Cell C announced their FY2017 results on 21 February 2018. This note presents a summary of their results.
The refinancing of Cell C has removed a significant financial burden and has freed up cash flow for investment into the business.
Cell C looks confident in the marketplace and has displayed a dedicated focus in the consumer market with an upward revenue growth. They have indicated that they are willing to invest and acquire in order to grow the business through potential fibre acquisitions, content growth and digitisation. Their latest numbers reflect as follows:
- 2 million subscribers: Cell C reaches a total subscriber base of 16.2 million, (14.8 million retail and 1.4 million MVNO subscribers)
- Cell C earned more revenue from data servicesthan it did from voice services
- The normalised EBITDA margin increasedfrom 20% (FY2016) to 23% (FY2017)
- The refinancing deal has cut debt from R17.7 billion to around R6.8 billion
In response to the new board structure, several new posts were created which includes Wholesale, Head of Content, and Digital Transformation.
Cell C Subscriber Numbers
- Cell C grew its retail subscriber base by 5% YoY growth.
- Cell C’s data user subscriber base stagnated, showing only a 0.7% YoY growth. Data user growth has rapidly declined from 160% in FY2015, to 19% in FY2016, now to 0.7% in FY2017.
- Similar to its slowdown in retail subscriber growth, Cell C’s MVNO subscribers showed an 5% YoY growth.
- Cell C’s MVNO subscribers represent 8% of its total subscriber base.
- The company has seen a strong uptake of its retail FTTH offering. FTTH subscribers grew by 678%in 2017.
- Launched C-Fibre in 2016 with open access FNOs – FrogFoot, Mitsol and Vumatel
- Launched C-Fibre in 2017 with open access FNOs – Metrofibre, Octotel and Openserve
Cell C refused to release any information on the performance of its content service Black.
On a blended basis, Cell C’s ARPU is the lowest in the market.
This suggests that they have a much higher proportion of Prepaid customers when compared to Telkom. 70% of Cell C’s service revenue is generated by its Prepaid segment.
In 2017, Cell C earned more revenue from data services than it did from voice services.
The normalised EBITDA margin, based on service revenue, increased from 26% (FY2016) to 28% (FY2017). Note that this differs from the reported EBITDA margin of 50% as Cell C incurred a significant Once-Off revenue item of R4 billion.
Capex reduced significantly from R2.3 billion to R1.2 billion, a reduction of 47%. This resulted from the delay in concluding the refinancing deal.
Cell C have defined four strategic pillars:
(1) Mobile Prepaid and (2) Mobile Postpaid
- 70% of Cell C’s service revenue is generated by its Prepaid segment.
- A key focus area is the growth of data services. In 2017, data revenue surpassed voice revenue.
- Cell C continues to seek out innovative offers to win subscriber market share and raise the Postpaid ARPU.
(3) MVNO Wholesale
- Cell C reported that it will continue to drive growth in its MVNO business.
- MVNO revenue grew from R315 million (FY2016) to R717 million (FY2017), however its MVNO subscriber base only grew from 1.3 to 1.4 million over the same period.
- Cell C has seen strong growth in revenue, driven by the increased consumption of data services.
- Cell C has defined its broadband strategy along two dimensions: (1) mobile broadband and (2) fixed broadband (fibre).
- The operator plans on growing its LTE coverage and intends investing upwards of R3 billion to expand LTE coverage.
- In Q2 2018, Cell C will launch a triple play offer that will include mobile, fibre and entertainment through the Black platform.
- The operator indicated that it has acquired two fibre players (no names mentioned). The first is a retail ISP, while the 2nd acquisition is a network operator who has deployed FTTH access fibre.
Cell C plans to invest R3 billion in 2018, and R3.5 billion in 2019 respectively into their network (Capex). Cell C has indicated that it will invest R1 billion in its LTE network in 2018. Overall, Capex will increase steadily over the next coming years.
The Blue Label Telecoms Circular (18/10/2016) shows that Cell C subscriber numbers are significantly lower when reported against the industry standard of a 90 day active subscriber definition. Using this new information and applying the 90 day definition to the historically published subscriber numbers shows that Cell C has not performed as well as it has claimed. Over the last five years, the mobile operator’s SIM market share has hovered around the 15% mark. This despite the various subscriber acquisition strategies undertaken by it.
