How we got here: The story of Cell C as told by its CEO
Cell C chief executive officer, Douglas Craigie Stevenson, says that the beleaguered company has a future despite the negative press coverage in recent month around its financial position.
“It does look like a horror story for Cell C,” he admitted in a press briefing in Sandton on Thursday (26 September) as he presented the group’s results for the year ended May 2019, showing a net loss of R8 billion.
Service revenue climbed 4% to R14.2 billion (2018: R13.5 billion), while earnings before interest, taxation, depreciation and amortisation (EBITDA) declined 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.
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.
How we got here
Having launched into the local market some 18 years ago, Craigie Stevenson said that under-capitalisation of the business over many years resulted in signing punitive contracts to finance growth
The chief executive said that tower agreements (2011) and other risk-based pricing on certain contracts have created significant financial drag on the business.
In addition, the company has often operated in stop-start scenarios due to the uncertain capital structure, he said.
He also pointed to questionable operational decisions, including the group’s most recent streaming venture, Black. He said that poor decision-making drove cash consumption without returns.
Craigie Stevenson said that growth in customers and revenue were inconsistent and did not convert into positive cash flow – adding that competing with two strong incumbents drained cash resources and increased debt.
He said that while the group followed the mandate of customer growth and revenue growth, these targets did not convert into positive cash flow for Cell C.
Stevenson said that there is still an opportunity for Cell C in the market, especially considering the value of its assets. “We have significant valuable assets and some of them are underused.”
He said that Cell C had valuable spectrum, a large customer base of 16 million active users, a wide distribution network, and a valuable brand – all of which it could leverage to improve its position.
Cell C’s distribution channels includes over 240 stores.
“Cell C has definitely not stagnated, we are generating service revenue,” Stevenson said. “It is also a part of the adjustments that we are making.”
“As we redevelop our product portfolio, we will focus on making sure we understand what type of products to offer to our customers.”
“We are getting the business into the right place,” he said. “We are getting rid of costs, getting more efficient, and understanding what a performance culture is all about.”
Stevenson stated that the company needs to be more efficient than any of its competitors to recover and improve its position going forward.
“We need to be more efficient than anybody in this business. We cannot do about R1.5 billion a month in turnover and make a loss.”
Green shoots?
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.
“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 being introduced to turn the business around include:
- Reviewing the channel options for the ‘black’ streaming service – which will ensure a saving of R120-million annually;
- 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;
- Shifting service revenue back to growth – 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.
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