Cell C reports R7.5 billion loss

Mobile operator Cell C has reported a staggering net loss of R7.5 billion for the six months to June 2020.

The loss comes as a result of once-off impairments and restructuring costs, the group said, including R5 billion worth of assets (network and right-of-use assets) that were impaired due to a new MTN network arrangement.

Earnings before interest and tax (EBIT) for the period was declared at a loss of R5.3 billion, compared to a profit of R90 million in H1 2019.

Excluding once-off recapitalisation and restructure costs, EBIT for H1 2020 would have been at R162 million, an improvement of 80%, the group said.

Normalised earnings – excluding non-recurring costs – improved 64% to R1.8 billion, it said, and considering the once-off recapitalisation and restructuring costs, the reported EBITDA is lower at R1.2 billion (2019: R1.4 billion).

The improved earnings were delivered against the backdrop of the depressed local retail environment, a decline in consumers’ disposable income and the national lockdown which resulted in reduced trading days during the period.

Overall revenue was at R6.9 billion compared to R7.4 billion previously. More than 89% of the company’s revenue comes from service revenue which was 6% lower at R6.5 billion, while hybrid and Fibre-to-Home saw an increase in sales of 16.7% and 11.1% respectively.

While revenue from the wholesale business reflected a 7% decline due to an exit from wholesale agreements which diluted margins and congested the network, the MVNO portion continued to reflect a solid growth and delivered an 18% increase, to R398 million it said.


Prepaid exodus

In line with management’s strategy to rationalise its subscriber customer base while retaining profitable customers, the prepaid subscriber base declined by 34.6% over a 12-month period.

Total subscribers declined by 28% to 11.7 million, from 16.3 million before.

This translated into a 9.9% decrease in prepaid revenue, while gross margin grew by 11.5% and prepaid average revenue per user (ARPU) increased by 26.9%. The rationalisation process translated into an overall improvement in the customer base and a further 4.8% increase in prepaid ARPU since the end of June 2020.

Zaf Mahomed, chief financial officer of Cell C said that despite the challenging circumstances which impacted on the commercial spend, the company was still able to improve its operating margin.

“The first six months of 2020 was characterised by the continuing slowdown in the economy which weakened general customer spend. We have taken active steps to reduce our focus on pure revenue and subscriber growth and have shifted to more profitable, long-term growth in the prepaid and contract segments.

“We were also able to generate R418 million more cash from operations compared to the previous period,” he said.

“We remain focused on restructuring the balance sheet and optimising the business for long-term competitiveness. We have a legacy debt challenge in our balance sheet, rather than an income statement one which will be addressed with the recapitalisation,” Mahomed added.


Prospects

Cell C’s CEO, Douglas Craigie Stevenson said the group is still on track to deliver on its turnaround, but noted that the group was unable to compete with the likes of Telkom, Vodacom and MTN.

“To stay competitive, Cell C had to take a different approach against our large rivals who are all heavily invested in capital-hungry infrastructure – three operators with large scale infrastructure simply doesn’t make financial sense.

“Our vision is to be the biggest aggregator of wholesale capacity and customer to the infrastructure providers. We will collaborate on infrastructure but compete on products and services. The 4G roaming agreement with MTN is the first step in cost synergies and bringing tangible benefits to our customers.”

He said that the last six months show early signs of recovery – “Our earnings are up, our margins are stabilising and there is a strong single-mindedness on cutting additional costs.”

The chief executive officer said that he expects operating margins to improve over the medium term as the business transitions to its new business model.


Issues

Cell C announced in early August that it was unable to make debt repayments, raising concerns among industry players about the future of the company.

Cell C defaulted on the payment of capital on its $184 million note which was due on 2 August 2020.

It also defaulted on interest and capital repayments on loan facilities with Nedbank, China Development Bank Corporation, Development Bank of Southern Africa Limited, and Industrial and Commercial Bank of China Limited, which were due in January and July 2020.

As part of the group’s turnaround strategy it has also announced that it will close 128 of a total 240 retail stores, and cut 546 jobs.


Read: Blue Label points to recovery following Cell C write down

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Cell C reports R7.5 billion loss