Safaricom : FY23 Results Conference Call Transcript

Conference Call Transcript

11 May 2023

FY23 2023 RESULTS

Caroline Wambugu Moderator

Good morning, good afternoon, and good evening from wherever you're joining us from and welcome to the Safaricom PLC Analysts call post our results released this morning in Nairobi, Kenya. My name is Caroline Wambugu. I'm the head of investor relations and finance planning analysis and I'll be moderating the discussion. We have our CEO, Peter Ndegwa, who will make introductory remarks. Thereafter our CFO Dilip Pal will give a high-level performance overview before we open up the session to field your questions to the leadership team.

Before we kick off the session, I would like to speak through a few housekeeping rules. Please ensure you have joined the session with your full names for ease of identification when you post your questions or comments. And if you haven't, you can take a moment now to rename yourself by hovering the cursor over your name and clicking the rename tab on the dropdown. Throughout this session, any questions you have will be shared via the Q&A tab and at the end of your question, kindly remember to include your organization's name. And in staying committed to our promise on diversity and inclusion, a live transcript has been made available for the comfort of anyone with hearing difficulties who has joined the call. You can access this by clicking the view transcript tab at the bottom of your Zoom application under the show captions. This will allow you to keep up with the conversation in a more comfortable manner.

Finally, and in case you require any other form of assistance from us that is not related to the discussion, you can write to us via the chat platform and the Investor Relations team will be at hand to assist you from the backend. And with that, I now welcome our CEO, Peter Ndegwa, to kick off the session. Thank you. Peter, over to you.

Peter Ndegwa

Thank you, Caroline. Please confirm that you can hear me well or I need to increase my volume in any way.

Caroline Wambugu Moderator

We can hear you, Peter. You may proceed.

Peter Ndegwa

Okay. Good afternoon, good morning, everyone, depending on where you are. And as Caroline has said, we are delighted that we were able to release our results this morning and Dilip our CFO will be going through a summary of those results. But I just wanted to say a couple of words. One is some big milestones, one is the fact that we've now received formal confirmation of the award of the Mobile Financial Services license in Ethiopia, which was also confirmed

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by the National Bank of Ethiopia this morning. That's a great milestone. We've been waiting for it. It will allow us to now complete the preparatory work that we've been doing in order for us to start rolling out our financial services business in the coming weeks and months. We will be able to give you an indication of what it will take to deliver that.

The second is another big highlight on Kenya, as you know, has gone through just like any country, major issues with respect to impact on macros, currency, the drought in the Horn of Africa and so on, and also an election year. And as we announced our half year results, we saw subdued performance in the second quarter, which affected the half. That continued in the third quarter, but I'm happy to say that from Q4, from actually around December, we saw a clear momentum. And therefore, our second half is a recovery compared to our first half. We also got the return to charging on M-PESA, which is also an important milestone, not just because of the revenue considerations, but because it also allows us to build a market that is less distorted than we were seeing before. So, we are happy with the solid results in Kenya. We are satisfied with the progress that we are making in Ethiopia. There's a lot of execution that we need to focus on, and we'll be speaking to that. I'm sure there will be lots of questions on Ethiopia, but certainly delighted that we can also now start to operate mobile money in the same way that we are doing in GSM. So that's all I wanted to say, Caroline, hand over to Dilip to give us a bit of a summary of where things are, and then we open it up for questions.

Caroline Wambugu Moderator

Thank you, Peter. Over to you, Dilip.

Dilip Pal

Thank you, Caroline. Confirm you can hear me well.

Caroline Wambugu

Yes, we can hear you. You may proceed.

