Broadband Infraco – Treading water

In summary, Broadband Infraco (BBI), a wholesale telecommunications operator, is in a concerning financial position. Failure by BBI to grow its revenue, outside of the top four customers, coupled with its current net burn rate (operating costs less revenue), will most likely see the operator run out of cash to fund its operations by March 2017. Should this happen, the government will be forced to reconsider its strategy regarding BBI. Unpacking the latest Broadband Infraco report shows that it’s key challenge remains it’s poor financial position.

On the 23rd August 2016, BBI presented its FY2017 Q1 report to the Parliamentary Portfolio Committee on Telecommunications and Postal Services. This note presents a brief review of the operator’s financial outlook.

Broadband Infraco Revenue: FY2016 Results and FY2017 Forecast

The following chart and table presents BBI’s historical and forecast revenue:

Broadband Infraco - Pic 1

Source: Broadband Infraco Annual Reports (FY2012 to FY2015), FY2017 Q1 Performance Report submitted to the Portfolio Committee on Telecommunications and Postal Services

Historically, BBI has benefited from South African government support. It concluded a multi-year contract with SITA (the State IT Agency) and sold 70% of the international submarine capacity (on WACS), that it had purchased, to the Department of Science and Technology (DST).

Analysis of the presented FY2016 information shows the following:

  • BBI earned 90% of its FY2016 revenue from four customers: Cell C, Neotel, SITA, WACS (DST, the sale of the international submarine capacity).
  • SITA is BBI’s single largest customer, who accounted for 33% of the revenue.
  • The combined SA government revenue, DST and SITA, accounted for 43% of this revenue.

Analysis of the forecast FY2017 revenue information shows the following:

  • SITA will remain BBI’s single largest customer, representing 27% of the forecast FY2017 revenue.
  • BBI plans to significantly grow the revenue earned from the rest of its customer base (and from new customers) by 219%, from R47 to R150 million.
  • BBI will remain dependent of the top four customers, given that the operator forecasts to earn 81% of its future revenue from this group. On paper, BBI’s revenue is at risk, given the high revenue concentration in the top four customers. However, it is unlikely that the revenue from this group is under threat. If there was any risk, it would arise from the pending sale of Neotel to Liquid Telecom. Following the completion of this sale, Neotel’s spend with BBI will likely decline.

The BBI challenge is its financial position. The following charts show the historical and forecast EBITDA margin and retained earnings trends:

Broadband Infraco - Pic 2

Source: Broadband Infraco Annual Reports (FY2012 to FY2015), FY2017 Q1 Performance Report submitted to the Portfolio Committee on Telecommunications and Postal Services

  • By March 2017, BBI expects its accumulated loss (or negative retail earnings) to surpass R1 billion.
  • The 7% EBITDA margin was achieved through a combination of revenue growth and cost reduction. BBI plans to continue these initiatives in FY2017.

So what are Broadband Infraco’s Strategic Initiatives?

A study of the top ten strategic risks, that BBI has presented in its FY2017 Q1 report, provides some insights into the company’s strategic intentions. The risks associated with the issues raised in this post are presented here (not all the risks are presented):

Risk #1 – Likelihood not to continue as a going concern – actions taken:

(a) Continue with key focus and drive on sales by all executives and KAMS, and (b) Enter into long term tenure with customers
(a) Continue cost optimisation of Cost of Sales and Operational costs – by renegotiating fibre maintenance and leases with the suppliers, (b) Continue with cash management initiatives, through daily bank reconciliations and working capital management
(a) Continue with renewed intensity to source funding from commercial banks, developmental institutions and specific vendors

Risk #6 – Difficulty to raise funds – actions taken:

Continue interactions with suppliers, commercial banks and developmental institutions to source funding for working capital, ring-fenced projects and selective maintenance projects.
Continue with renewed intensity to source funding from commercial banks, developmental institutions and specific vendors.

Risk #7 – Damage to the reputation of Broadband Infraco – actions taken:

Pro-active relationships are being put in place with IT Web, Tech Central, Money Web and Business Day to source inputs from BBI before publication.
Pro-active integrated PR & Marketing strategy to be activated to convey BBI‘s positive success stories.
High brand visibility is being maintained through all stakeholder – related events and programmes.

These actions show that BBI is embarking upon a reputation management campaign to ensure that the market does not perceive BBI as a supply risk in its capacity as a supplier.

Broadband Infraco Financial Challenge – Revenue and Net Burn Rate

BBI’s FY2017 revenue forecast is premised on growing the revenue contribution from customers, other than the top four, by 219%. Failure to grow the customer base will see further pressure placed on BBI’s ability to fund its operations and invest in network capex. Failure to invest will result in the operator becoming more constrained in its ability to generate new revenue.

The inability to invest will result in the operator losing the opportunity to win new customers. Furthermore, the inability to fund replacement capex will see the BBI network deteriorate, leading to poor service delivery. This in turn will cause customers to move away from BBI.

BBI will require financial assistance within this year from the government to continue as a going concern if it (1) fails to grow revenue, outside of its top four customers, and/or (2) is unable to reduce its burn rate.

Overall, Broadband Infraco operates in a competitive market where the slightest slip-up results in lost business. Quite likely, the SA government will need to review its plans regarding this operator.

The current FY2017 financial forecast sees this company treading water.

In closing, what are the SA Government options?

The strategic options that the SA government could consider, are presented in the following table:

Broadband Infraco - Pic 3

As shown, the SA government has a key decision to make over the coming year. What to do with Broadband Infraco!

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