Commentary

Headline earnings per share increased by 15% to 42.73 cents. This growth was achieved in spite of the Group’s share of losses in Blue Label Mexico increasing by R14.5 million, negatively impacting on growth in headline earnings per share by 2.17 cents.

The growth in earnings was primarily attributable to increases in revenue of 14%, gross profit of 11% and EBITDA of 20%. Gross profit margins increased from 7.48% to 7.62% on exclusion of imputed IFRS interest adjustments. The growth in margins was achieved through the efficient application of cash resources to bulk inventory purchases at favourable discounts, early settlement supplier discounts, an increase in commissions earned on the distribution of prepaid electricity and compounding annuity income.

The South African distribution segment continues to be the predominant contributor to Group profitability through the expansion of its offerings into its multitude of distribution channels. It is a reliable aggregator for several suppliers, supported by a responsive service. Its reputation continues to be one of trust and reliability.

The recently acquired Retail Mobile Credit Specialists (RMCS) and Viamedia, both performed according to expectations in enhancing Group profitability.

The secure and safe banking and financial services provided by Oxigen Services India, continue to gain momentum with deposits reaching USD2.7 million per day at the interim stage. It has become the largest provider in India of domestic money remittances on the Interbank Mobile Payment Service network, a platform provided by the National Payments Corporation of India.

BASIS OF PREPARATION

The condensed consolidated interim financial statements have been prepared in accordance with the JSE Limited Listings Requirements, the presentation and disclosure requirements of IAS 34 – Interim Financial Reporting and the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Reporting Pronouncements as issued by the Financial Reporting Standards Council. The condensed consolidated interim financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and the requirements of the Companies Act of South Africa.

These condensed consolidated interim financial statements have been prepared in accordance with the going concern principle, under the historical cost convention, except for certain financial and equity investments which have been measured at fair value. The accounting policies and methods of computation are consistent with those applied in the annual financial statements for the year ended 31 May 2014 and with those applied in the previous condensed consolidated interim financial statements, with the exception of the standards that are effective for the first time in the current period. These have been disclosed in note 1 to the consolidated annual financial statements for the year ended 31 May 2014. These standards have not had a significant impact on the interim financial statements.

We aim to provide stakeholders with the same additional information that management uses to evaluate the performance of the Group’s operations.

Accordingly, we make reference to gross profit, as well as operating profit before depreciation, amortisation and impairment charges (EBITDA) excluding imputed IFRS interest adjustments.

In addition, the Group applies core net profit as a non-IFRS measure in evaluating the Group’s performance. This supplements the IFRS measures. Core net profit is calculated by adjusting net profit33 for the year with the amortisation of intangible assets that arise as a consequence of the purchase price allocations completed in terms of IFRS 3(R): Business Combinations.

The results have not been reviewed or audited for the period ended 30 November 2014.

SEGMENTAL REPORT

South African distribution

		Unaudited 30 November 2014 R’000		Unaudited 30 November 2013 R’000	Growth R’000	Growth
Revenue		10 157 038		8 923 465	1 233 573	14%
Gross profit		696 195		621 463	74 732	12%
EBITDA		507 718		448 264	59 454	13%
Core net profit		347 668		307 835	39 833	13%
Gross profit margin		6.85%		6.96%
EBITDA margin		5.00%		5.02%

The increase in revenue by 14% was predominantly achieved through access to additional channels of distribution. Revenue generated on “PINless top-ups” increased by R468 million from R721 million to R1.189 billion. As only the commission earned thereon is accounted for, the effective growth in Group revenue equated to 18%.

Net commissions earned on the distribution of prepaid electricity increased by R12 million to R79 million (18%) on revenue of R5.3 billion generated on behalf of the utilities.

The gross profit increase of 12% was achieved after inclusion of imputed IFRS interest adjustments. On exclusion of these adjustments for the current period and the comparative period, gross profit increased by R107 million, equating to an effective growth of 18%. Similarly the impact on gross profit margins on exclusion of imputed IFRS interest adjustments equated to a growth from 6.62% to 6.85%.

