Cell C: Slowly, steadily goes the turnaround

Heavily indebted cellular company Cell C has stabilised the business and improved the quality of its earnings, but stakeholders and lenders may be dismayed to learn that the turnaround will take until at least 2024 to complete.

But by this time, assuming all goes well, the company will have transitioned from a telco into what management calls a “techco”, a digital services provider that uses its telco platform to provide customers with a range of products and services.

However, getting there requires South Africa’s fourth-largest telecoms operator to swallow the medicine — impairments, retrenchments and other cost-cutting — which is reflected in the most recent results for the year to December 2020.

Once-off items affecting the reported loss of R5.5-billion include a R5-billion impairment, recapitalisation costs of R434-million and network site restoration costs of R248-million. 

Total revenue for the 12-month period was down by 8% to R13.8-billion as the company continues its process of weeding out its unprofitable subscribers.

Its nearest competitor, Telkom, is making hay, growing prepaid customers by 30% in nine months to September 2020. Vodacom and MTN are growing customers and revenue in the single digits. 

Cell C says its strategy of focusing on more profitable customers is bearing fruit as the average revenue per prepaid customer (ARPU) has increased by 28% on a year-on-year basis, despite a 15% decline in its prepaid subscriber and a decline in prepaid revenue.

“Our results reflect a business in transition. We are starting to see the impact of our changes, which included a focus on more profitable subscribers and through the reduction in costs a shift to revenue-generating activities,” says CFO Zaf Mahomed.  

The ARPU of prepaid customers highlights an encouraging upward trend, moving from R52 per customer in the first half of 2019, to R69 per customer in the latter half of 2020. 

Considering the once-off costs, which included expenses allocated to impairment, recapitalisation and the costs associated with network restoration, normalised earnings (before interest, tax, depreciation and amortisation) were 30% higher at R4.1-billion. 

A focus on costs has also made Cell C operationally more efficient. The company has cut its headcount from 2,600 to 1,340, cut down on professional services, closed some stores, reduced its network infrastructure costs and in the process removed more than R500-million worth of annual expenditure.

On the upside, this has resulted in better cash flow as reflected in its cash earnings (before interest, tax, depreciation and amortisation) of R844-million (2019: R240-million).

“The business does seem to be on a more sustainable footing,” says Peter Takaendesa, head of equities at Mergence Investment Managers, “but it is difficult to stabilise a business whose revenues are coming down.”

Profitability was better in the second half of the year, he grants, but this was supported by the cost reductions.

“We cannot save ourselves to a profit,” agrees CEO Douglas Craigie Stevenson. Cutting expenditure is simply part of the process of transitioning the business into one that is fit for purpose. Management sees this process unfolding between 2021 and 2023. 

“We need a startup mentality, one that is innovative and accountable.” There is a lot of work on all fronts, but particularly on the “people side,” Craigie Stevenson says.

Over the next three years, Cell C will fully transition to roam on partner networks — with the aim of providing a quality network, innovative value offerings to its customers and ensuring a profitable and sustainable business.

Craigie Stevenson added that Cell C’s focus in the future will be on evolving to a digital lifestyle company that offers value-for-money solutions and services by understanding the needs of its customers.

“To stay competitive, Cell C had to take a different approach against our larger rivals, which are all heavily invested in capital-needy infrastructure — multiple operators with large-scale infrastructure simply doesn’t make financial sense.  We will collaborate on infrastructure but compete on products and services.”

Last year, 2020, laid the foundation for change, he says. “Our earnings are up; our margins are stabilising and there is a single-mindedness on cost management. We are leading the way in building a reimagined Cell C that creates value for its stakeholders.”

But whichever way you spin it, the balance sheet, with its R8-billion of rand, euro and dollar-denominated debt, will remain a constraint. 

“Gearing is just too high,” says Takaendesa. “Management has done well in terms of cost reductions and has done what they said they would, but if the rand moves in the wrong direction, the company's profitability will be severely affected. 

“No further detail was provided on the recapitalisation — besides the comment that it was delayed by Covid-19 — and until this process is completed, cost-cutting is all they can do.” 

Will the company succeed? 

“It’s never fair to dismiss someone’s plans,” Takaendesa says. “But it was always going to be difficult to turn this business around. People go to Cell C for affordable data and packages, something that will become harder and harder to compete on. We will watch their transition into a techco with interest.” DM/BM