Cell C reports massive R8 billion loss
Mobile operator Cell C has published its annual results for the year ended May 2019, revealing a net loss of R8 billion for the period.
Service revenue was up by 4% to R14.2 billion (2018: R13.5 billion) with earnings before interest, taxation, depreciation and amortisation (EBITDA) decreasing by 19% to R3.39-billion (2018: R4.18-billion) due to the expanded network roaming agreement with MTN.
The group also reported low capital intensity of R1.9 billion – 12% of revenue – due largely to reduced network capital expenditure.
A net loss after-tax was declared at R8.03 billion (2018: loss of R656-million).
The net loss after tax includes impairments to the value of R6.275-billion, Cell C said, tied to the carrying value of various assets and trading losses.
Cell C incurred trading losses of R1.56 billion, impairments of its property, plant and equipment of R2.2 billion and de-recognised its deferred tax asset of R4.09 billion.
“We performed an annual impairment test on the carrying value of the property, plant, equipment and intangible assets (Cash generating unit – or CGU) during the 31 May 2019 period.
“The impairment was calculated at the higher of fair value, less cost to sell or the value in use. The impairments assumptions were made on the cash flows which were limited to the generation of cash by the CGU with no regard to new technology, expansionary growth or the pending recapitalisation transaction.
“It should be noted that future impairment assessments may result in the reversal of impairments recognised in this period,” it said.
Financial performance
Zaf Mahomed, chief financial officer of Cell C said the financial performance for the past year up to May 2019 has been below expectations.
“The 2019 financial year has been characterised by slow growth, a volatile rand against major currencies, service issues relating to load shedding and a continuing slowdown in the economy, which resulted in a decline in GDP in the first quarter of 2019.
“Consumer purchasing power has weakened, which together with reduced disposable income contributed to a lower than expected financial performance of the company.,” he said.
Despite the new regulatory and legislative framework pertaining to data expiry and out of bundle usage, implemented with effect from March 1, 2019, revenue was still up.
Total revenue of R15.4-billion (+1%) has increased year-on-year, mainly due to growth in the contract (+6%), broadband (+20%) and wholesale (+14%) segments.
However, the performance was offset by the decline in prepaid revenue (-1%) due to a decline in the prepaid customer base (-4%) and a decline in equipment revenue (-25%) due to an increase in subsidies driven by the market.
There was a slight drop in total subscribers by 2% to 15.9-million while the Average Revenue per User (ARPU) of contract customers increased by 11% to R253 per customer.
“Cell C has taken active steps to reduce its focus on pure revenue and subscriber growth to focus on profitable, long-term growth in prepaid and contract segments,” Mahomed said.
The cost-cutting initiatives (highlighted below) were not yet reflected in the past annual period, so direct expenditure increased by 11%, mainly as a result of the increase in roaming costs.
The roaming agreement was finalised in August 2018, which contributed 32% of the direct costs incurred.
The lower than expected revenue and the unexpected increase in roaming costs, pushed Cell C’s annual gross margin down by 5%.
Net debt, excluding finance leases, increased from R7.44-billion to R8.24-billion, which was driven by the increased capital expenditure and working capital drawdown facilities.
“Networks will be a utility in the future with one or two mobile infrastructure providers per country and it does not make economic sense to overbuild on basic infrastructure.
“Against this background, we are in negotiations for an extended roaming agreement which will enable Cell C to manage its network capacity requirements in a more scalable and cost-efficient manner. This will also provide access to current and future technologies,” it said.
Cost-cutting
On top of the group’s annual results, CEO Douglas Craigie Stevenson provided a quarterly overview, alongside the measures the company is taking to turn the business around.
In Cell C’s last quarter performance (tended August 2019) the group highlighted:
- Year-on-year quarterly service revenue, up by 2% at R3.68-billion;
- Year-on-year quarterly gross margin down 9%;
- Year-on-year quarterly EBITDA was 18% higher at R1.042-billion.
According to Craigie Stevenson, he is confident that Cell C will stabilise and recover to the benefit of its shareholders, consumers, staff and the local telecommunications industry.
“Our turnaround strategy is focused on ensuring operational efficiencies, restructuring our balance sheet, implementing a revised network strategy and improving our overall liquidity,” he said.
“Cell C has a real opportunity to address its historical performance through a focus on operations that will restore shareholder value. We are convinced that our wide-ranging operational initiatives will position Cell C for long-term success.”
Some of the initial changes include:
- Reviewing the channel options for the ‘black’ streaming service – which will ensure a saving of R120-million annually with additional savings expected as Cell C continues to right-size this business unit;
- Rebalancing its traffic and retail products – Cell C removed non-profitable products and increased its focus on retail product pricing and wholesale pricing;
- Implementing a cost efficiency programme across all expense lines in the organisation – the current run rate of over R864-million, with more anticipated will result in these savings reflected in future results;
- Shifting service revenue back to growth – this will be achieved through a more focused approach on profitable products and re-energising its distribution channels.
Craigie Stevenson said that by executing on its focused turnaround plan, Cell C will dramatically improve its financial profile and deliver a streamlined business.
Read: Cell C won’t be able to repay its debts without a plan: S&P
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