annual report 2010 | living our vision · pdf format of the year-end results presentation and the...
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Annual report 2010 | Living our vision
The appeal of prepaid ...
to consumers
� Prepaid products and services are the ultimate budgeting tool, as consumers have
absolute choice and control over what they spend
� The majority of prepaid transactions are cash based, therefore using prepaid removes the
requirement for credit vetting
� Prepaid products and services can be conveniently topped up, either virtually or physically,
as and when required by consumers
� Prepaid products and services are sold across a broad footprint of traditional and
non-traditional outlets
� Prepaid products and services enable the world’s unbanked consumers to purchase
first-world products and services in a manner which suits them and allows consumers
to transact as and when they wish
to suppliers
� Prepaid products and services mean cash upfront for the supplier, thereby guaranteeing
payment
� Guaranteed payments translate into no need for debtor collections and therefore no bad
debts
to merchants
� Blue Label’s prepaid products and services allow for multiple products to be sold from one
device, thereby enabling merchants to have multiple revenue streams utilising a relatively
small retail space
� Prepaid products and services are delivered virtually, eliminating stock management
Financial highlights
Maiden dividend | 12 cents per share
�11% | Increase in revenue
�10% | Increase in gross profit
�21% | Increase in EBITDA
�6% | Decrease in core earnings per share
R516 million cash flows
from operating activities
The attached USB device will link you directly to our website and contains downloadable files in PDF format of the year-end results presentation and the 2010 Annual Report.
Our group in brief1 Corporate profile2 Vision and mission5 Investment proposition9 Strategic and operational highlights
11 Our values13 Group structure14 Milestones16 Board of directors22 Segmental management24 Chairman’s report30 Joint chief executive officers’ report36 Segmental reviews
Governance and sustainability59 Corporate governance78 Remuneration report86 Report of the Audit, Risk and Compliance Committee92 Sustainability report
120 Independent assurance statement124 Financial director’s report
Financial statements134 Directors’ responsibility135 Declaration by Company Secretary136 Independent Auditors’ report138 Directors’ report142 Group statement of financial position 144 Group statement of comprehensive income146 Group statement of changes in equity148 Group statement of cash flows 149 Notes to the group annual financial statements234 Company statement of financial position235 Company statement of comprehensive income236 Company statement of changes in equity237 Company statement of cash flows238 Notes to the company annual financial statements
Annual general meeting259 Notice of annual general meeting265 Explanatory notes to resolutions for consideration
at the annual general meeting267 Form of proxy268 Notes to the proxy form
Glossary269 Glossary
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1Corporate profile | Background and nature of business
Vision statement
To become the leading
global distributor of secure
electronic tokens of value
and other transactional
services within emerging
markets.
Mission statement
To provide world-class
product and service offerings
to consumers within the
middle and lower tiers of the
world’s economic pyramid.
We aim to achieve this
through the development and
acquisition of cutting-edge
technologies, the expansion
of our global footprint of
touch points and adherence
to our core values.
Blue Label Telecoms enables unbanked and underbanked consumers in emerging and developing markets to access first-world products and services, conveniently and cost effectively.
The vast majority of the world’s emerging market population are either unbanked or
underbanked, yet a large number of products and services are only available to people with
bank accounts, credit cards or debit cards. Even though consumers may be unbanked or
underbanked, they have access to cash and are increasingly demanding equal access to first-
world products and services. The key to enabling access to these products and services to
the unbanked or underbanked is to make them available on a prepaid or pay-as-you-go basis.
This method of distribution is growing rapidly in emerging and developing economies and is
the cornerstone of Blue Label’s business.
In 2001, when Blue Label commenced operations, “prepaid” was synonymous with airtime.
The group recognised the opportunity to grow the prepaid product and service concept from
airtime to other offerings, including but not limited to electricity, ticketing, insurance as well
as other transactional services.
The company develops proprietary technology to support the rollout of its bouquet of products
and services. The Blue Label network was built around the premise that any product or
service that can be digitised, can be distributed and paid for through its footprint.
Blue Label has established a distribution network for processing transactions through various
points-of-presence including individual merchants, single entity retail outlets, national chain
stores and petroleum forecourts in South Africa and beyond.
Blue Label aims to extend its global footprint of touch points, both organically and acquisitively,
by continuing to fulfil the significant demand for the delivery of a multiplicity of prepaid
products and services through multiple distribution bases utilising its various proprietary
delivery mechanisms.
ANNUAL REPORT 2010
2 Corporate profile
Blue Label Telecoms is:
• The owner of scalable and transferable proprietary technology
• An unaffiliated distributor of products and services in an open loop
– Hardware agnostic
– Product and services agnostic
• A payment facilitator
• A virtual mall:
• Our products and services require no stock management, therefore there is no dead stock, no perishables, no overstocking and no pilferage
• So long as you are able to pay, you are able to purchase: all payment options, including cash, debit card, credit card and EFT can be accommodated.
BLUE LABEL TECHNOLOGY PLATFORM (AEON)
How we operate: a technical overview
TRANSACTIONJUNCTION
(POSTILLION)
FINANCIAL INSTITUTIONS
Kiosk
Wholesale Main retailers
Independent retailers Kiosks Informal
retailers
POS terminal
Vending machine
Integrated gateway Touch screen Bulk voucherMOBILE
DEVICES
BLUE LABEL DISTRIBUTION
AIRTIME UTILITIES(ELECTRICITY) INSURANCE
GIFT VOUCHER, LOYALTY
CARD, ETC
BLUE LABEL TECHNOLOGY PLATFORM (AEON)
BILL PAYMENTS/
EFT
AIRLINE TICKETS,
BUS TICKETSOTHER
Products/ServicesBlue Label or third party
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Blue Label Telecoms, prepaid products and services
Blue Label has extensive operational experience in various prepaid markets, spanning several continents.
The enduring relationships with both supply partners and its distribution network enable Blue Label to reduce lead times in taking products and services to market.
Customers are partners in the supply and payment value chain.
DISTRIBUTIONLarge and growing footprintNew points of visual presenceVending machinesTouch screensPOS terminalsMobile phones
Management of salesAirtime/Starter packs
Inventory managementInventory balancing maximised
MARKETINGVisual presence to increase customer awarenessPoint-of-sale materials
Intelligent consumer dataDiverse mix of
communication channels
TECHNOLOGY
Designed and developed in-house
We own the technology – back-end and terminal firmware
Ongoing research and development
Country customisation – language and character changes
VALUE ADDED SERVICES
Helpdesk for retailers
Technical installation and support
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InvestingInvestment proposition
Blue Label is a South African-based lifestyle enabler. We provide consumers with additional choice of how to pay for
goods and services – prepay or as it is sometimes described, pay-as-you-go. This enables unbanked or underbanked
consumers to access goods and services by prepaying for them. Our growing distribution network in South Africa covers
over 130 000 points of sale from major retail stores to registered individuals and we continue to expand our footprint
across the emerging markets of India, Mexico and Nigeria.
=
business model STRENGTHENED since listing
+strong CASH generation even during recession
+robust GROWTH footprint
ANNUAL REPORT 2010
6
Business model strengthened
� Business founded in 2001 by entrepreneurial thinkers
� Business model strengthened by restructuring and consolidation ahead of listing
� Listing in November 2007 raised R1.3 billion
� Governance and compliance structure strengthened
� Low gearing since listing
� Global shift in consumer transactional behaviour: from credit to debit to prepaid terms
� High-volume low-margin distribution and sale of e-tokens of value
� Leveraging favourable working capital management
� Typical market is in emerging and developing economies
� Target market is world’s unbanked and underbanked consumer
� Enabling access to prepaid products and services
� Strong barriers to entry for competitors include entrenched relationships, vendor lock-up through systems integration, ubiquity of POS and proprietary technologies
� Long-term contracts with mobile network operators
� Long-term relationships with participants across seven main distribution channels
� Holds approximately 60% of South African prepaid airtime and about 11% of prepaid electricity market
� In-house developed and maintained proprietary technology
� Monetising existing footprint by offering additional value added services
� Processes over 400 million transactions per month
� Strategic 12% shareholding by Microsoft
� Entrepreneurial, young and talented management team
Investment proposition
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Strong cash generation
� Cash-generative business even during recession
�Trading revenue from sales of prepaid virtual and physical mobile and fixed line airtime, prepaid electricity, tickets, insurance and other transactional services via its wholesale, retail and merchant distribution footprint
� Trading and annuity revenue from sale of starter packs, their activation and ongoing utilisation
� Annuity revenue from subscription-based services
� Interest income derived from a combination of high revenue volumes and favourable trading terms
� Dividend policy in place
� Capital expenditure relates mainly to point-of-sale devices
Robust growth footprint
� Licensing of technology as an alternative to equity investment
� Expanding goods and services offerings in South Africa: prepaid electricity, bill payments, money transfers
� Replicate existing goods and services offerings in other emerging markets, particularly India, Mexico and Nigeria
� Impart offerings and learnings across global footprint
� Established systems and infrastructure, so growth costs incrementally decreasing
� Growth prospects, both organic and by merger and acquisition
� Growth can be funded from internal cash flows
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Strategic and operational highlights
Continuing focus on consolidating footprint in India, Mexico and Nigeria
India turnaround plan bears fruit
Mexico rollout programme steadily progresses with more than 3 500 POS devices
Nigeria extends offering to four additional networks as dealer relationship strengthens
South African distribution sees growth in products and services, including prepaid electricity, money transfer, EFT, Lotto, bill payments, PINless
Blu-approved branding being introduced
Growing
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Enduring relationships � Partnering with key stakeholders to ensure sustainability
� Skill retention through self-empowerment, incentivisation and creating a sense of ownership
Entrepreneurship � Indentifying new opportunities and converting them to profit centres
� Encouraging entrepreneurial thinking and rewarding innovation
� Encouraging a culture where excellence as opposed to position rules
Innovation � Encouraging lateral thinking to achieve proprietary technology and commercialisation
� Not allowing comfort zones to retard progress
� Not resting on our laurels
Integrity � Ethical business practices
� Sound governance
� Strict compliance with legal and regulatory obligations
� Respect for the interest of all stakeholders, including shareholders, customers, suppliers and employees
� Making a contribution to the betterment of society as responsible corporate citizen including commitment to transformation and socio-economic and environmental imperatives.
