Commentary

Financial review

The financial results for the period ended 30 November 2011, reflected a once off income receipt of R79,4 million that was received in October 2011. The once off income receipt is excluded for the purposes of representing the performance of the group during the period under review; headline earnings per share of 34,78 cents equated to a growth of 26%. These results were achieved through a growth in revenue to R9,5 billion, an increase in gross profit by 9% to R644 million, supported by gross profit margin increases from 6,38% to 6,80% as well as the reduction in issued shares as a result of the purchase of Microsoft’s 12% shareholding in the group in December 2011.

The vending of “pinless top ups” was introduced as an additional mechanism for the distribution of prepaid airtime during the comparative period. Only the gross profit earned thereon is included in group revenue as opposed to the gross revenue generated from transactions of this nature. These sales increased from R7 million to R411 million. The inclusion of this revenue in group revenue would effectively result in a growth in total group revenue of 7%.

The increase in gross profit included the exponential growth in commissions earned on the distribution of prepaid electricity as well as compounding annuity revenue earned from starter packs. Furthermore, the healthy cash resources enabled the group to enter into bulk inventory purchase transactions totalling R1,5 billion, at favourable discount rates.

The South African distribution segment remains the predominant contributor to group earnings. On the international front, Ukash continued to increase profitability whilst Oxigen Services India (“OSI”) and Blue Label Mexico (“BLM”) incurred losses.

Cash flows generated from operating activities, before the bulk inventory purchase transactions of R1,5 billion, amounted to R566 million. Post these transactions, the net movement in inventory by R1,3 billion, resulted in a negative cash flow from operating activities of R723 million. The statement of financial position, reflecting capital and reserves of R3 billion, remains robust and liquid.

Financial overview

• Revenues increased to R9,5 billion.
• Gross profit increased by R54 million to R644 million supported by margin increases from 6,38% to 6,80%.
• Overheads increased by 14%.
• EBITDA increased to R372 million equating to a growth of 4%.*
• Headline earnings increased by 10% to R230 million.*
• Headline earnings per share increased by 26% from 27,70 cents* to 34,78 cents per share.
• On inclusion of the once off comparative receipt, headline earnings per share declined by 5% from 36,74 cents to 34,78 cent
  *On exclusion of the once off income receipt of R79,4 million in the comparative period.

Basis of preparation

The condensed consolidated interim financial information has been prepared in accordance with the requirements of Section 8.57 of the JSE Limited Listings Requirements and the presentation and disclosure requirements of IAS 34 Interim Financial Reporting and the AC500 standards as issued by the Accounting Practices Board. The condensed consolidated interim financial information has been prepared in accordance with International Financial Reporting Standards (“IFRS”) and the requirements of the Companies Act of South Africa.

This interim financial information has 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 2012, 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 annual financial statements. These standards have not had a significant impact on the interim financial information.

In addition, the group uses 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 profit 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 2012.

Segmental report

South African distribution

Prepaid airtime, annuity revenue generated from starter packs and commissions earned on the distribution of prepaid electricity, accounted for a 2% increase in revenue. This excluded growth of R404 million in sales of pinless top ups, the gross profit thereon only being accounted for as revenue. The effective growth in revenue therefore equated to 7%.

Commissions earned on the distribution of prepaid electricity amounted to R53 million (2011: R41 million), equating to revenue generated on behalf of utilities of R3,5 billion (2011: R2,7 billion). Gross profit increased by R55 million (11%), supported by margin increases from 5,54% to 5,99%. Commissions on prepaid electricity accounted for 0,11% of this margin increase. On exclusion of IFRS adjustments, margins increased from 5,24% to 5,75%.

The growth in EBITDA of 11% was inclusive of the effects of IFRS adjustments. On exclusion of these adjustments in both the comparative and current period, a more representative growth of R47 million was achieved, equating to a 13% increase.

International distribution

*Represents loss after taxation and non-controlling interests in Africa Prepaid Services Nigeria.

Historical revenue and gross profit were generated by SharedPhone International, which was disposed of in January 2012.

The decline in EBITDA of R23 million was predominantly representative of costs incurred on the ongoing litigation pertaining to Africa Prepaid Services Nigeria (“APSN”) and a decline in foreign exchange gains relating to loans to OSI.

The comparative losses from discontinued operations pertained to the winding down of APSN.

The group’s objective in the international segment is to partner with local management in the countries in which it operates. These partnerships result in its international operations being equity accounted for. The group’s current active international operations, namely, Ukash, Oxigen Services India and Blue Label Mexico are disclosed accordingly under share of losses from associates and joint ventures.

The share of these net losses comprised the following:

Ukash

The group’s share of profits in Ukash, after the amortisation of intangible assets, increased by 92% to R4,4 million. These results were achieved on organic growth in revenue by 28%, an increase in gross profit by 35% and EBITDA growth of 33%, all reported in their local currency.

Oxigen Services India

Blue Label’s share of losses declined to R2,5 million against losses of R4,4 million in the comparative period. Revenue increased by 16% resulting in a positive EBITDA, all reported in their local currency.

When comparing the performance of OSI to the six months ended 31 May 2012, revenue declined by a melded 2%. This was due to the necessity to upgrade its information technology systems to a more robust and scalable platform. In addition 10 500 terminals were replaced on a piecemeal basis with more advanced equipment. This process resulted in a temporary decline in retail sales. Costs incurred in this transition process resulted in a decline in EBITDA over this period.

The focus on the above, compounded by the necessity to employ and train 200 field sales executives to cover the expansive urban and rural India, which impacted negatively on its operating profits.

