquired to complement our distribution strategy. Glocell's core strategy is in the distribution of starter packs through its established channels. In the current year, the company experienced unfavourable trading conditions, with specific reference to starter packs, exacerbated by the impact of COVID-19. Measures are in place to enhance its contribution to Group profitability.

Blue Label Connect distributes tailor-made hybrid top-up airtime and data contracts on behalf of all major South African cellular network operators. These contracts comprise either a SIM-only package or alternatively a hybrid of airtime bundled with mobile phones, tablets and accessories.

Blue Label Connect, through its over-the-air mobile platform, enables its partners to extend their customers' offerings into the digital space to maximise customer convenience. Its cost-effective mobile platforms enable customers to purchase tailor-made products and services utilising their mobile phones. The company experienced challenging economic conditions, an unfavourable trading environment, margin compression as a result of reduced incentives from the mobile networks and an increase in product costs, exacerbated by COVID-19.

Blu Nova has become one of the leading practitioners of data and decision science in South Africa. We have deployed a state of the art decision engine which is supplying intelligent data leads and has assisted in securing new business.

Cell C's turnaround strategy, based on the three drivers below, is resulting in positive change in the business with a view to Cell C becoming a lean, agile and highly responsive business.

• Liquidity platform: this was put in place to manage cash flow within the business and to see Cell C through the recapitalisation process.
• Network strategy: implementation of the extended roaming agreement with MTN commenced on 1 May 2020 which enables network innovation, promotes efficient network infrastructure utilisation and sustainable investment in network infrastructure.
• Operational rationalisation: the company has taken active steps to reduce its focus on pure revenue and subscriber growth to focus on profitable, long-term growth. There is an unrelenting focus on cost-cutting and there is a change in the operating model from build, own and operate all functions to focused investment, partnering and an acquirer of services.

Cell C has deliberately decreased its subscriber base by 28% over the 12 months to end May 2020, taking total subscribers down to 11.8 million. In spite of this, service revenue only declined by 2% to R13.9 billion. By rightsizing the customer base and focusing on profitable customers, Cell C achieved a 10% increase in EBITDA to R3.7 billion.

The turnaround strategy is clearly delivering improved operational efficiencies with the positive impact of these changes filtering through during the latter six months of the reporting period.

Cell C's recapitalisation is a complex restructure given the multiple stakeholders involved. Progress is being made in this regard and stakeholders will be updated in due course.

Please click here https://www.bluelabeltelecoms.co.za/inv-results-updates-cellc.php to access Cell's C presentation
for the 12 months ended 31 May 2020.

We maintain our strategic drive towards improving customer centricity within our operating model, underpinned by partnership, collaboration, prioritisation and alignment according to the Group's RITE (Reach, Innovation, Trust and Efficiency) strategy.

Significant effort has been applied to our technology over the 2020 financial year. We are accelerating innovation, go-to-market strategies and digital enablement. We are fintech specialists enabling financial inclusion through platform innovation. By entrenching our entrepreneurial culture and agile practices, our ability to execute on strategic growth objectives has improved.

We have deployed innovative tokenised products: food vouchers with cash redemption; virtual vouchers for partner redemption (BluVoucher) and airtime (Ringas) with consumer-ready digital redemption mechanisms (USSD, Online). We have expanded consumer convenience with universal bus flows and new carriers for long-haul bus transport. In addition, we have deployed hyper-automation and RPA technologies to assist the merchant and consumer experience. The software development stack has been expanded with low-code, no-code application development functions in order to fast-track our go-to-market strategies.

We continue to expand our digital solution footprint with active POPs (Points of Presence) in the main market, retail and petroleum channels.

We have launched payment mechanisms into trusted consumer apps to purchase VAS products as well as to create the ability to white label our core technology offerings and deployed consumer applications to specific communities with content and bespoke service requirements.

IT security, risk and compliance are essential to Blue Label and our customers. We have concentrated specifically on scalability and platform refactoring.

• Optimal scalability was achieved for high-speed throughput.
• We have expanded hybrid-cloud strategy which enables uptime of business-critical applications.
• We have invested in infrastructure and software to improve stability and ensure future capacity.
• We have simplified integration mechanisms deployed as restful APIs, on a roadmap towards an open integration gateway and marketplace.

We have also invested in significant additional redundancy for improved stability and business continuity. Active-active was deployed with transactional success rates and uptime increasing to beyond 99% and transactional volume growth sustained at over 20% per annum. There has been a 71% reduction in production defects from prior years.

We have deployed a new framework for cybersecurity and governance – this is vital for customer confidence. Security vigilance, POPIA, GDPR, ECT Act compliance and vulnerability checks have been entrenched into our approach to enable our data-driven business model. Increased cybersecurity investments have resulted in a zero impact, reliable ecosystem of platforms in our landscape.

BLDS is one of the market leaders in consumer data, big data, validation, verification, cleansing of data and lead generation. BLDS is accredited by the Direct Marketing Association of South Africa, of which it is a founding member.

The decline in revenue of 7% to R189 million was attributable to lower demand for aggregated data and lead generations
as a result of COVID-19 restrictions, which impacted the call centre operations during the lockdown period. Although revenue declined, gross profit margins increased from 30.45% to 30.74%, limiting the decline in gross profit to R4 million (6%). After an overhead decline of 21%, EBITDA increased by R3 million (7%) to R40 million. Of the core headline earnings of R41 million, BLDS accounted for R24 million. UCCS generated earnings of R39.6 million, of which the Group's share thereof amounted to R16 million.

We have placed significant effort in assisting our agents to work from home during the lockdown period. We are looking at having between 50% to 65% of our agents working offsite within 12 months.

In the 2020 financial year we strengthened inhouse compliance and legal expertise in order to address the POPIA, CPA and other consumer protection legislation. We are fully equipped to implement the Protection of Personal Information Act and the likes thereof. COVID-19 has been extremely disruptive and has forced us to take a hard look at our business methodologies. We have had to be innovative to reduce the cost of acquisition which bodes well for the future.

Our IT and technical prowess have stood us in good stead during the disruption caused by COVID-19 and is the key to future acceleration of our digital innovation.

Blue Label Mexico successfully implemented a turnaround programme based on people, processes and technology.

Losses in Blue Label Mexico declined from R47 million to R9 million, of which Blue Label's share amounted to R5.8 million after the amortisation of intangible assets. In the comparative year, the Group's share of losses amounted to R24 million.

Although its revenue declined by R451 million (12%) from R3.6 billion to R3.2 billion, gross profit increased by R9 million (6%) underpinned by an increase in gross profit margins from 3.83% to 4.66%. Operational expenditure declined by 12%, through the implementation of significant cost-saving initiatives. The resultant EBITDA increased by R31 million from a negative R23 million to a positive R8 million.

The Group has recently concluded an agreement to dispose of its 47.56% interest in Blue Label Mexico in order to focus its efforts on the South African distribution businesses and to deleverage the Group in order to ensure a more robust and liquid balance sheet going forward.

The investment in OSI was fully impaired as at 31 May 2019. Please refer to note 2.1 of the Group annual financial statements for a full report on the financial implications.

Local management remains committed to identifying potential investors into this business and we will report further on any success in this regard.