Our values
Connecting
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� Bricks and mortar
� Technology offerings
United Kingdom
South Africa
India
Nigeria
Mexico
GlobalOperational structure
Value addedservices
Datacel
Velociti
Blue Label Data Solutions 81%
CNS
Blue Label Procurement 50%
Cellfind
Content Connect Africa
South Africandistribution
The Prepaid Company
Crown Cellular
Bela Phone Company 51%
Ventury
Matragon
Kwikpay SA
Virtual Voucher
The Postpaid Company
Internationaldistribution
Africa Prepaid Services 72%
APS Nigeria 51%
Gold Label
Oxigen Services India 37.22%
Ukash15.79%
SharedPhone International 50.1%
Blue Label Australasia 50.5%
Blue Label Mexico70%
100% unless otherwise stated
Technology
Activi TechnologyServices
Activi
TransactionJunction 60%
Blue Label One
ANNUAL REPORT 2010
14 Milestones
June
BLI founded by Mark and Brett Levy after its primary investment vehicle, TPC, acquired a national licence to distribute prepaid airtime for Telkom
Between the formation of BLI and the listing of Blue Label Telecoms, TPC acquired a range of strategic businesses aligned to the telecommunications industry, resulting in substantial growth of market share
20
03
20
05
20
04
20
01
October
Acquires interest in Ventury
Acquires stake in Kwikpay SA
December
Acquires equity stake in Africa Prepaid Services
June
Acquires initial equity stake in Oxigen Services India
August
Acquires equity stake in Cellfind
February
Acquires indirect interest in Datacel
May
Acquires equity stake in SharedPhone International
Nthwese Investment Holdings Consortium (Proprietary) Limited, a BEE consortium, together with the Public Investment Corporation acquires 33.33% stake in BLI
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06
March
Acquires equity stake in Virtual Voucher
May
Acquires interest in Matragon
May
Commences operations in Nigeria
August 2010
Maiden dividend of 12 cents per share approved
June
Increases equity stake in Oxigen Services India
Establishes Blue Label Mexico
September
Acquires equity stake in Ukash
December
Establishes Africa Prepaid Services Nigeria
January
Acquires Content Connect Africa
March
Acquires Crown Cellular
April
Acquires remaining minority interest in Ventury2
00
8
April
Acquires equity stake in Activi Technology Services
November
Microsoft acquires 12% equity stake in BLT
Microsoft and BLT sign strategic collaboration and preferred partnership agreements
Prior to listing, BLT restructures, acquiring the majority of its minority shareholders’ interests
BLT lists in the
Telecommunications
sector on the main
board of the JSE
Limited
ANNUAL REPORT 2010
16 Board of directors
Laurence Nestadt (Larry)Independent non-executive chairman
Born: 1950
Larry has a long and successful corporate career, both in South Africa and internationally. Larry is a co-founder and former executive director of Investec Bank Limited. He assisted in the creation and strategic development of a number of listed companies such as Capital Alliance Holdings Limited, Super Group Limited, Hosken Consolidated Investments Limited, SIB Holdings Limited and Global Capital Limited.
In addition to serving as past chairman on the boards of these companies, he is currently the executive chairman of Global Capital (Proprietary) Limited. Larry has also served on the board of directors of Softline Limited, JCI Limited and Abacus Technologies Holdings Limited. Larry was a former director of a number of non-listed companies, internationally and locally; viz, Stenham Limited (UK) and Prefsure Life Limited (AUS). Currently he is chairman of the following non-listed South African companies: the Pro Shop Group, Melrose Nissan, SellDirect Marketing (Proprietary) Limited, BCE Foodservice Equipment (Proprietary) Limited and Placo Holdings (Proprietary) Limited.
Larry is a respected member of the South African business community and his strategic vision and experience contributes significantly to the board.
Brett LevyJoint chief executive officer
Born: 1975
Brett has an impressive entrepreneurial history having founded and operated a number of small businesses from the early 1990s. Brett has been involved in a wide range of industries, including the distribution of fast-moving consumer goods and insurance replacements for electronic goods. His business achievements have secured a number of prestigious nominations and awards, including the ABSA Bank Jewish Entrepreneur of the Year Award (2003) and the ABSA Jewish Business Achiever Non-Listed Company Award (2007), which he won jointly with his brother Mark. Brett was nominated as an Ernst & Young World Entrepreneur SA Finalist for 2007. In 2010 Brett was a finalist in the Top Young Entrepreneur category of the African Access National Business Awards and received the Liberty Life Award for a Remarkable Success Story in the 2010 David Awards.
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Mark LevyJoint chief executive officer
Born: 1971, BCompt (UNISA)
Mark graduated with a BCompt degree from UNISA in 1993. After a period as a commodity trader, Mark decided to pursue his goal of becoming an entrepreneur and has spent the past several years spearheading Blue Label Telecoms’ impressive growth and international expansion. Together with his brother Brett, Mark won the ABSA Jewish Business Achiever Non-Listed Company Award (2007). Mark was nominated as an Ernst & Young World Entrepreneur SA Finalist for 2007. In 2010 Mark was a finalist in the Top Young Entrepreneur category of the African Access National Business Awards.
Mark PamenskyChief operating officer
Born: 1972, BCom (Wits), BCompt (Hons) (UNISA), CA(SA)
Mark completed his articles with PricewaterhouseCoopers Inc. before moving to the corporate finance department of Mercantile Bank. In 1999 he joined the boutique corporate advisory firm, Nucleus Corporate Finance, before joining Blue Label Investments in 2001. Mark has played an integral role in the strategic and operational management of the Blue Label Telecoms group and much of its telecommunications footprint can be attributed to his leadership. Mark is a member of the South African Institute of Chartered Accountants (SAICA) and the Young Presidents Organisation (YPO).
ANNUAL REPORT 2010
18 Board of directors | continued
David RivkindFinancial director
Born: 1972, BAcc (UNISA), CA(SA)
David commenced his articles at Papilsky Hurwitz and in 1999 he joined Merrill Lynch International (UK) as a financial controller. David was employed by Credit Suisse for a brief period before his return to South Africa in 2002. On his return David became the financial director at Integr8IT (Proprietary) Limited prior to his appointment as the chief financial officer for Blue Label Investments where he contributed significantly to the rapid growth of the group. David is a member of SAICA.
Kevin EllerineNon-executive director
Born: 1969, National diploma in Company Administration
Kevin joined the family business, Ellerine Holdings, in January 1991 as merchandise manager. In 1993 he became property manager of Ellerine Bros. (Proprietary) Limited, and was appointed managing director of the Property Division in 2000, a position he still holds today. He sits on the boards of all the property and private equity companies in which Ellerine Bros. is invested.
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Gary HarlowIndependent non-executive director
Born: 1957, BBusSci (Hons) (UCT), FCMA, CA(SA)
Gary graduated from the University of Cape Town in 1979, later qualifying as a Chartered Accountant (SA) in 1982, an Associate of the Chartered Institute of Management Accountants (UK) in 1983 and as a Fellow Chartered Management Accountant (UK) in 1996. After forging a career in merchant banking, Gary was appointed adviser to the finance department of the African National Congress in the early 1990s regarding developing Black Economic Empowerment policy. In 1992, he played an instrumental role in the creation of Thebe Investment Corporation and also served as joint chief executive officer of Msele Corporate and Merchant Bank, South Africa’s first black-controlled merchant bank. Gary was appointed group chief executive officer of Unihold Limited in 1996, where he led the transformation from an engineering conglomerate holding company to an international IT and telecommunications focused group. Subsequent to leading a management buy-out, Unihold de-listed from the JSE in 2001. Gary has served on numerous private and public company boards, including three listed banking groups.