The growth in EBITDA of 13% was inclusive of the effects of imputed IFRS interest adjustments. On exclusion of these adjustments, a more representative growth of R92 million was achieved, equating to a 22% growth, with EBITDA margins increasing from 4.69% to 5.01%.

Core net profit increased by 13% after an increase in finance costs and non-controlling interests. The increase in finance costs was congruent with the application of cash resources to acquisitions, dividends paid, bulk purchasing transactions and early settlement discounts.

International distribution

		Unaudited 30 November 2014 R’000		Unaudited 30 November 2013 R’000	Growth R’000	Growth
EBITDA		(4 511)		(9 790)	5 279	54%
Share of (losses)/profits from associates and joint ventures		(42 128)		(30 285)	(11 843)	(39%)
– Ukash		7 379		6 937	442	6%
– Oxigen Services India		(666)		(3 537)	2 871	81%
– Blue Label Mexico		(45 194)		(30 709)	(14 485)	(47%)
– Other		(3 647)		(2 976)	(671)	(23%)
Core net loss		(45 881)		(37 809)	(8 072)	(21%)
– Equity holders of the parent		(39 666)		(30 132)	(9 534)	(32%)
– Non-controlling interests		(6 215)		(7 677)	1 462	19%

The positive movement in EBITDA of R5.3 million was mainly attributable to a decline in expenditure on legal fees from R10.5 million to R7.3 million incurred by Africa Prepaid Services Nigeria (APSN) and a decline in employee costs by R1.4 million. These costs will not perpetuate as the litigation has been settled.

The share of net losses from associates and joint ventures comprised the following:

Ukash

The Group’s share of profits in Ukash, after the amortisation of intangible assets, increased by 6% from R6.9 million to R7.4 million. During November 2014, an agreement was signed whereby Blue Label Telecoms will dispose of its interests in Ukash. Completion of the transaction will take place after receipt of the necessary regulatory approvals.

Oxigen Services India

The Group’s share of losses declined from R3.5 million to R0.7 million, after the amortisation of intangible assets of R0.7 million. This positive turnaround was attributable to increases in revenue by 16% and gross profit by 36%, reported in their local currency.

The benefits of Oxigen Services India’s defined strategy of becoming India’s first non banked mobile wallet that empowers the unbanked masses to instantly transfer and receive cash across the entire country are clearly evident in its turnaround into

profitability. This has been primarily due to its shift in strategy to a focus on money transfer services without detracting from its airtime sales.

Daily money transfer deposits have increased from USD1.2 million per day in the comparative period to USD2.7 million per day in this reporting period, increasing exponentially through its connectivity with the National Payment Corporation of India.

Blue Label Mexico

In the comparative period, Blue Label Mexico incurred losses of R67 million, inclusive of a subsidy receipt of R32 million from trade partners. The Group’s share of losses in the comparative period equated to R31 million after the amortisation of intangible assets. In the current period, Blue Label Mexico’s losses increased to an equivalent of R95 million, of which R5 million was attributable to negative foreign exchange movements. The Group’s share of losses equated to R45 million of which R2 million pertained to these foreign exchange movements.

In spite of revenue increasing by 20%, the main reasons for further losses were attributable to continued margin compression and an increase in overhead costs. The increase in overheads was necessitated by a continued roll out of point of sale devices as well as ancillary support services.

Although Blue Label Mexico has made significant progress in establishing points of presence, as well as strategic alliances with all Telco networks, VISA, Banamex and various FMCG suppliers, the benefits of these initiatives are only expected to manifest themselves in the future.

Mobile

		Unaudited 30 November 2014 R’000		Unaudited 30 November 2013 R’000	Growth R’000	Growth
Revenue		95 248		80 749	14 499	18%
Gross profit		61 138		56 436	4 702	8%
EBITDA		20 241		18 927	1 314	7%
Core net profit		11 951		14 172	(2 221)	(16%)

This segment comprises Cellfind, Panacea Mobile, Blue Label Engage, Blue Label One, Simigenix and the recently acquired Viamedia.

