Ecocash boosts Econet revenues

MAY 08,2014.

THE HERALD.

Econet Wireless Zimbabwe will be focusing on investment, innovation and value creation going forward as a way of sustainably growing its business. Group chief executive Mr Douglas Mboweni told an analysts briefing on Monday that the company could only enhance revenue generation through pursuing these three areas.

"We are wired to create wealth but the main issue is that for us to achieve this we must ride on the current technology wave rather than fighting it," said Mr Mboweni.

"We will continue to invest but this time we will be investing on new technologies, selection and timing of investments."

Mr Mboweni said the way they would invest would be different from prior years where the focus was only on creating capacity. Instead the kind of investments that will be done will be focusing on what will be on demand in line with global trends.

"We cannot do without innovation and this is the only way we can be able to close the gap," said Mr Mboweni. Innovation, according to him, focused on ways to improve revenue through developing new products and services especially at a time when voice revenues have saturated.

Mr Mboweni also noted that Econet would focus on five pillars going forward and these are market leadership, revenue diversification, group synergies, business efficiency and stakeholder management.

"Through continuous investment in capacity building and new technologies, we intend to maintain our market leader position."

"Services such as broadband and overlay services are the future for Econet and this explains the reason why we are investing heavily on this area.

This is the next generation of services which we see as a way to diversify our revenue sources. As a business we have realised that we can't fight technology as you can only do that at your own peril," Mr Mboweni said.

Econet will continue to come up with new services on broadband and overlay services "to maximise on these areas and very soon you will see the return of EcoLife and EcoTracker. We will soon launch most of the products which are currently on pilot study and these are EcoFarmer and EcoSchool. The major reason for all these new exciting products on the line is because we are a solutions provider."

Mr Mboweni said stakeholder management was key for growth. "This is particularly key as we are now dealing with a number of regulators from the Ministry of Health, Agriculture, Potraz, Banking, Insurance and other more regulators as we grow," he said.

Giving an operational highlight, Mr Mboweni said subscriber growth rose by 10 percent to 8,78 million subscribers.

"We are still excited with this growth and we see the trend going up as we continue to invest." He added that subscriber growth was also witnessed in broadband and overlay services.

"A 31 percent growth in registered subscribers for broadband to 4,2 million customers was recorded whilst EcoCash subscribers grew by 67 percent to 3,5 million customers."

Econet's market share stood at 66 percent while the remainder was shared by the other two operators. He said the company was focussing on creating maximum value to customers.

"Multi-simming is definitely a rising issue specifically as you tap towards the lower end of the market. However, the development of overlay services is creating loyalty and will work towards defending this market share," he said.

On mobile penetration ratio, Mr Mboweni told the meeting that Zimbabwe was now among the fastest growing nations in sub- Saharan Africa with a ratio of 103 percent. He said Econet had been the major driver in putting Zimbabwe on the regional map.

"On market presence, Econet has covered most areas within the country except for national parks. We are also working on covering these national parks going forward," he said.

Mr Mboweni revealed that this huge presence had been achieved through over 20 000 individual entrepreneurs, 180 branded shops mainly EcoCash points, 10 000 agents and over 700 green kiosk countrywide. Further to this, 225 employed customer service agents at its call centre had supported its huge presence across the country.

Turning to the financial review, group chief finance officer Mr Roy Chimanikire revealed that revenue grew by 8 percent to $752,7 million. The 8 percent growth emanated mainly from broadband services, overlay services, Steward Bank and Mutare Bottling Company. Voice and SMS revenues did not contribute to this growth as they declined by 0,1 percent and 1,9 percent respectively. Of the total turnover, non-voice amounted to $139 million.

Broadband revenues grew by 62 percent to $72,4 million driven by increased data capable devices and investment in infrastructure.

Mr Chimanikire said broadband accounted for 10 percent of total revenue which is comparable to other emerging market operators.

"The low smart phone penetration presents a significant opportunity as well as access to credit through Steward Bank going forward."

EcoCash revenues on the other hand grew by a phenomenal 307 percent to $33,4million driven by product awareness, diversity of product range, strong agent network and alliance with banking partners.

"We expect MMT (Mobile monet transfer) services to grow while this service will remain a key value driver and will also assist us in subscriber retention and loyalty," he said.

EcoCash contributed 5 percent to revenue and business is now profitable despite having not yet reached its full potential.

Total costs rose by 11 percent to $436 million with the costs reflective of investment in new revenue streams. "We will be focussing on a cost rationalisation exercise with particular emphasis on network and IT cost optimisation, hybrid power systems to reduce fuel costs, supply chain management and centralised procurement as well as marketing and distribution costs," Mr Chimanikire added.

EBITDA grew by 10 percent to $332 million driven by the impact of financial services, data and other new revenue streams.

Mr Chimanikire highlighted that growth may continue to be witnessed as the full potential of these new revenue streams was yet to be realised. EBITDA margins subsequently rose to 44 percent which still is comparable to regional peers. "Considering our economic environment, we are still happy to have sustained these margins. We are in the top percentile among our peer operators in terms of margins."

After tax profits, however, declined from $139,9 million to $119,4 million due to an increase in depreciation and interest cost. Depreciation and amortisation rose to $101,7 million from $71,6 million impacted by amortisation of the new licence and additional investment.