Joe MthimunyeIndependent non-executive director
Born: 1965, BCom (Zululand), BCompt Hons/CTA (UNISA), CA(SA)
Joe Mthimunye qualified as a Chartered Accountant in 1993. After working for KPMG, he joined Nampak Limited in the capacity of divisional accountant. In 1996, he co-founded Gobodo Incorporated, an accounting practice with eight other partners which in time became the biggest black accounting firm in South Africa. In 1999, he led a management buyout of Gobodo Corporate Finance from the accounting firm and re-branded it as AloeCap (Proprietary) Limited. He currently serves as the executive chairman of AloeCap. He also serves on the board of directors of Invicta Limited and all the non-listed companies in which AloeCap Private Equity is invested.
ANNUAL REPORT 2010
20 Board of directors | continued
Lucy (Pani) Mamage TyalimpiIndependent non-executive director
Born: 1962, BCom (Hons) (UNISA), MBL (UNISA), Diploma in Investment and Portfolio Management
Pani is the divisional executive of the Development Bank of Southern Africa, largely responsible for the funding of municipality infrastructure programmes in Eastern Cape, Mpumalanga and KwaZulu-Natal. Prior to working at the Development Bank of Southern Africa, Pani worked for several financial institutions, including Public Investment Corporation (“PIC”) as the head of Isibaya Fund, the private arm of the PIC for the funding of BEE transactions, infrastructure development in a socially responsible manner. She also worked for African Harvest Capital and ABN Amro, where she was employed in corporate advisory services. Pani also spent five years at the Development Bank of South Africa, working in the Project Finance Unit. She currently serves on the board of directors of a number of companies and investment committees. Pani brings extensive market and investment knowledge to the board.
Neil Lazarus SCNon-executive director
Born: 1958, BA LLB (Wits)
Neil graduated from the University of the Witwatersrand in 1981 with a BA LLB degree. After completing his articles, he was admitted as an attorney in 1983. He was admitted as an advocate in 1984 and practised at the Johannesburg bar. He was appointed as senior counsel by President Mandela in 1998. He also served as an acting judge. As an advocate, Neil specialised in corporate restructures, mergers and acquisitions and has been involved in significant corporate reorganisations both locally and internationally. Upon leaving the profession in 2000 he became a director of Corpcapital Limited, establishing its corporate finance business. Neil has discharged both corporate finance and legal mandates for a number of local and international transactions.
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Peter MansourNon-executive director
Born: 1970, BSc (Economics)
Peter began his career at Microsoft in 1995 as a Business and Strategy Analyst for MSN. During this period, he helped transition MSN from an Internet access business to an Internet portal business. He provided analytical and strategic support for several large acquisitions, including Hotmail and WebTV. In 1998, Peter joined the fledgling Windows CE team, where he served as the GPM for Pocket Outlook for the HandheldPC and PocketPC, which would eventually become Windows Mobile.
In 2000, Peter left Microsoft to start Sproqit Technologies, where he served as president and CEO for six years. Sproqit’s patented thin-client architecture increased performance and simplified development for mobile applications.
Peter returned to Microsoft in 2006, where, as GM of Strategy and Business Development for the Unlimited Potential Group, he created Microsoft’s emerging markets mobile payment strategy and led equity investments in Blue Label Telecoms in South Africa and Oxigen in India. Peter currently runs mobile engineering for Microsoft’s emerging market division.
ANNUAL REPORT 2010
22 Segmental management
Abraham Smit Angelo Roussos Bradley Turkington Brett Stagman David FraserGroup CEO Africa Prepaid Services (Proprietary) Limited Group chief information officer Chief sales officer – South
African distributionGroup CFO Africa Prepaid Services (Proprietary) Limited Group chief technology officer
BA LLB, BCom PGDA (UCT), Adv., CA(SA), CPA (USA)
BSc (Lab. Med.), MBBCh (Wits) BSoc Sci (Finance Hons) (Natal) BCompt (Hons) (UNISA),
CA(SA)
BSc (Eng), MSc (Eng), PhD (Natal), CEng (UK), MIET (UK), MIEEE (USA), MSAIEE (SA), MSPE
After completing his BA. LLB. Braam was admitted as an advocate in South Africa. Thereafter, he qualified with a CA(SA), working in Cape Town and San Francisco. He joined the group in 2005 initially as CFO and later CEO of Kwikpay SA (Proprietary) Limited. In 2008 he was involved in investigating international greenfield opportunities, which led to him setting up the group’s operations with its partners in Mexico. He was appointed by Africa Prepaid Services as Group CEO in May 2009.
Angelo became interested in high-speed networking and supercomputing while pursuing a postgraduate medical degree, collaborating on the NSFNet, a precursor to the modern internet. In 1990, he established one of the first companies in South Africa to provide e-mail services, and later the second SA business to provide commercial Internet services. With his partners in 1994, he created one of the largest ISPs in SA. In 1998, Angelo left medicine to focus full-time on IP-networking, and he formed InfoSat which was the second company in the world to offer DVB/IP services via satellite. Sentech, the largest signal distributor in Africa, acquired a majority stake in InfoSat. From 2002 through to 2003, Angelo guided Sentech as group executive Multimedia Services and was responsible for the technology selection, business strategy and business management of the new multimedia business. Apart from his extensive IP-based telecoms experience, Angelo has engaged in strategic, policy and regulatory representations to the SA government and regulator. Together with Dr David Fraser, Angelo is responsible for ensuring that the group remains ahead of the trend through the development of new and innovative technology solutions, with a focus on the transactional side of the business.
After completing a postgraduate degree in finance, Bradley became financial director of a London-based wholesaler. After four years abroad, he returned to South Africa and on the back of the international relationships established became involved in the South African cellular telephony industry from its inception. Bradley served on the local board of a NASDAQ listed company, bringing prepaid to South Africa and many other markets. In 2006, he joined the Matragon group as consultant to expand its international business. He was responsible for formulating Blue Label’s international strategy prior to listing and in 2007 was appointed COO of the International distribution segment, responsible for all the international business operations and initiatives. Earlier this year he assumed the new role of chief sales officer for the South Africa Distribution segment.
After completing articles Brett moved into the diamond industry where he later became the South African financial director of Rosy Blue International. Thereafter he joined Loreal as the CFO of their manufacturing division in South Africa. Brett joined Africa Prepaid Services in 2009.
David is a professional engineer who has considerable international and local business experience in telecommunications, mobile and transactional systems. After qualifying, David lectured and researched communications at university after which he established a number of successful companies, including telecoms and broadcasting services companies and a scientific consultancy firm. His know-how in wireless and related businesses has assisted in the establishment and growth of several European and USA-based companies. David became involved at Sentech in South Africa with the development of Africa’s first public broadband 3G wireless data network, and joined Blue Label in 2005. David is responsible for the group’s mobile strategy, both locally and internationally, and heads up the group’s Mobile pillar. He is passionate about the opportunities that integrated mobile platforms and services can bring to Blue Label’s customers and their customers. David is also involved with business development and maintaining key relationships with several of the group’s partners.
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Dean Suntup Gustav Vermaas JJ Botha Niel BarnardChief financial officer – South African distribution
Chief commercial officer – South African distribution
Group Executive International Business and Strategy
Chief executive officer – Blue Label One
BCom (Wits) Hons (UNISA), CA(SA) BCom CMA (ACMA UK) BCompt (Hons) (UNISA),
CA(SA)BSc (Information Technology), MSc (Programme Management), MCSE
After qualifying as a chartered accountant Dean remained at PricewaterhouseCoopers Inc as assistant manager, later joining BSC Technologies (Proprietary) Limited, a business established by the Levy brothers. He became financial director of BSC in 2003 and in 2005 transferred to The Prepaid Company as financial director. Dean has been instrumental in overseeing the growth of the SA distribution segment, including the successful integration of businesses which have been acquired over time.
Gustav is a BCom graduate and qualified as a Chartered Management Accountant (ACMA UK) in 1995. He joined Blue Label in 2005 to consolidate the group's field support teams into what became Activi. During 2007 – 2009 he was instrumental in the consolidation of the technology and operational teams.
His 20 years' experience has been focused on solving business problems by integrating strategy, technology, business processes and people interventions, while retaining a strong operational input. Before joining Blue Label he was co-founder of IQ Commerce, CEO of Nashua Connect and a member of the IQ Business Group international Exco. He started his career in the Anglo American Corporation, later joining TOTAL, spending nine years in the petroleum industry.