Viamedia, which was acquired with effect from 1 September 2014, together with Blue Label One made positive contributions to growth in revenue, EBITDA and core net profit.

Their contributions to EBITDA growth were R15.6 million and R6 million respectively. Their combined contributions were offset by negative growth in EBITDA of R20 million in the balance of the companies comprising this segment. Margin compression on bulk SMS distribution by Cellfind and Panacea was the main factor causing their negative contributions to growth.

At core net profit level, positive contributions to growth by Viamedia of R8.5 million and Blue Label One by R4.4 million were negated by net negative growth contributions of R15.1 million by the balance of the companies comprising this segment.

Solutions

		Unaudited 30 November 2014 R’000		Unaudited 30 November 2013 R’000	Growth R’000	Growth
Revenue		75 106		74 808	298	0%
Gross profit		30 451		32 166	(1 715)	(5%)
EBITDA		18 122		17 264	858	5%
Core net profit		7 770		9 257	(1 487)	(16%)

The Solutions segment houses Blue Label Data Solutions (BLDS), Forensic Intelligence Data Solutions, Datacision, Blue Label Call Centre, Velociti and CNS Call Centres. BLDS contributed R14.5 million to EBITDA and R7 million to core net profit.

Corporate

		Unaudited 30 November 2014 R’000		Unaudited 30 November 2013 R’000	Growth R’000	Growth
EBITDA		(25 607)		(43 201)	17 594	41%
Core net loss		(32 200)		(50 054)	17 854	36%

The decline in negative EBITDA and core net loss was primarily attributable to a once-off income receipt.

DEPRECIATION, AMORTISATION AND IMPAIRMENT CHARGES

Depreciation, amortisation and impairment charges increased by R12.1 million of which R10 million pertained to the amortisation of intangible assets emanating from the acquisitions of RMCS and Viamedia.

NET FINANCE COSTS

Finance costs

Finance costs totalled R100 million, of which R29 million related to interest paid on borrowed funds and R71 million to imputed IFRS interest adjustments on credit received from suppliers. On a comparative basis, interest paid on borrowed funds was R7 million and the imputed IFRS interest adjustment equated to R74 million. Interest paid on borrowed funds was attributable to the cost of financing bulk inventory purchase transactions and early settlement payments attracting discounts, for which facilities were utilised and repaid during the current period.

Finance income

Finance income totalled R91 million, of which R15 million was attributable to interest received on cash resources and R76 million to imputed IFRS interest adjustments. On a comparative basis, interest received on cash resources amounted to R16 million and the imputed IFRS interest adjustment to R54 million. The decline in interest received was attributable to the utilisation of funds on hand for the payment of dividends, acquisitions, bulk inventory purchase transactions and early settlement discounts.

STATEMENT OF FINANCIAL POSITION

Total assets increased by R384 million to R6.9 billion, of which growth in non-current assets accounted for R332 million and current assets for R53 million.

The increase in non-current assets was mainly attributable to a net growth in intangible assets and goodwill totalling R324 million, to capital expenditure net of depreciation of R13 million and to investment in associates and joint ventures of R21 million.

The increase in intangible assets and goodwill mainly related to the acquisition of Viamedia, of which goodwill equated to R193 million and intangibles R135 million. A further R58 million was incurred for the purchase of software, starter pack bases and a distribution channel. Amortisation of intangibles amounted to R63 million.

The increase in investment in associates and joint ventures was predominantly due to an additional R50 million capital contribution to Blue Label Mexico, movement in loans of R15 million, comprising of interest capitalised of R6 million and unrealised foreign exchange gains of R9 million. These increases were off-set by a share of net losses incurred of R43 million and a negative impact of R1 million in foreign currency translation reserves.

The net increase in current assets mainly comprised an increase in accounts receivable of R312 million and an increase in inventories of R529 million congruent with bulk inventory purchases. Cash resources declined by R796 million in line with the application of cash to fund the increase in assets and payment of dividends.