Subscriber Reporting Overview
Mobile operators have settled on a 90-day revenue-generating subscriber definition for reporting active mobile subscriber numbers. The 90-day says that a subscriber is defined as active, if on that SIM there is a revenue generating event over a continuous 90-day window. The 120-day definition extends the 90-day window to 120 days. Cell C has reported their subscribers on a 120-day definition, whereas the rest of the mobile operators have reported their subscribers against a 90-day definition.
The 90-day is defined as the 90RGS subscriber, while the 120-day is defined as the 120RGS subscriber.
Why is reporting subscriber numbers against a common definition important?
The analysis of the market and individual operator performances relies upon using subscriber numbers reported against a standard definition (or as close to a such a definition as possible). For example, the reported subscriber numbers are one of the KPI’s used to assess the market and individual operator performance over time. The analysis, however, requires that the information used is based on a standard definition. When an operator does not adhere to this principle, then that KPI analysis can lead to the wrong assessment of that operator’s performance, and can provide the wrong view about the market dynamics.
Cell C Historical Subscriber Reporting
Historically, there was always a suspicion that Cell C reported their subscriber numbers on a 120RGS basis while the rest of the mobile operators used the 90RGS definition. In the Blue Label Telecoms Circular (BLT-Circular), Cell C was reported to have over 25 million subscribers (page 11). However, on page 14 of the BLT-Circular, Cell C was reported to have 12.7 million subscribers. This large difference in subscriber numbers triggered an investigation into these numbers. It emerged that the 25 million was based on a 120RGS definition, whereas the 12.7 million was based on the 90RGS definition.
Cell C is not the only operator to have used a different subscriber definition.
From 2005 to 2012, Vodacom reported its prepaid subscriber base on a 210-day RGS. This was changed to a 90RGS in March 2012. The percentage difference between the 90RGS and 210RGS increased from around 9.6% (March 2005) to 21% by March 2012.
It was expected that Cell C would have a similar overstate factor when comparing the 90RGS and 120RGS subscriber bases. The information revealed in the BLT-Circular showed that there is a large difference between the two sets of Cell C subscriber numbers (90RGS vs 120RGS).
Reviewing Cell C Historical Subscriber Numbers
The large difference in the 90RGS and 120RGS subscribers required a comprehensive review and reassessment of Cell C’s historical subscriber numbers. Given that Cell C has not declared its historical numbers against the 90RGS definition, we needed to revisit all of the previously published Cell C subscriber numbers, in order to better understand the operator’s performance.
We analysed the published numbers and drew out the following observations:
- The large overstatement of Cell C subscribers is found in their reported prepaid subscriber base:
- At June 2016, the 120RGS subscriber base is overstated by 115%, when the base is compared against a 90RGS subscriber definition.
- Analysing the reported Cell C numbers shows that the impact of the overstatement becomes more apparent from March 2012 onward. Based on a 90RGS definition, the Cell C subscriber numbers were overstated by around 80%. This is similar to our estimate of Cell C’s churn over this period.
- The postpaid base (postpaid+hybrid) reported subscriber numbers are consistent with historically reported numbers:
- Therefore, we conclude that there is most likely a very small overstatement of the postpaid base.
SA Network SIM Market Share
The challenge in undertaking a historical correction of the published Cell C subscriber numbers, is deciding on the correction factor to align the 120RGS subscriber base to the 90RGS subscriber base. The following chart shows the network SIM market share trend over the past five years.
Source: SA Telecoms Model, Sep 2016
Cell C has remained at around 15% market share. It has not achieved the subscriber growth that it has claimed, and the actual subscriber numbers now indicate that Cell C has not grown its market share as previously thought. The new data throws doubt on the success of Cell C’s strategy to grow its subscriber base.
What the chart does show is that Telkom Mobile is the only operator to have consistently grown its market share of SIMS.
- Analysis of the newly revealed Cell C subscriber numbers, shows that Cell C’s 90-day defined subscriber base (for June 2016) is only 12.7 million and not the 25 million that it had communicated to the market. This is an overstatement by 95%.
- Using the 25 million, 120-day definition, has enabled Cell C to claim that it has performed remarkably well over the past few years. Our view is that Cell C has used these subscriber numbers to validate its strategy.