JJ Botha is a qualified chartered accountant and current Group Executive International Business and Strategy. His responsibilities include executive board appointment at international operations, strategy and review, as well as establishment and incubation of specialised group-wide business initiatives. He has served in the group for more than four years, including CEO of the Mobile Service Company and Cellfind.
He has over 15 years' experience in the mobile services industry in Africa, in particular South Africa and Nigeria. He was Chief Sales and Products Officer of Zain and spent eight years at Vodacom, where his particular successes included sales, distribution and product development.
Niel has a wide ranging skill set and has worked in various industry sectors such as medical aid, government, telecoms and IT. After completing his degree at UNISA, Niel worked for various companies, in diverse roles ranging from IT support to project management and has been in the telecoms industry since 2003. Niel spent five years with Nashua Mobile where he was key to the development of various new initiatives, including the strategic projects, strategic partners, product development, retail sales and business solutions. Niel joined the Blue Label group in 2006. He became the managing director and later chief executive officer of Cellfind. His current area of responsibility spans Content Connect Africa, Cellfind and Blue Label One, where the main focus areas are WASP services, mobile services and development, LBS, content aggregation, B2C marketing and media sales. Niel in conjunction with Dr David Fraser is responsible for the development and implementation of Blue Label's overall mobile strategy and its related aspects.
ANNUAL REPORT 2010
24 The group generated EBITDA of R689 million, up 21% for the year under review.
Larry Nestadt, chairman
Telecoms and Media 2009, predicts global
mobile banking users will
increase from 2008 to
2013 from 67 million
to 1 billion.
The company was
ranked 50th in the
2010 Financial Mail Top
Companies awards.
Chairman’s report
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DEAR STAKEHOLDERS
I am pleased to report the group continues to show remarkable resilience in spite of the recession,
with increased revenue of 11% to R17.03 billion for the year ended 31 May 2010. After the impact of
the sub-standard performance and consequent closure of certain operations in the call centre business,
the group has positioned itself leaner and healthier with a strong foundation for growth opportunities in
the year to come.
Blue Label’s core strategy remains investing in distribution platforms for electronic tokens of value in
emerging markets, presently covering South Africa, India, Nigeria and Mexico. On an international front,
the group’s share of losses in India declined significantly. Nigeria has solidified its distribution base and
has traded profitably since inception. Mexico, a greenfield start-up, has deployed over 3 500 point-of-sale
devices, which is a remarkable achievement by most comparable standards.
The group continues to strengthen relationships with suppliers and customers and extend its range of
products and services beyond airtime top-up to prepaid electricity, public transport ticketing, electronic
road toll collection, cash transfers and mobile wallets.
We are reminded that just some 15 years ago, the desktop computer morphed into the laptop or notepad
and nowadays the same functionality, and more, is available on smartphones. According to Ericsson, in
just the past 18 months to mid-2010, global mobile subscriptions increased some 25% reaching over
5 billion, driven mostly by growth in China, India and Nigeria. In the first six months of this calendar year,
some 80% of the growth came from Africa and Asia-Pacific. Ericsson estimates that by 2020 there will
be 50 billion mobile devices in use.
According to Informa Mobile Payments and Banking 2009, mobile-initiated transactions are forecast to
increase from 2008 to 2013 by value, from $72 billion to $800 billion and by volume, from 25 billion
to 300 billion. Informa Telecoms and Media 2009, predicts global mobile banking users will increase
over the same period from 67 million to 1 billion. The same source estimates that global mobile money
transfers will be worth some $200 billion by 2013. Blue Label is well positioned, through its e-voucher
distribution capabilities, to participate in this exciting and rapidly growing world of mobile transactioning.
ANNUAL REPORT 2010
26
GROUP PERFORMANCE
The group generated EBITDA of R689 million, up 21% for the year under review. While this was supported
by growth in both the South African and International distribution segments, the Value Added Services
(VAS) segment underperformed, particularly at the call centre operations. The impact of the recession
was felt in the VAS segment, where outbound insurance and cellular sales declined. This led to the closure
of the call centres in Johannesburg, Kimberley and Bloemfontein, which resulted in the impairment of
goodwill pertaining to these operations. Renewed focus has been given to inbound services and database
collection and management.
As a positive cash generative group with healthy cash reserves, any decline in interest rates has a
negative impact on profitability. The reduction of interest rates since November 2008 of 550 basis points,
resulted in a decline in actual interest earned of R74 million, in spite of an increase in cash reserves.
Notwithstanding growth in EBITDA and the containment of overheads, the above factors resulted in a
decline in core earnings of 7%.
DIVIDEND POLICY
On 23 August 2010, the board approved a maiden dividend of 12 cents per ordinary share, in respect of
the year ended 31 May 2010. The dividend policy is to consider paying a dividend after taking into account
cash flow needs for working capital, capital expenditure, share buy-backs and acquisitions. We intend
maintaining a dividend cover of three to four times earnings.
CORPORATE GOVERNANCE
I am pleased to report a strengthening in the corporate governance culture across the group, following
on from its entrepreneurial origins. An external service provider has been engaged to conduct a formal
assessment of Blue Label’s adherence and readiness to adopt the principles and practices of best
governance, as contained in King III. The assessment will provide Blue Label with key findings on areas
requiring improvement and a high-level roadmap addressing these over the ensuing financial year. The
board is committed to ensuring alignment over time with the requirements of King III and with the new
Companies Act, expected to come into effect later in 2010.
Chairman’s report | continued
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DIRECTORATE
In November 2009 the board bade farewell to two directors, Jackie Huntley and Herbert Theledi, who had
served since the listing. I thank each of them again for their contribution to board deliberations and wish
them well in their future endeavours.
Kevin Ellerine was appointed to the board in place of our friend and board colleague, Sidney Ellerine,
who passed away in July 2009. I look forward to his constructive participation in board and committee
proceedings.
The Remuneration and Nominations Committee is canvassing individuals, particularly from historically
disadvantaged groups, whom it believes can strengthen the board by making an active and positive
contribution to the continuing development and growth of the company.
BBBEE AND TRANSFORMATION
The group has made significant progress this year with BEE and transformation. The Transformation sub-
committee meets regularly to plan and strategise around all transformation and BEE initiatives.
The group has set BEE targets within each subsidiary to be achieved during the financial year ending
May 2011. These requirements have focused specifically on training initiatives, inclusive of learnerships,
enterprise development efforts through our partnership with ZOK, and comprehensive socio-economic
programmes through the Chairman’s Fund.
ANNUAL REPORT 2010
28 Chairman’s report | continued
SUSTAINABLE DEVELOPMENT
The board and management team remain committed to open and transparent dialogue with stakeholders.
The company was ranked 50th in the 2010 Financial Mail Top Companies awards, announced just after
financial year end. Blue Label Data Solutions was granted Centre of Excellence accreditation by the Direct
Marketing Association of South Africa. The Prepaid Company received Telkom’s Best Prepaid Channel
Partner for the sixth consecutive year, as well as Vodacom’s Best Prepaid Channel Award for the fourth
consecutive year.
Our joint chief executives, Mark and Brett Levy, were both finalists in the Top Young Entrepreneur category
at the sixth annual African Access National Business Awards 2010. Brett Levy also received the Liberty
Life Award for a Remarkable Success Story in the David Awards in 2010.
The Chairman’s Fund is an important donor to the Blue Label community and in the financial year ended
May 2010 contributed R3.1 million to various worthy causes. The focus of these contributions has been
on youth development, HIV/Aids, and sports development.
Contributions were made to the Protea Glen Legacy Park and Nomondes Children’s Home. At Legacy
Park, a quality sporting complex was built, utilised by schools from sunrise, corporate leagues during
the evening and for other community projects, activities, education and awareness programmes into the
night. Nomondes Children’s Home accommodates 32 abandoned and orphaned children. Representatives
from Blue Label actively support the home by serving on the board of trustees along with Nomonde Doda,
the Home’s founder, and assist with securing funding and encouraging good governance principles.
In the forthcoming year we will continue to support Legacy Park and Nomondes Children’s Home and are
looking forward to the support we can give to the Netcare Cranio Facial Programme, amongst others.
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PROSPECTS
The past year has been characterised by consolidation, rationalisation and cost containment. Blue Label’s
strong balance sheet positions it well to consider value accretive strategic acquisitions as well as organic
expansion opportunities.
APPRECIATION
I extend my gratitude to my fellow directors for their diligent service. On behalf of the board, I thank
our joint chief executives and group founders, Mark and Brett Levy, and their executive team for their
determination and enthusiasm in what turned out to be a difficult year. My gratitude to all employees of
Blue Label for their commitment and loyalty.