Blue Label Mexico

In the comparative period BLM incurred losses of R20 million of which the group’s share of 40% equated to R8,5 million after the amortisation of intangible assets. In the current period BLM’s losses increased to R52 million. In October 2012, BLT increased its shareholding from 40% to 45%. The group’s melded share of losses for the period equated to R23 million.

The losses in Mexico were primarily attributable to an increase in overhead costs, necessitated by its aggressive roll out of point of sale devices and ancillary support required thereon. At the end of the reporting period the number of point of sale devices increased to 42 000 net of churn

Mobile

This segment comprises Cellfind, Blue Label One and Content Connect Africa. The comparative EBITDA includes the once off income receipt of R79,4 million. On elimination of this comparative receipt, the effective growth in both EBITDA and core net profit equated R10 million and R8 million respectively. This was achieved through an increase in revenue by 71% and an increase in gross profit by 47%. Content Connect Africa was disposed of in September 2012.

Solutions

The Solutions segment houses Blue Label Data Solutions (“BLDS”), Velociti and CNS Call Centres. BLDS contributed R15 million to EBITDA, equating to a growth of 34% on the prior period. This growth was negated by a negative EBITDA contribution by Velociti due to a substantial decline in outbound call centre campaigns. It is the intention to increase the volume of inbound activity in order to compensate for the outbound decline.

Technology

Technology losses are representative of the costs of development and support to the group’s Information Technology infrastructure. Income generation was limited to services to third parties.

Corporate

In spite of an increase in negative EBITDA by 11%, core net loss declined by 12%. This decline was mainly due to the change in legislation applicable to Secondary Tax on Companies (“STC”). No STC was payable on the dividends declared in the current period, whereas STC on dividends declared in the comparative period amounted to R11 million.

Depreciation, amortisation and impairment charges

Depreciation and amortisation of intangible assets declined by R6 million due to impairments of assets in the prior period. Amortisation of intangible assets in terms of purchase price allocations declined by R6 million in line with the expiration of useful tenure.

Net finance income

Finance costs

Finance costs totalled R91 million, of which R8 million related to interest paid on borrowed funds and R83 million to imputed IFRS interest adjustments on credit received from suppliers. On a comparative basis, interest paid on borrowed funds was R3 million and the imputed IFRS interest adjustment was R72 million. The increase in interest paid on borrowed funds was attributable to the bulk inventory purchase transactions of which facilities were utilised and repaid during the current period.

Finance income

Finance income totalled R91 million, of which R26 million was interest received on cash resources and R65 million pertained to IFRS adjustments. On a comparative basis interest received on cash resources amounted to R32 million and the imputed IFRS interest adjustment R54 million. The decline in interest received on cash resources was caused by the utilisation of funds on hand for the bulk inventory purchase transactions as well as by a reduction in interest rates by 0,5%.

Statement of financial position

Total assets increased by R345 million, of which R68 million was attributable to growth in non-current assets and R277 million in current assets.

The movement in non-current assets by R68 million was mainly attributable to investment in associates and joint ventures, of which R86 million related to an additional investment in BLM, set off by net losses of R22 million in associates and joint ventures.

The increase in current assets was primarily due to an additional inventory holding congruent with the bulk inventory purchases. These transactions were also the primary cause for the decline in cash resources. Although the stock turn consequently increased from an historical average of 11 days to 38 days in the short term, the discount afforded thereon justified this temporary excess in inventory holding.

Debtors collection period remained consistent at 26 days.

The net profit of R229 million less a dividend of R155 million as well as the movement of R35 million in foreign exchange translation reserves were the main contributors to the growth in capital and reserves.

Current liabilities increased by R286 million in line with the utilisation of extended credit available. Accordingly, the payment period to creditors increased from 37 days to 46 days.

Statement of cash flows

Cash flows of R566 million were generated from trading operations, of which R1,3 billion was applied to an increase in inventory, resulting in negative cash flows from operating activities of R723 million.

A further R107 million was applied to investing activities of which R86 million related to the additional investment in BLM, R12 million to capital expenditure and R7 million to acquisitions.

After the payment of dividends of R157 million to shareholders and minorities and the acquisition of treasury shares for R17 million, the cash on hand amounted to R970 million.

Forfeitable share scheme

Forfeitable shares totalling 3 881 276 (2011: 4 836 611) were issued to qualifying employees. During the period 434 061 (2011: 910 093) shares were forfeited and 2 700 512 (2011: nil) shares vested.

Prospects

A number of innovative financial services products, aimed at bringing financial inclusion and transactional value to customers, will be launched. These initiatives will benefit through the utilisation of BLT’s mobile systems and the leveraging of the group’s extensive distribution network. These additional financial services products complement the group’s existing prepaid products and enhance the value-proposition to the merchants and their customers.

Recently launched loyalty initiatives are expected to generate revenue through supporter engagement programmes, including communications, events, access-control and concessionary services that enhance service value to supporters. These programmes benefit from the latest Near Field Communication and mobile technologies to collect and process data beneficial to the customer experience.

SMS aggregation is expected to gain further momentum following the successful development of technology pertaining to this service and a strategic acquisition in this segment of the market.

Consumer awareness of the benefits of prepaid electricity is expected to continue and in turn impact favourably on commissions earned on the distribution of this product.

Oxigen Services India continues its drive into banking services initiatives in partnership with leading banks and financial institutions.

The group’s statement of financial position remains robust and liquid, which augurs well for future growth, acquisitions and distributions to shareholders.

Subsequent events

Airtime bases were acquired from Vo-Call Cellular Proprietary Limited and DNI 4PL Contracts Proprietary Limited for R108 million and R40 million respectively.

The above transactions were both concluded in January 2013.

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

*Supervised the preparation and review of the group’s interim results.