Although the stock turn increased from 26 days at year end to 35 days in the short term, the discount afforded thereon justified this additional inventory holding.

The debtors collection period, equating to 40 days at year end, increased to 44 days at the interim stage.

The net profit attributable to equity holders of R284 million, less a dividend of R182 million, resulted in retained earnings accumulating to R2.3 billion.

Trade and other payables increased by R220 million with credit terms averaging 59 days.

STATEMENT OF CASH FLOWS

Investment in excess inventory resulted in a negative cash generation of R304 million from operating activities. The nature of inventory is one of a highly liquid commodity.

R287 million was applied to investing activities, of which R50 million related to the additional investment in Blue Label Mexico, R144 million to the acquisition of Viamedia, R59 million to the purchase of intangible assets, R32 million to capital expenditure and R5 million to loans granted.

After applying R19 million to the acquisition of treasury shares and a dividend payment of R185 million to shareholders and non-controlling interests, the balance of cash on hand amounted to R388 million.

FORFEITABLE SHARE SCHEME

Forfeitable shares totalling 3 124 234 (2013: 3 014 847) were issued to qualifying employees. During the period 6 084 (2013: 462 283) shares were forfeited and 3 819 408 (2013: 3 629 922) shares vested.

LITIGATION UPDATE

The arbitration proceedings between APSN and the former subsidiary of Telkom SA SOC Limited (Telkom), Multi-Links Telecommunications Limited (Multi-Links) have been settled.

The litigation action in the High Court of South Africa between Telkom and Multi-Links, on the one hand, and Blue Label, Africa Prepaid Services, APSN and certain individuals, on the other, has been settled.

In terms of the settlement agreement all claims and counterclaims have been withdrawn and all of the parties have agreed that they will have no further claims against one another arising out of the disputes forming the subject of both the arbitration proceedings and the action, including any claims for costs.

PROSPECTS

Oxigen Services India is poised to address the next stage of its growth cycle by increasing its share of domestic and international remittances. It is able to facilitate banking, money transfer transactions and instant payments within the convenient reach of people via secure proprietary technologies. As the considered pioneer in the establishment of a retail payment eco system based on GPRS point-of-sale devices, PCs and mobile phones, OSI is well placed to provide remittance capabilities to 450 000 unbanked villages in India.

TicketPros, a ticketing provider and proud partner of premium sporting events in South Africa, has expanded on its existing service channels of ticketing to concerts, music festivals, hospitality and transport. Proprietary technology facilitates the provision of a myriad of added benefits to ticket purchasers, which afford it a competitive edge in the market place.

Acquiring, which is the ability to process credit and debit card payments for products and services on behalf of merchants, is set to gain momentum as a result of the establishment of successful alliances with various financial institutions. This will enable consumers to transact at store level through the multitude of points of presence that Blue Label has deployed both locally and internationally.

The prevalence of prepaid water meters is following in the footsteps of the prepaid electricity model. Installation of meters by third parties, supported by state-of-the-art software, has enabled Blue Label to enter into the prepaid water arena. Vouchers can now be purchased by consumers at the multitude of points of presence that it has established. Existing relationships with several municipalities will enable it to replicate its prepaid electricity model, given the quality of service that it has provided them with on the prepaid electricity side to date.

Blue Label Mexico will continue to grow its points of presence network in pursuit of its strategy of enhancing its products and service offerings, including transactional revenue. As opposed to being confined to one network, it has taken the initiative of becoming a multi-carrier which should enhance earnings.

POST BALANCE SHEET EVENTS

Subsequent to the period under review, The Prepaid Company concluded an agreement to acquire a starter pack base for an amount of R31 million.

APPRECIATION

The board of Blue Label Telecoms would once again like to express its appreciation to its suppliers, customers, business partners and staff for their ongoing support and loyalty.

For and on behalf of the board

LM Nestadt	BM Levy and MS Levy	DA Suntup* CA(SA)
Chairman	Joint Chief Executive Officers	Financial Director

17 February 2015

* Supervised the preparation of the Group’s interim results.