Larry Nestadt
Chairman
ANNUAL REPORT 2010
30
Mark and Brett Levy, joint CEOs
Increased revenues were
mainly achieved through:
• Further increases in
local and overseas
market penetration as
our footprint grew
• Expanding the range
of prepaid electronic
goods and services
• Additional revenue
derived from annuity
airtime services.
RICA enabled Blue Label
to position over 6 000
registration agents in
the market, the largest
number of any service
provider.
Joint chief executive officers’ report
We aim to extend the existing range of products and services to new markets, initiate new offerings and increase our distribution channel in the informal market.
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GROUP PERFORMANCE
The strength of the group’s South African distribution segment, together with its growing International
footprint in India, Mexico and Nigeria, and expansion of the range of products and services continues
to drive revenue growth. Over time it is our vision to derive 50% of our profit from the International
distribution segment and 50% of all profit from non-telephony sources, such as prepaid electricity, toll
road collections, money transfers and distribution of other secure tokens of value.
The financial year commenced with South Africa officially in recession, the first since the last quarter
of 1992. During the year, soaring job losses impacted consumers as businesses sought to cut
costs. Telecommunications spend reduced across the economy with an immediate impact on sales of
hardware, new software licences and contracts and services. Yet prepaid ARPU held up well in spite
of SIM card saturation. Emerging markets showed some growth, albeit only at single-digit figures
rather than the double-digit expansion of the past two years and in less evolved markets, consumer
expenditure was largely stable or at worst decreased slightly.
Against this background, the growth in demand for the group’s products and services contributed to an
increase in revenue, but the poor performance from the call centre operations resulted in reduced core
net profit of 7% to R397 million. Core earnings per share was down 6% to 52.34 cents per share year
on year.
Increased revenues were achieved through:
• Further increases in local and overseas market penetration, as our footprint grew
• Expanding the range of prepaid electronic goods and services
• Additional revenue derived from the growth in annuity airtime services.
In this difficult environment, Blue Label restructured and rationalised operations. This involved consolidating
some activities, selling businesses where partners recognised greater opportunity than we did, optimising
resources, in particular by transferring scarce skills to growth regions and rotating management. As the
process gains momentum, we look to achieving better operational efficiencies as we achieve economies
of scale.
ANNUAL REPORT 2010
32
Since August 2009, RICA required all new mobile phone starter pack activations and existing active
users to be registered. The impact of RICA was to drive lower churn among subscribers, particularly
during the eight months from August 2009 to March 2010. RICA enabled Blue Label to position over
6 000 registration agents in the market, the largest number of any service provider, to ensure that our
suite of goods and services was uppermost in mind at every registration. Since May 2010 we have seen
registrations return to the levels last seen prior to the implementation of RICA.
The group’s resilient operational performance during the recession, its cash-producing strength with
year end cash generated from operations of R516 million and strong local and international growth
programme evidenced a successful business model which we believe is sustainable.
For some years we have debated the suitability of the telecoms sector for Blue Label’s listing on the
JSE, given our business model is more aligned to a banking and distribution business than a telephone
company. This year we tasked an external service provider to review the sector options for our listing.
In short, there seems little prospect for a share price rerating by moving sector, especially as there is
no obvious best-fit alternative sector. Rather, it is suggested that a rerating compared to our developed
market peers, is more likely to be achieved through corporate activity, continuing strong cash generation
and ongoing success.
STRATEGIC ACQUISITIONS, INVESTMENTS AND DISPOSALS
In November 2009 the group sold its 90% share in African Prepaid Services Mozambique to the minority
shareholder AP Capital for US$3.95 million. The lessons learned in operating this, our first offshore
investment, continue to hold us in good stead as we expand our international products and services
footprint in larger and faster-growing emerging markets.
Africa Prepaid Services DRC was sold in December 2009 owing to the difficult operating conditions in
that country. Most of our expatriate staff were redeployed elsewhere in the group, most notably, Nigeria.
Joint chief executive officers’ report | continued
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In March this year, additional loan funding of US$6,8 million was approved for Blue Label Mexico.
Just before financial year end, a deal was closed at R59 million to purchase the client base and
recurring annuity income from The Starter Pack Company (Proprietary) Limited.
Since the financial year end, we announced a partnership with Neotel, for the distribution of its prepaid
communication services to the market.
NEW PRODUCT DEVELOPMENT
Investment in R&D remains an important tool in delivering our vision of widening our bouquet of offerings
and capitalising on the footprint already established. R22 million of total capex of R196 million for the
year, was invested in R&D.
During the year, Blue Label partnered with Gidani, the South African Lotto operator in respect of FNB’s
distribution channels. We also extended our relationship with Pick n Pay to cover the acceptance of our
Ukash prepaid vouchers.
The group concluded a reseller agreement with Symantec for the introduction of a protection product for
Smartphones, by utilising unique antivirus technology, advanced firewall and SMS anti-spam protection.
We continue development of a distribution platform for electronic road toll collection.
Mobile banking, specifically money transfers, is in its infancy in South Africa. Given the highly regulated
environment, Blue Label continues to engage with potential banks in a planned partnership to deliver this
service to the market. The product concept comes with a strong track record in emerging and frontier
markets and is particularly popular among migrant workers sending money home as well as paying school
fees and taxi fares.
ANNUAL REPORT 2010
34 Joint chief executive officers’ report | continued
SUSTAINABILITY REPORTING
We run our business mindful of our impact on economic, social and environmental issues. We remain
committed to open and transparent dialogue with stakeholders, as reported in the engagement
matrix on page 98 of this report. The company was ranked 50th by revenue in the Financial Mail Top
Companies survey.
PROSPECTS
The last financial year has been characterised by consolidation and rationalisation in our local and overseas
businesses, streamlining without compromising our strong cash-generative capabilities. This puts us in a
strong position to consider value-accretive strategic acquisition and organic expansion opportunities. We
aim to extend the existing range of products and services to new markets, initiate and bring to market new
products and services and increase our distribution capabilities in our target markets.
The South African distribution segment is expected to see airtime sales grow in keeping with the overall
performance of the mobile networks. The non-telephony contribution to the business is growing monthly as
prepaid electricity meters are introduced across the country. Future earnings growth is expected from the
establishment of Mobile Merchant Solutions, extending the group’s point-of-sale footprint, increasing use
of retail outlets for bill payments, the uptake of mobile banking across South Africa and the introduction
of free-flow toll roads.
We expect the International distribution segment to make meaningful strides in the year ahead. This
view is predicated on us overcoming some of the challenges we face with Multi-Links in Nigeria and the
10-year contract is currently under review. Additional distribution arrangements have been concluded with
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a number of mobile networks in that country. Blue Label Mexico is expected to continue its measured
rollout of POS terminals. At Oxigen India, the business has emerged more streamlined from its get well
plan. Oxigen India will roll out kiosk banking and mobile wallets via its web-enabled retailers in terms of
an agreement with the State Bank of India. This will facilitate virtual banking to India’s vast unbanked
population. New relationships formed with the State Bank of India, ICICI Bank and Corporation Bank could
facilitate access to over 100 million banking and internet clients.
APPRECIATION
We remain grateful to the head office staff who coped so spiritedly during the landlord’s upgrading of
the Sandton building – this pain has been assuaged by the splendid finished product. Our heartful thanks
to all employees for their diligence and hard work in this difficult year characterised by rebuilding and
restructuring. Our gratitude also goes to the executive team for their absolute dedication. We thank the
members of the board for their guidance and leadership over the past year. Finally, we would have no
business if it were not for our suppliers and customers, whom we recognise and thank for their loyalty
and support.
Mark Levy and Brett Levy
Joint chief executive officers
ANNUAL REPORT 2010
Segmental reviews | South African distribution
Revenue
EBITDA
201091.3%
201099.5%
200992.9%
2009109.9%
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This segment distributes prepaid products and transactional services to the South African wholesale
and retail consumer markets.
The strategy is to identify key objectives with a view to the effective sharing of Information Technology
and Intellectual Property across the group with growth and sustainability in mind. Expanding our footprint
remains a top priority driven through a co-ordinated and managed approach across numerous subsidiaries.
The product development team continues to build on the existing Blue Label technology platform, developing
proprietary e-tokens for distribution and deployment, as well as third-party e-tokens, into the entire prepaid
market.
This year we introduced a customer retention programme. It has shown significant results in maintaining
our customer base, while also facilitating the launch of new products and services to existing customers
and promoting organic growth.
This segment currently generates the majority of its profits from prepaid airtime which it purchases in bulk
from the networks at a discount and on-sells at a margin. While it is expected that there will be pressure
on margins resulting from the reduction of interconnect fees, most of the effect of margin compression,
is expected to be absorbed throughout the channel.