Dilip Pal

Thank you. Good morning, good afternoon, and good evening from wherever you have joined. It's a pleasure to talk to you today. As you have seen, we have released our results this morning, and some of you may have been through the numbers, or you have participated in the update call. For me, I'd like to say that it's been a very challenging year as Peter alluded. We had quite a few headwinds coming from macros like high inflation, a depreciating shilling, but beyond that we also had severe drought, and then increase in energy cost driven by tariff reviews as well as subsidy removal. We also had communication authority driven subscriber registration process that led to approximately 1.6 million customers leaving us who couldn't complete the process. I think the most important part was the mobile termination rate review. Which resulted into a reduction of 40% from 99 cents to 58 cents that impacted our top line in the last financial year by KShs 2 billion. On an annualized basis, that impact leads to a KShs 3 billion impact in our top line. That said, as Peter mentioned, we also had a return to charging for wallet to bank and bank to wallet, which was good news and that has also boosted our M-PESA performance in quarter four. Starting with Kenya, I'll just give a very high-level overview, and that with

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customers, our overall customers grew by 3% to 44 million, and our one-month active customers are closing at 33 million. One-month active customers on M-PESA grew by close to 2 million, closing at 32 million as at end of March 2023. From a revenue perspective, we have seen improvement in the second half compared to the first half, adjusting to mobile termination rate (MTR). Our second half service revenue grew by 6.5% compared to a growth of 5% in H1, and for the full year, adjusting with MTR, revenue grew by 5.7% on a reported basis growth of 5%. M-PESA, mobile data and fixed are the key revenue drivers. M-PESA overall recorded a growth of 8.8%, driven by ARPU uplift coming from increased number of transactions per customer per month, which increased to over 24, which is 16% growth from last year. And with return to charging coming in, M-PESA also grew by 12.2% in quarter four. Mobile data was a good story, double digit growth continued, driven by an ARPU uplift of 16% and also usage growth of 54% closing at 3.6 GB per customer per month. Overall fixed revenue grew by about 20%, driven by customers and a stable ARPU. The traditional revenue like voice and messaging has been under pressure, but I'm happy to report that messaging revenue actually grew by close to 5%. And we have seen improved performance in H2 in voice declining only by 1.7%, finally closing at 2.8% for the year. In terms of costs, direct costs came in more or less flat or a slight decline, driven by reduction in interconnect costs and also reduced handset sales resulting in lower handset costs. Operating expenses overall went up by 7%, driven by energy cost, the depreciation in the shilling and also increasing payroll costs. With all of this, it's a solid performance in a very challenging macro environment. Adjusted with MTR, the headline numbers are: service revenue grew by 5.7%, net income on a reported basis, adjusting to MTR grew by 4%, and if you normalize with Ethiopia, financing costs grew by 6.4%. Group performance overall came within the guidance, both for EBIT as well as CAPEX.

Now moving to Ethiopia, as Peter mentioned, we are very excited about the news of finally getting the MFS license and we are hopeful to launch our services as soon as possible. Now, other than that, in seven months we have acquired close to 3 million customers, and we have seen very good momentum on our mobile data and customers are happy about using our network and that is also reflected on the mobile data usage per customer per month, which closed at 1.5 GB per customer per month. Our rollout is now picking up speed. We have closed at close to 1,300 sites by year end and we are on course to close 3,000 sites by March 2024. Now, I'm sure you have gone through the numbers in the morning, but let me pause here and now I hand over back to Caroline for Q&A. Back to you Caroline.

Caroline Wambugu Moderator

Thank you very much Dilip for that and I can see lots of questions have started streaming in, which gives us great pleasure now to get into it so that we can tackle each and every one within the time allocated and we trust that we shall do the best that we can but keep them coming. So let me start off with a question here from Modi of CITI and this is to you Dilip. Please could you quantify the benefit from reinstating mobile money charges and what proportion of the 12% of the mobile money revenue growth comes from this? Also, do we expect similar kind of growth trajectory what you've seen in Q4 into the next business year which is this current FY. Dilip over to you.

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Dilip Pal

Thank you, Caroline. So, return to charging and remember what we have done is also rationalized pricing. So, over 14% price rationalization has happened because we wanted to drive affordability and also to make sure that we can retain the volumes and the values that was coming through this channel.

The average monthly uplift is anything between three to two to four hundred million that's what has come in, in Q4. From a growth perspective, we have always been messaging around our ambition to grow the M-PESA revenue which is now contributing 40% of our service revenue. And we said that a minimum of double-digit growth is what we're expecting on a medium-term basis. So, I think it just reconfirms the kind of growth that we have seen in Q4 that M-PESA is back to where it should be and you have seen the numbers actually in the fourth quarter number, with more that 11% growth. So Q1 was 11% and then as the election was approaching and also because of the macroeconomic factors we have seen a slowdown. So, Q1 was very good. Q2, Q3 subdued and then we are back to where we normally see in our M-PESA revenue growth. Thank you.