A dividend of 1,29 cents was declared. "We are glad to declare this dividend after having paid off $137,5 million license renewal."

Further, he said the dividend cover will be dependent on prevailing circumstances hence "no stable dividend cover for now."

Capital expenditure declined by 5 percent to $140 million and this resultantly led to the capital expenditure to revenue ratio going down from 21 percent to 19 percent. Mr Chimanikire told the meeting that this ratio was comparable to other African peers.

Econet reduced its debt to $228 million compared to $265 million at the end of the prior year. The reduction in total debt saw the gearing ratio further improving to 38 percent from 54 percent. "This ratio has improved significantly as it was above 100 percent in the early years of dollarisation."

Responding to a question on rising competition on EcoCash, Mr Mboweni said that they were in "safe territory" due to their first mover advantage.

"We believe we have the critical mass supported by the necessary investment. We are also digging new grounds and this will enable us to defend our position."

Concerning the issue with Bankers Association of Zimbabwe, Mr Mboweni referred to the issue as a "temporary friction" which will be resolved over time. He also said the company preferred formation of partnership relationships rather than parasitic ones over the issue of exclusive use of agents.

Analysts Comment

Econet's financial results at first glance appear to be good with after-tax profits of $119 million. This is so if one acknowledges the fact that the figure was arrived at after factoring in the licence issue and weakening fundamentals in the economy. Another sweetener to the financial performance will be the resumption of dividend payment of 1.29 c which translates to a 6.2x cover. An improvement in the leverage ratio from 54 percent to 38 percent also does not need to be underestimated.

Those who remember our analysis on Econet last year will know that we mentioned that Econet's core business is now maturing. At the recent briefing Mr Mboweni confirmed our analysis when he highlighted that the voice side of the business had matured, and an 800 000 increase in subscribers did not translate into an increase in voice revenues, instead there was a decline.

Sooner or later data will follow suit. According to an Alcatel-Lucent report typical data contributes far less to revenue but requires as much as 54 percent of resources thus putting more "load" on the network. Typically the more data traffic, the more the capacity investment and ongoing expense incurred. Such is the nature of telecoms and Econet is not an exception. This is the reason why most global players are acquiring or venturing into cable television, broadcasting or similar sectors.

Econet, it now seems, wants us to believe that they are a bit too much of a behemoth. For nothing we should say. Rather than enhancing the business model and working on its cost controls, the company is at the present mostly focused on public relations campaigns, as if they are on a campaign trail. The same goes for the dividend, an appropriate strategy for a business that is suffering a decline in profitability, works wonders for the share price as the 3 percent movement alludes.

Of major concern is still the level of disclosures, corporate governance, interparty transactions which are appalling as they seem to benefit some shareholders to the detriment of others not within the circle of convenience. More clarity on Depreciation, Amortisation & Impairment is required; a cost of $102 million which is an increase of 42 percent is just too high; almost as if they were writing off a big chunk of the $178 million increase in fixed assets.

So if you might forgive some of us who might sometimes seem, erroneously to be hero-worshippers, to conclude that the company gives the impression of juicing up some of their data. Their basis for outside data is usually unverifiable internal sources as opposed to third parties.

We would appreciate verifiable research methodology included in some of these analyses. For instance the company claims its 225 Customer Services Reps handle over 200 000 calls daily? That is over 1000 calls a day per individual. This will mean that these guys do not sleep at all, 24/7 these guys are at work; no wonder the contact centre takes forever and ever to answer some of our calls, and we the customer just have to endure. Interpreting that very same data from a different angle also means that for the 8 million subscribers the company has, only one customer services representative for every 36 000 subscribers, definitely not a good standard. Maybe the 225 was a typo of some sort, let's just say. Nonetheless, there are sticky issues which we believe may reflect a "not so good" financial performance. Profitability for the mobile operator has been declining over the past two years in absolute terms and also in relative terms (net margin analysis).

PAT which peaked in F12 at $166 million has declined by 16 percent to $139,9 million (F13) and by 15 percent to the latest figure of $119,4 million. Whilst we acknowledge the impact of the license issue, we still believe this decline may be sending another message. Could it be inefficiencies or saturation? Assuming it is the former, with the various revenue diversification strategies being pursued, then Econet should possibly at least be maintaining profitability rather than the declining trend being witnessed.

In addition, with the overconfidence that the company boasts of in terms of being a market leader, one would not expect such a decline in profitability. Our view is that the company despite accepting the fact that they are losing out to competition, the financials statistics reveal this trend.

With voice revenues declining and rising competition in its overlay and broadband services mainly from Telecel, Econet may possibly not realise or unlock much value which may result in relatively low profitability trends to be maintained going forward. This may be so considering the disturbing trends of declining disposable incomes. Multi-simming may also work against the company despite the confidence the group CE has. The same can be said about mobile banking. Overall the trends being witnessed on the telecoms sector highlights that a strong brand is not enough when it comes to value creation.

Into the future, we do not see double digit growth rates being witnessed at group level. Resultantly, the share price is likely to be unmoved due to company performance and also the general bearish sentiment across the broader equities market. Nonetheless, the fact that the company has been given a new 20 year lease of life is a positive starting point for the telco giant.

The one million dollar question that remains unanswered is will Econet , who have laid the foundation for connectivity and access, be the winners; or will it be competitors, other global technology groups, the banks, media, advertisers or retailer giants as we head into the future?