The Prepaid Company (TPC)
Established in 2001, TPC was the original company spearheading the group’s entrance into the prepaid
airtime industry. TPC wholesales virtual and physical e-tokens to all of the major chain stores in South
Africa and is a leading distributor of prepaid airtime on behalf of all the network operators. Through the
introduction of e-tokens this base was extended to include cash and carry operators and independent
retailers. Distribution of all virtual products and starter packs is facilitated, managed and maintained by
ANNUAL REPORT 2010
38
proven technology developed in-house, which ensures efficiency at purchasing, distribution and control
levels. TPC remains the major contributor to group revenue and profitability, being responsible for:
• All supplier agreements
• All wholesale sales
• Procurement of all stock
• All bulk print sales
• Starter packs
• Reconciliation and settlement
• Treasury.
Comm Express Services (CES)
CES markets and distributes all prepaid airtime through in-house manufactured vending machines and
POS terminals and touch screens in independent retailers countrywide, but mostly ‘mom and pop’ stores
from rural to urban areas. The technologies used are managed by Activi, a subsidiary responsible for
technology development, implementation and maintenance, in the group.
Virtual Voucher
Virtual Voucher started as a distributor of prepaid airtime through an integrated prepaid voucher
management system to over 550 Engen petroleum sites across South Africa. Using an integrated till
management system, the need for POS terminals was obviated.
Kwikpay
This is a leader in the distribution of virtual prepaid airtime, electricity vouchers and bill payments via multi-
application and managed terminal vending solutions and integrated POS devices. It services both large
corporate and independent clients, including Spar, Clicks, Nedbank and FNB.
Segmental reviews | South African distribution continued
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Cigicell
Virtual prepaid airtime and electricity is distributed through a broad network of channels, including POS
terminals at the forecourts of the major oil companies, including BP, Sasol and Shell. Cigicell maintains
strong ties with electricity suppliers and national petroleum accounts.
Crown Cellular (Crown)
Crown is a wholesale and retail distributor of physical and virtual prepaid airtime and starter packs
servicing the informal market. Crown operates 17 free-standing stores as well as serviced kiosks within
large independent stores. Its entire inventory is purchased from TPC. This is our typical retail/wholesale
model.
The Postpaid Company
This company is focused on the sale of contract-based products to pre-approved customers via tele-
marketing and sales techniques.
Each of these companies is responsible for ensuring customer maintenance, site expansion and growth of
new products and services. Over the past year, moving additional products through a retail environment
has positively impacted product sales. Blue Label is constantly engaged in channel expansion through
new retail and corporate relationships. Ultimately, our ability to offer an extensive range of products and
services, has strengthened our value proposition.
PRODUCTS
Prepaid electricityContribution to turnover from prepaid electricity has been exponential. In 2009 it was R0.7 billion, rising in 2010 to R1.9 billion. We do not, however, account for revenue at face value, but only for the commission received, as we act as agent on behalf of the utility�companies.
ANNUAL REPORT 2010
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Blue Label currently accounts for a small part of the third-party prepaid electricity market, thought to be around R7 billion. It is believed this share can grow substantially, particularly as Eskom and utility companies increase the number of its prepaid customers, both organically via the conversion of postpaid customers and through the aggressive rollout of new prepaid meters in previously non-electrified neighbourhoods. Through agreements with Eskom and numerous municipalities, we have created the single most comprehensive prepaid electricity supply pipeline, both on and off-line, in South Africa.
Our aim for the coming year is to grow this supply bouquet and to continue feeding it through to the end-consumer via our extensive distribution footprint in the formal and informal retail sectors. We are presently supplementing our existing vending technologies with new and innovative ones, which are expected to increase our market share.
FNB LottoA technical support arrangement was concluded with Gidani, the licensed operators of the Lotto in South Africa, to integrate their products into till points and those distribution channels managed by FNB.
Algoa bus ticketingPrepaid bus ticketing was introduced in Nelson Mandela Bay municipality. The model has allowed Algoa to eliminate bus ticketing fraud and to remove the cash receipt function from the bus drivers and place it in the hands of the vending merchants. The success of the project has led to interest from other bus companies who wish to replicate the model within their distribution base.
Cover2Go This prepaid insurance product was launched as a pilot in Umtata last year and was well received with a steady uptake in subsequent months. The model is currently being monitored in order to determine the appetite for a nationwide rollout.
The Bela international calling card and White Label international calling card Both these proprietary calling cards went live just before the December holidays through mass retail channels and as per the marketing plan, received quick uptake and adoption, particularly among communities with roots outside South Africa.
Segmental reviews | South African distribution continued
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UkashThis product, a form of prepaid digitalised cash, was introduced from our International distribution segment to the South African market, where it is sold through Pick n Pay and Shoprite. Negotiations are underway with other major retail chains to accept Ukash vouchers. There has been a steady growth in the uptake of the product as the number of redemption sites have increased.
Off-site ticketing for GautrainThe off-site Gautrain Gold Card vending machines, established since the financial year end, are gaining acceptance since the train’s launch in June 2010. The number of dispensing units is set to increase as new sectors on the train’s widening network are opened and as consumer demand for the service grows.
New products and servicesNew products and services introduced during the year included UNIPin and RICA registration.
PROSPECTS
The group is currently in the process of restructuring the South African distribution segment, which will
achieve a single management, accounting and distribution model. This unified business approach allows
for enhanced line of sight to market growth opportunities and customer retention, while incorporating
customer care and CRM methodologies and allowing for further market segmentation and product
specialisation.
It is anticipated that during the forthcoming year, revenue could continue to grow organically, not only through the existing product offering, but also via additional product offerings developed in-house or on behalf of third parties and which are expected to be rolled out across the group’s POS footprint. These initiatives include:• M-Pesa• Money remittances across the group’s POS footprint• Electronic toll collecting on toll roads• Bill payments.
42
ANNUAL REPORT 2010
Segmental reviews | International distribution
Revenue
EBITDA
20107.3%
201019.88%
20094.8%
20091.08%
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The strategy of the International distribution segment is to pursue growth opportunities within
the group’s global footprint, through a combination of established “bricks and mortar” operations
in selected markets, entering into strategic partnerships and providing technology licences to
third parties. The focus is on systematically rolling out multi-secure electronic tokens, including
but not limited to prepaid airtime distribution of goods and services, in replication of the South
African distribution segment model. It is our intention to introduce and distribute as many secure
electronic tokens, as well as other products, utilities and services, in our international markets.
The segment disposed of its investments in Mozambique and DRC during the year under review and
concentrated resources in growing the business footprint in the emerging markets of India, Mexico and
Nigeria.
OXIGEN INDIA
The company was incorporated in August 2003 and is 37.22% owned each by Blue Label and Microsoft
with the remaining 25.56% held by local partners. Currently, Oxigen is an electronic distributor of recharge
vouchers and prepaid subscriptions for mobile and satellite TV, supported by about 75 000 points of
presence, expected to rise during the financial year ending May 2011. Other transactions facilitated are
prepaid railway, airline and bus ticketing as well as bill payments for mobile, landline and utilities.
As reported last year, we implemented a ‘get well’ plan which has resulted in a sustained focus on
efficiencies and management of expenditure. The impact of the plan became evident as EBITDA turned
positive towards the end of calendar 2009 and losses reduced. Salient features of the plan were:
• Technical and other operational improvements
• Changes to the distribution structure and margins
• Availability of a wider selection of value added products and services
ANNUAL REPORT 2010
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• Introducing direct top-up already offered by the mobile operators (some 70% of all recharges are done
this way), but previously not available in our channels
• Facilitation of a more profitable bill payments system
• Major cost reductions and contained operating expenditure.
These improvements were delivered in a challenging and competitive environment, as it is noted that
margins in India are the lowest achieved among the international operations. This places pressure on
Oxigen to improve technology product and service offerings, as well as increase the effectiveness of
distribution channels to ensure a more consistent revenue stream from a diverse product mix.
In October 2009, the company launched cellphone vending, the first instance of offering all mobile
operators from a single phone. This was well received with over 3 000 re-sellers signing up within the
initial period after launch. To date over 17 000 re-sellers have been signed up and turnover for this
business has increased Rs 0.2 million per day to about Rs 0.3 million per day.
Technical integrations with the State Bank of India (SBI), the largest bank in India, ICICI Bank and
Corporation Bank resulted in Oxigen having access to more than 100 million banking customers in the
B2C segment for mobile and internet banking transactions. The success of the initiative with the SBI led to
the appointment of Oxigen’s affiliate Sahyog Micro Finance Foundation, as Business Correspondent to SBI.
This allows Oxigen’s retail outlets to become the bank’s Business Correspondents, for which we will provide
complete back-end and technological support. The intention of the Business Correspondent model is to
make retail outlets an extension of the bank’s branches, providing no-frills banking facilities to consumers.
