Cell-C - profits in South Africa

South Africa: Seven Years On, Cell C Makes an Operating Profit

CELLULAR operator Cell C has turned an operating profit for the first year in its seven-year history, reversing a loss of R349m to post a profit of R321m.

The main fillip to its figures came from a 44% rise in the number of customers to give it 4,8-million, after it launched two cut-price packages to woo more young and talkative customers.

These had been an unprecedented success and a major factor in its turn-around, said CEO Jeffrey Hedberg.

But Cell C still has a way to go before it retains a net profit, with new chief financial officer Fabrizio Mambrini refusing to say when it would finally cross that hurdle. The timing would depend on how much cash it pumped into expanding its network, he said. In the coming two years, capital expenditure would hit R2,4bn, up from R1,2bn spent in the past two years.

Cell C's revenue of R7,5bn for the year to December was up 17% from R6,4bn, while earnings before interest, tax, depreciation and amortisation topped R1bn, surging 236% from just R310m.

The two cut-price deals saw its traffic soar from 400-million minutes a month to 700-million minutes, forcing it to expand its coverage and quality to meet demand. It now carries 87% of its own traffic, but still roams on Vodacom's network in areas where it is not financially viable to set up its own.

Hedberg said 2007 was a "defining year" when Cell C stopped trying to emulate its dominant rivals MTN and Vodacom by being all things to everybody. Its new strategy had been to create simple, affordable packages so more previously untapped consumers signed up and existing customers could afford to make more calls.

Mambrini said attracting young customers with less money to spend initially gave it a lower average revenue per user, but it was an investment for the future if it could retain their loyalty as they grew older and wealthier.

Cell C is 60% owned by Saudi Oger, 25% by empowerment investors CellSaf and 15% by Lanun Securities, another Saudi firm. One potential move that could drastically change its future is if its sister company Oger Telecom bids for a controlling interest in Telkom. Telkom and Cell C would then work closely together to offer combined fixed and mobile services.

A tie-up with Telkom would give Cell C scale in distribution, advertising and on its balance sheet, Hedberg said.

"I know it could make a good deal of sense and Saudi Oger is very keen on interacting with the stakeholders to see if it can drive a win-win deal."

Telkom said this month that Oger had not returned with a firm offer after its initial overture was rebuffed.

However that pans out, Cell C is focusing on gaining subscribers more cheaply by reducing the commission it pays airtime resellers. That was a fine balance that demanded high volumes of customers, so resellers were still willing to offer Cell C rather than score higher commission by selling MTN or Vodacom instead, Mambrini said.

Other aims for this year were to launch more customer-friendly packages and improve its network quality and customer service.