- However, the operator had not reported its subscriber base against the industry standard of 90RGS. Correcting the historical subscriber numbers to a 90RGS definition shows that Cell C has not been successful. Over the past five years, its SIM market share has remained at round 15%.
- The significantly overstated Cell C subscriber numbers have hidden from the market the true challenges that Cell C has faced. The 90RGS numbers indicate that Cell C’s strategy has not been as successful as the operator would have the market believe.
- What the overstatement has done, is to hide and obscure insight into the real winner in the market in terms of subscriber market share growth – namely, Telkom Mobile. Over the past five years, Telkom Mobile has been the only mobile operator to have grown its subscriber base, albeit off a low base.
This analyst note drew upon the information published in the Blue Label Telecoms Circular issued on 19 October 2016. This information was used to guide the rebasing of the historical subscriber numbers published by Cell C, to a 90-day subscriber definition (90RGS).
In October 2016, Blue Label Telecoms announced that it had increased its offer to R5.5 bn for 45% equity in Cell C. In December 2015, the company offered R4 bn for 30% equity. The new offer does not change the fundamentals of the refinancing deal. We expect that the new deal will not bring any new added benefit to Cell C.
October 2016 Announcement
In a SENS note (5/10/2016), Blue Label Telecoms announced that it had increased its proposed equity purchase in Cell C, and now offers to buy 45% for R5.5 billion. The acquisition will be made through its wholly owned subsidiary The Prepaid Company Proprietary Limited (“TPC”). The R5.5 billion will be made up from the following cash sources:
- R2.0 billion via a vendor consideration placement with NET1 UEPS Technologies Inc, through its South African subsidiary Net1 Applied Technologies South Africa Proprietary Limited, at a price of R16.96 per share, which represents a 10% discount to the 30 business day weighted average traded price; and
- R3.5 billion from available cash and funding facilities.
New Refinancing Structure
Under the new deal, the equity structure will look as follows:
- the subscription by TPC (The Prepaid Company Proprietary Limited) for shares comprising 45% of Cell C’s total issued share capital for a subscription consideration of R5.5 billion;
- the subscription by MS10 (senior management of Cell C) for shares comprising 10% of Cell C’s total issued share capital;
- the subscription by MS15 (Albanta Trading 109 Proprietary Limited) for shares comprising 15% of Cell C’s total issued share capital; and
- the subscription by 3C (3C Telecommunications Proprietary Limited) for shares comprising 30% of Cell C’s total issued share capital, for a subscription consideration equal to an amount which will result in Cell C’s net borrowings being reduced to a maximum of R8.0 billion at the time of receipt by Cell C of the respective subscription considerations.
In the December 2015 deal announcement, Cell C staff were going to buy 29.42% equity, split in two tranches of 11.77% and 17.65%. Under the current deal, we assume that MS10 and MS15 refer to these two tranches of equity purchases for the Cell C Staff. The Cell staff will now own 25% equity in the operator.
Similarly, according to the December deal announcement, 3C was going to retain 35% equity. Under the new deal announcement, 3C will only retain 30% equity in Cell C.
The following diagram sets out the proposed new shareholding of Cell C:
Source: Blue Label Telecoms SENS 5/10/2016
Deal impact on Cell C
This deal is about refinancing Cell C, reducing its long term borrowings to a maximum of R8 billion, while providing a strategy for the 3C Telecoms shareholders to reduce their risk and exposure through Cell C. The deal offers the opportunity for Cell C management and staff to participate at an equity level, while it provides Blue Label Telecoms an investment opportunity in an industry they understand.
The deal will improve Cell C’s profit after tax (PAT) margin by reducing interest payments. However, it will have no significant impact on the operator’s operational performance. The deal gives Cell C better access to future funding through Blue Label Telecoms.
Deal impact on the market
We don’t expect the deal to radically change Cell C’s strategy. Cell C has already embarked on an aggressive subscriber acquisition strategy.
The challenge for Cell C is that it has not translated its successful subscriber acquisition into revenue market share. Cell C has grown its market share, but its share of the mobile revenue has not grown in proportion to its subscriber growth.
Over the coming year, we expect Cell C to focus on growing its revenue market share by attracting the higher value customers to its network. Cell C is using new product innovation and pricing to draw in high value customers.