This should enable Oxigen to consolidate its position in the market by strengthening its brand across India.
The company’s focus has remained on the distribution of airtime. However, good progress was also made
during the year in securing additional revenue sources from new and higher margin value added services.
Segmental reviews | International distribution continued
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While POS deployment has been steady, the rate is expected to accelerate as we plan to deploy GPRS-
enabled terminals. GPRS rates have reduced markedly to about $2 per month, thereby addressing the
connectivity constraint faced in terminal deployment.
Since year end, Oxigen jointly launched with SBI, kiosk banking, targeting some 20 000 Oxigen merchants,
initially in Delhi and Mumbai. SBI has also approved the introduction by Oxigen of a mobile wallet platform.
Overall business is expected to grow as Oxigen develops a stronger and broader market presence,
particularly once Oxicash and its wallet and card products are introduced.
BLUE LABEL MEXICO
Blue Label Mexico, which commenced trading operations in May 2009, is partially owned by Nadhari SA
de CV, a Mexican company with product and service expertise in emerging markets.
The business is now underpinned by a number of agreements with sales channels and key mobile
operators/service providers, giving Blue Label Mexico the ability to offer PINless recharge, direct top-up
for the primary mobile operators in Mexico, using our proprietary AEON platform developed by Activi.
At year end some 3 000 POS units were active in the market, with a rollout rate of a net few hundred
additional units per month, using internal channels and independent sales organisations. Integrated
solutions and POS devices are positioned in several retail environments, including convenience stores
and petroleum forecourts and are aimed at the previously unserviced or under-serviced communities,
replicating the successes achieved in these sectors in South Africa. A strategic and synergistic contract
was reached with the World Organisation of Credit Unions (WOCCU), providing extended reach into new
market segments for the millions of members of its affiliated credit unions and member micro-finance
sites.
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Recently, network integration into Atio and its associated petrol forecourts as well as the liquor chain
Alianza, commenced. The rollout of cellphone vending and PC-based vending solutions started towards the
end of the financial year. Additionally, Blue Label Mexico is currently deploying Bill Payment services into
its footprint, and planning to deliver other products, such as lottery from Pronosticos, which will diversify
the product offering and revenue streams.
Mexico presents several growth prospects, both in terms of POS deployment and the introduction of new
products and services replicating established offerings in other countries. Its geographic location makes
it an important springboard into the Unites States and Latin American markets.
AFRICA PREPAID SERVICES NIGERIA (APSN)
Blue Label has an effective ownership of 36.7% in APSN, through its 72% shareholding in Africa Prepaid
Services. The company provides a single point of contact to all network operators and distributors in
Nigeria, consistent with the Blue Label business model around the world. In support of this strategy, APSN
has an end-to-end distribution agreement with Multi-Links, a subsidiary of Telkom South Africa Limited.
The agreement with Multi-Links provides for APSN to service its entire distribution channel in Nigeria for
a 10-year period which commenced in December 2008. Operations started in May 2009 and current
products include the distribution of airtime cards, starter packs, phones and data products, while bulk
printing vouchers and other value-added services are likely to follow. The annual review of the contract
is currently underway. Multi-Links accounts for approximately 2% of the total 74 million subscribers in
Nigeria. At financial year end, some 907 000 phones had been distributed and 50 000 customers had
activated data products distributed by APSN.
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During the past year, APSN extended its airtime offering in the market by entering into agreements with
ZAIN, Globacom, Etisalat and Starcomms to secure availability of their airtime. Agreements with other
network operators are expected to follow. With the current national subscriber penetration believed to
be less than 50% and growing significantly year on year, these distribution relationships are expected to
provide real growth opportunities for the company.
APSN will introduce one POS device which has the ability to distribute airtime recharge for each of the
networks, thereby reducing distribution costs to the current dealer channels. This is expected to entice
these channels to convert current physical distribution to a virtual method. The recharge products will be
offered either directly to the retail market at a margin or through mass market dealer channels where a
technology fee is charged.
As major dealers distribute on behalf of most of the Nigerian networks, the strength of the existing dealer
relationships forged to date, places the company in a strong position to leverage these channels for
launching additional network products and services.
The first application of Bulk printing technology in Nigeria, will soon be rolled out. The system is fully multi-
tiered, enabling dealers and merchants to on-sell the solution to their customers or to roll out bulk printing
to their sub-dealers, a process well suited to the Nigerian market. The company is exploring offering other
value-added products and services, which could include prepaid electricity vouchers and bill payments.
Revenue growth from Multi-Links will depend on the availability and pricing of up-to-date phones, the
introduction of RUIM card starter packs (which commenced in 2010), the provision of greater service
selection and the implementation of bulk distribution of airtime. It will also be subject to the ability of
Multi-Links to expand the product and service offering directly to the market in conjunction with increased
customer awareness activities.
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Market experience gained during the first year of operations, the process of obtaining recharge agreements
for all network airtime distribution and the solid relationships built with the major dealers, augur well for
the growth of products and services in Nigeria.
UKASH
The strategic investment in Smart Voucher Limited, trading as Ukash, was acquired in 2008. It is an
international developer of patented prepaid cash voucher technologies enabling it to supply end-users with
prepaid Ukash vouchers, which effectively digitises cash. Ukash is the global e-money network that enables
consumers to turn their cash into an e-cash voucher so that they can pay, play and reload online. It is
patented, proven and completely scaleable.
Ukash vouchers are now available in 400 000 locations in over 30 countries on six continents, principally
South Africa, the United Kingdom, Europe, Australia, South America, North America and China. In South
Africa Ukash is sold through Pick n Pay and Shoprite and negotiations with other major retail chains to
accept Ukash vouchers, is gaining momentum.
Revenues and redemptions have increased over the year under review, mainly as a result of an increase
in the number of issuing sites and a broader range of redemption opportunities online. Redemption
values continue to show approximately 70% annualised growth. Improved efficiencies have ensured the
containment of operating expenditure.
Ground work has been done this year to identify new channels for the use of Ukash, particularly for
transient communities. Many members of these groups are unbanked and previously found it difficult to
monetise products and services without access to a mobile network operator. Hence community-based
mobile wallets are now starting to gain acceptance. Initiatives like “reLoad” and “rePower”, for replenishing
prepaid debit cards, as well as other mobile and electronic wallet and e-commerce-type environments and
the Ukash virtual prepaid card Neo, positively impacted revenue during the year.
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The repower agreement signed with MasterCard® earlier in 2009 is expected to enhance Ukash’s
revenue growth, providing an alternative means of redemption and facilitation of payment. Further growth
is anticipated to arise from an increase in the number of issuing sites, by entering into new markets and
expanding into known redemption environments, such as VOIP and gaming.
SHAREDPHONE INTERNATIONAL
SharedPhone operates SIM card mobile payphone software, which is particularly practical in rural areas,
as it allows vendors to provide public telephony services as well as sell prepaid airtime, from mobile
phones through a mobile payphone reimbursement system. This enables the sale of prepaid products and
services such as airtime, electricity and insurance. Results were adversely impacted through the overall
reduction of VOIP traffic and the effect of the earthquake in Haiti, where the major mobile operator is one
of SharedPhone’s major clients. In the coming year operations are expected to expand into west Africa.
PROSPECTS
Growth prospects for International distribution are firmly predicated on economic and other developments
in each of the main areas of presence, ie India, Mexico and Nigeria. The turnaround in Oxigen India is
expected to continue gaining momentum and the rate of traction growth shown at Blue Label Mexico
appears to be taking hold. The introduction of electronic distribution of airtime by APSN will further
diversify our footprint as well as enhance the sustainability of our existing operations. Indications are that
this segment should continue to improve its growth contribution to the group.
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Segmental reviews | Technology
Revenue
EBITDA
20100.1%
2010(11.97%)
20090.1%
2009(8.54%)
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The Technology segment is responsible for the group’s core technology systems. Its objective is to
develop, deploy and support the technology platforms within the group as well as a number of third-
party partners.
The core technology service offering includes:
� Facilitating secure financial transactions
� Providing and enabling various types of secure e-tokens
� Operational support of these e-token and transactional systems
� Device and customer field support
� Hosting and management of IT infrastructure
� Manufacturing and maintenance of devices in the field.
The strategy of the Technology segment is to:
� Develop commercially viable and functionally rich transaction engines
� Provide stable and robust platforms
� Standardise deployments with templates and methodologies
� Optimise technology investment through the sharing of Blue Label infrastructure
� Provide end-to-end support for technology and deployments
� Retain and develop skills.
The group’s infrastructure connects into some of South Africa’s major banks, utility companies and
telecommunication operators and switches both debit and credit card electronic funds transfer (EFT)
transactions and e-token products for some of the country’s leading retailers and petroleum companies.