Caroline Wambugu Moderator

Thank you, Dilip, for that. Let's take a question here and this is to you, Peter, from Zintle Tuala. The question is, you reported having a coverage of 22% in Ethiopia end of March, and this is under the 25% regulatory requirement. Are there any implications of not meeting the target and when do you expect to be compliant?

Peter Ndegwa

Thank you, it's a great question. So, yes, the license requirements are that we should be hitting 25% population coverage by end of March 2023. We were aware throughout the period that this was a requirement. We reported to the regulator that based on the fact that we launched commercially a bit late for various reasons including some of the initial political instability where we had to take the team out of market and so on and so forth, that there was always expectation that there would be some flexibility in terms of ability to do that. And our commitment is that we would meet that by the end of June and which we will meet that commitment and hit the 25%. And based on the target that we have set for the year, for calendar or financial year 2024, we should be well within the original milestones that were required by the regulators. So, it is an issue the regulators are aware and also it is primarily because there were some challenges at the beginning that meant that we were not able to deliver on our rollout within the time frame that we expected.

Caroline Wambugu Moderator

Thank you very much Peter for that. The next question is from Maddy of HSBC. I think this I'll share out between the two of you but the first one is, can you please elaborate on the hyperinflation impact in Ethiopia, especially going forward, can you please give some scenarios, e.g., if nothing changes inflation goes higher or lower by certain points? So that's to

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you Dilip. Second question is on what's the drivers behind lower EBIT growth expectations in Kenya and the split between telco, M-PESA and what levels of revenue expectations are built into the EBIT guidance? I think Dilip you can first take those two then I'll speak to the other two

Dilip Pal

Thank you. So, let me first start with hyperinflation. So, hyperinflation in this continent is not new, there are few other countries which have been through this but for Ethiopia it is new. As I have alluded in my presentation, when the cumulative inflation for three years exceeds 100% which is what happened in the case of Ethiopia, the IAS-29 is required to be applied and because we are an IFRS compliant group we have to apply that. Now, you would have seen the impact coming through income statement and net impact of 3.5 billion. In summary, in simple terms, basically the monetary assets and monetary liabilities are restated. Because we have more monetary liabilities driven by vendor financing benefit that we have, this resulted into a gain. And to your question on how you see this going forward, of course, as you go along as you start paying off vendor financing liabilities, the monetary liabilities will go down and therefore it will unwind. And also, there are possibilities of Ethiopia coming out of hyperinflation environment and therefore we move back to historical basis of reporting. I think one additional point I wanted to highlight here is these are accounting adjustments and in no way impacts shareholder return simply because we have decided to even exclude this, the net gain in the income statement of 3.5 billion from calculation of dividend. So that the numbers reflect the underlying performance of the business.

Now, on the guidance, this is the management view about what we think the Kenyan-Ethiopia business will be I think you're referring to probably the Kenyan business. The way to look at it is the macro challenges still continue and I think the estimate for the growth that the economic growth is also anything between 5 to 5.5%. So, I think recovery, macro recovery, is going to take time and that's the sentiment that goes into the overall number. To your point on the revenue which is what kind of revenue growth is factored in. Normally we guide only on EBIT, we don't guide on revenue, but I think this is a fair reflection of what you're expecting in the coming year in terms of guidance for Kenya. And for Ethiopia, we have also highlighted FY24 will be the peak EBITDA losses or EBIT losses because that's when we are expanding our network. We mentioned about going up to 3000 sites by end of financial year, which means the cost is going to be coming in faster than the revenue pickup. The revenue will start coming in, but the losses will be peak in FY24. And you have seen CAPEX guidance, pretty much similar profile, Ethiopia will be spending almost similar to what Kenya would be spending in the next financial year. Thank you, Caroline.

Caroline Wambugu Moderator

Thank you, Dilip, for that. To Peter, can you elaborate on M-PESA license in Ethiopia, what activities you can take, what's not allowed, what's allowed and what price you paid for the license? That's from Maddy of HSBC, Peter.

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