Econet Wireless’ ‘TMT’ model begins to pay off…as company rides on cash woes, business efficiencies to grow its income in H1

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An increase in contribution of non-voice revenue to 63 percent of total and a reduction in finance costs by $10,7 million led Econet Wireless Zimbabwe to an exceptional performance for the half year to August 31, 2017. The group’s revenue grew 17 percent to $352,67 million while after-tax profit was $48,85 million from $14,73 million last year, an increase of 226 percent.

According to its results statement, Econet experienced phenomenal growth in Ecocash and Steward Bank revenue. The former registered a 46 percent growth in income to $57,1 million while the latter was up 9 percent to $63,4 million. Both business units benefitted from the cash shortages in the economy which resulted in increased transactional activity for Ecocash and translated to growth in net commissions for Steward Bank.

Management is pleased with the company’s results and mentioned that they are now operating what they called Telecommunications, Media and Technology (TMT) model. For the period, non-voice revenue contributed 63 percent to total income. Data grew by 9 percent, contributing $63.4 million to total revenue.

On the back of strong income growth, profitability was improved with EBITDA increasing by 31 percent to $139,1 million. Depreciation charges came down 7 percent from last year and operating profit rose 89 percent to $79,6 million. On aggregate, margins improved with EBITDA margins at 39 percent from 35 percent in the comparable year.

Econet managed to repay its US dollar debt after raising funding through a rights offer. The balance sheet now holds predominantly the debentures issued to shareholders as part of the rights issue offer. As a result, finance costs reduced by 71 percent which was a significant boost to net profit. Profit t after tax was up 226 percent to $48,9 million. Cash flow from operations grew by 171 percent following better profits for the period. Total assets grew by 18 percent to $1,4 million.

Subscribers went up by 41 percent to $11,4 million. Econet is working on core IT capabilities for Steward Bank while Ecocash increased its capacity by 3 times to cater for increased transactional activity. Further, Econet Zimbabwe signed an agreement with Econet Media to provide Kwese TV content to ZImbabwe. Kwese is set to contribute to Econet’s revenue streams as it’s online content will boost data revenues.

Econet declared a dividend of 0.579 cents for the second quarter of the year, which brought total for the interim period to $0,965
Our thoughts

What an impressive run it has been for Econet, with its diversification out of a predominantly voice revenue business progressing well, with a gain in margin in the process. Econet has been running with the mantra of riding the wave of technology and the current results are showing the success of the work they have put into ensuring that they surf the wave and not drown in it.

The TMT model has been adopted by telecoms and media companies worldwide. For it to be successful, there are three pillars that are required and which need to be constantly updated.

These are creating new sources of revenue, rationalising the cost structure and enhancing the speed of technology of adoption. Econet looks best placed in all, save perhaps for the last one; how fast does this country adopt to new technologies? While for the last years, Econet has been at the mercy of the economy, ironically for this period, the economic challenges have been a blessing to Ecocash.

Consumers are pushing transactions mainly through plastic and virtual money, and Ecocash has maximised in the gains supported by its dominant market share in the mobile money market. The Ecocash team has continued to be aggressive and added more value to the platform — one example being ZINARA toll gates and more recently, the Ecocash swipe card, which virtually allows all Ecocash customers to transact with any local bank on Zimswitch. Continued partnerships with banks has been another key channel of income generation, and opportunities remain as long as there is transactional activity.

Most significantly for Econet, long after the current cash crisis is gone, Ecocash customers will have already adopted the convenience of the use of mobile transactions, such that it is likely they will continue the habit.

It is also commendable that the necessary investments were made towards the capacity of Ecocash. Management has said the same is underway at Steward Bank. In our opinion, the core IT investment at Steward Bank should be treated as priority given general public sentiment over the banking and customer systems infrastructure at the bank.

It seems Steward Bank was not ready for the growth in customers and surge in transactions, and its systems have failed its customers several times. But despite these challenges, the bank had a good run for the period, supported by commission growth mainly from Ecocash.

Data also remains a big growth opportunity for Econet. There is certainly scope to increase penetration, especially in the rural areas, where smart phone and device ownership is still low to moderate. The business announced earlier this year that it was upgrading all its rural sites from 2G to 3G within the financial year.

This should create further capacity to drive usage in rural areas. There is still a considerable opportunity for more data consumption in cities and urban centres, where Econet has had a head start in the mobile market, in investing in faster LTE technology in more than 63 percent of LTE coverage areas in the country. The huge data investment has already seen Econet control 75 percent of current mobile data traffic, according to Potraz’s Q2 sector report, making the data outlook bright.

While Econet reported a half-year growth in data revenues of 9 percent from prior comparable period, there are still more data use cases for its consumer and business customers which fit into their TMT model. At the launch of ‘Kwese TV Everywhere’ last Thursday in Harare, the company’s CEO Douglas Mboweni and COO Fayaz King took turns to make the point that ‘Kwese TV Everywhere’ would be accessible “everywhere”, on multiple devices and on up to five users on one decoder account.

It was easy to interpret this to mean Econet would be using its vast data network to allow its customers to access Kwese content on multiple devices; TV, mobile phone, PCs or tablets — thereby using more data. However it’s still early days to assess the impact this will have on performance.

In the short to medium term however, affordability of data would be instrumental in improving data usage, though the mobile operators prefer for the market to determine price. In the long term, a general improvement in disposable incomes, as well as continued technological advancement should add volumes and value, for the likes of Econet, to this segment.

The TMT model appears to us to be a way by Econet of moving the mobile competition battle ground away from the voice and “commodity” data space, to a whole new ecosystem where the customer pays for convenience and for an ‘experience’; be it the convenience of integrated mobile transacting on multiple digital platforms (on Ecocash and Steward Bank), or an entertainment experience or viewing Kwese content on TV or online via multiple devices.

Whatever the customer chooses, it seems Econet has conspicuously positioned itself at the centre of the ecosystem, creating value for customers and for its shareholders. — FinX.

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