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52 Segmental reviews | Technology continued
KEY OPERATIONAL CAPABILITIES
The operational capabilities offered through the Technology segment include:
� Distribution platform for e-tokens of value:
• Prepaid airtime: the airtime vending platform enabling both local and international subsidiaries, to
vend airtime for all major telecommunication operators
• Prepaid electricity: enabling vending of prepaid electricity on behalf of electricity utilities, such as
Eskom, and a growing number of local authorities across the nation
• E-token distribution: takes place via cellphones, kiosks, POS terminals, internet, bulk printing devices
and self-service vending machines
� Electronic Voucher Management System: supporting the electronic generation, issuing and
redemption of paper vouchers and virtual PINs
� Electronic Funds Transfer: switching credit, debit and fleet card transactions for leading South African
retailers and petroleum companies, through the Blue Label subsidiary Transaction Junction (TJ)
� Hosting services: hosts production servers and applications on behalf of the group’s subsidiary
companies as well as third-party clients, through our IT infrastructure. All services are backed by
24x7x365 monitoring, support, reporting and full disaster recovery
� Device deployment services: full asset life cycle management and task tracking are provided. This service
includes the sourcing, procurement and financing of POS terminals, kiosks and vending machines as well
as the installation, training, task tracking and maintenance of these devices
� The factory focuses on the manufacturing, distribution and maintenance of POS terminals, kiosks
and vending machines.
PERFORMANCE OVERVIEW
The year under review has been both challenging and rewarding. Consolidating and integrating group
systems and platforms is progressing well and is expected to be completed during the course of the
coming financial year. As the nature of the transactional and secure e-token side of our business changes,
and more and more transactions are delivered through real-time transactional processing systems, so
the reliance on the group’s core technology systems increases. While we have implemented and continue
to roll out best-of-breed industry platforms and network solutions, a critical success factor is to ensure
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we attract and retain top-skilled people to operate our platforms and enhance our ability to support the
business technologically. In turn, they need the best supporting structure and systems possible.
e-tokens and VAS transactions
Progress was made in consolidating and enhancing existing core capabilities, including the group’s
e-token, PIN generation and redemption platforms. Further capabilities were added in South Africa
by additional network integrations, facilitating real-time top-up of airtime and novel electricity top-up
products. Product and services were extended to provide robust and scalable ticketing solutions,
resulting in Blue Label successfully completing its entry into transport ticketing.
We continue to provide innovative and robust products to customers and to deliver critical capabilities to
our partners.
Electronic Funds Transfer
TJ completed a number of major project delivery successes in the past year, resulting in transactional
volumes increasing three-fold. These include the introduction of Lotto-related products into multi-channel
retail and banking environments and the ongoing rollout of various large-scale EFT projects for retail
partners. TJ continues to earn its reputation as the pre-eminent independent financial value-added
switching services company in South Africa. TJ remains pivotal to the group’s commitment to deliver
electronic products and services across the entire arena of EFT, prepaid e-token distribution and fulfilment,
bill payment and e-top-up, including ticketing and stored-value-card solutions.
PROSPECTS
The emphasis for the year ahead is on consolidating progress made over the past few years. As the
nature of the business and solution requirements evolve, the Technology segment must continue to be
at the forefront of delivering enhancing functionality and scalability of its real-time transaction processing
capabilities and ensuring system and service uptime.
It is expected that a number of projects and opportunities, especially related to mobile vending, enhanced
merchant enablement and in remittance and mobile money transfers, are possible in the near future.
54
ANNUAL REPORT 2010
Segmental reviews | Value added services
Revenue
EBITDA
20101.3%
20103.67%
20092.2%
200913.24%
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The segment specialises in marketing cellular and financial products and services through outbound
telemarketing and other channels and also provides inbound customer care and technical support. The
VAS segment includes call centre operations (Datacel), a location-based reselling business (Cellfind)
and a digital marketing campaign business (Content Connect Africa).
DATACEL
Datacel is the group’s business process outsourcing (BPO) company and comprises CNS, Velociti and Blue
Label Data Solutions. Key clients include TransUnion ITC, iBurst, Virgin Mobile, Autopage, Liberty Life,
ABSA, Cisco, Nashua Mobile, Hollard and Pick n Pay.
The call centre operations did not perform well during the year, mainly due to the economic downturn,
which affected a lot of outbound cellular and insurance companies.
Rationalisation resulted in the closure of the Blue Label Call Centre in Johannesburg in September
2009 and the CNS call centre activities in Bloemfontein, Kimberley and Cape Town at the end of
the financial year. Most losses resulted from insurance companies reviewing their direct marketing
model and adjusting their commissions downwards based on a lower than expected persistency
ratio. The closure costs, combined with the non-contributing earnings from this business and the
resulting impairment charges against goodwill adversely impacted Datacel’s results for the year.
The remaining call centre activity was consolidated at Velociti which now operates 700 seats in Durban,
offering both inbound and outbound campaigns from internal and external companies.
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During this difficult trading period, the revenue benefits from Velociti’s inbound customer services division
were clearly apparent and the diversified client base ensured a more balanced spread of income, resulting
in Velociti trading profitably.
Blue Label Data Solutions achieved cost savings, mostly through consolidating back office functions and
delivered a satisfactory performance. It was granted Centre of Excellence Accreditation by the Direct
Marketing Association of South Africa.
The Datacel group is now appropriately streamlined and its management strengthened to rebuild its
reputation as a BPO call centre. The outlook for the business remains conservative as the effects of the
downturn are still evident in the market.
CELLFIND
Cellfind’s focus is on delivering annuity income derived from LBS via the Vodacom and MTN networks, as
well as providing WASP services. The long-term vision is to be the leading provider of LBS in Africa and,
with appropriate partners, to take interests in non-African countries.
Since inception, Cellfind has invested in developing generic interfaces to its LBS, allowing both easy and
expanded consumption of services through its own products, as well as those developed by partners,
using the same interfaces. Cellfind has the billing and management processes in place to monetise these
services.
The company continues to perform well in spite of tough trading conditions. The core LBS are provided
through Vodacom and MTN and have remained the key revenue drivers, although this year returned a
flatter growth rate. Newer services, such as miTraffic and miMusic, are showing steady increases in
consumption.
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Product offerings were extended this year with the introduction of miTraffic, which is an MMS report on
traffic conditions within a 50 km radius, and GuardMe, a mobile safety alert available to the MTN 2MyAid
and Vodacom Look4Help emergency services.
Cellfind also provides WASP aggregation services, which include SMS, USSD and WAP services, as
well as airtime billing services. This is seen as the focus of growth efforts, along with the extension
of the core LBS and other platforms, for wider and more flexible use. For example, on-demand
consumption of location requests by third-party applications such as Mig33TM.
The B2B side of the business experienced constrained growth and Cellfind shifted efforts to other B2B
offerings, such as corporate panic buttons for scheme members, vehicle asset tracking and staff tracking.
Contracts have been concluded with Discovery Health, AngloGold Ashanti and Fidelity.
In addition to traditional LBS, the value-added services such as traffic congestion heat maps, security and
tracking services and location-specific weather, continue to show robust growth. Similarly, subscription
music downloads are now well entrenched and growing steadily. These services are offered in collaboration
with CCA. Cellfind services are now being bundled under the “mi-brand”, such as miLocate and miMusic.
The product range includes brands such as Look4Me, Look4Help, Look4Me for Business, MTN WhereRU,
MTN 2MyAid, Cellfind Assets, Cellfind Messaging Portal, 911 Alert, Look4Music and miTraffic.
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CONTENT CONNECT AFRICA (CCA)
CCA was purchased in 2008. It is an aggregator of on- and off-portal localised content for mobile
operators and third party clients throughout Africa. It is the custodian of the distribution rights to, and
licence agreements for, a number of products and services, including mobile music, mobile games,
entertainment, news and interactive television content.
CCA maintains its reputation as the leading digital content aggregator for mobile phones in Africa by
servicing solid relationships with key clients, such as MTN and Vodacom. In addition, it provides content
for Cellfind’s miMusic product. In South Africa, CCA manages promotional events and releases by the
mobile operators and executes digital marketing campaigns on their behalf.
CCA has had a difficult period as both its key clients, MTN and Vodacom, deployed new delivery platforms.
Both went live in November 2009 in time for the summer holiday promotions. The new platforms make it
easier to service multiple territories with a single upload step, meaning increased content consumption.
CCA content now reaches all 21 of MTN’s territories covered, thereby expanding the market base without
any increased costs.
In May 2010, CCA started loading World Cup 2010 content specifically for MTN Africa and in total
uploaded several thousand content items. CCA continues to sign up emerging and leading artists and
musicians and is extending its services to B2B channels other than the network operators.
Segmental reviews | Value added services continued