Airtel Africa PLC

LSE:AAF

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, welcome to the Q3 2020 Results Conference Call of Airtel Africa. Today's speakers are Raghunath Mandava, Chief Executive Officer; Jaideep Paul, Chief Financial Officer. [Operator Instructions]. Before we continue, I will present an important disclaimer. This press release contains forward-looking statements, which by their very nature involve inherent risks and uncertainties and risks exist that such forward-looking statements will not be achieved. You are strongly advised to review the disclaimer page of the investors press release available at https:\\airtel.africa\investors. This conference call will be recorded, and the transcript will be posted on the website. The first speaker today will be Mr. Raghunath Mandava. Please go ahead, sir.

[Raghunath Venkateswarlu Mandava, MD, CEO & Director]

[ Good morning ], everyone. Thank you for joining today's call. For those who do not know, my name is Raghunath Mandava, I'm the CEO of Airtel Africa. I will, in the next few minutes, [ read ] from the last quarter performance published today. This is now the eighth consecutive quarter that we have delivered double-digit revenue growth and an EBITDA margin expansion in constant currency. During the last quarter, the revenue on constant currency basis has increased by 14.2% over last year, taking the similar 9-month performance to a little over [ USD 5 billion ], which is a 12.4% growth over the previous year same period. The improved performance is a result of our recovery in west of Africa and our continued [indiscernible] performance in Nigeria and East Africa. In line with our strategy that I've shared in the past, we are seeing growth across voice and mobile money. Our customers have grown 9.4% and have now reached 107 million. The voice revenue for the quarter based on this customer growth has now grown to 5.3% for the quarter. We have continued to strengthen our data networks through further rollout of 4G and also through acquisition of [ Crediton ] spectrum. Data revenue grew by 41.3% in the last quarter. This is through a combination of data customers growing by 12.4% and data ARPU by 23.6%. The average data consumed per month by our data customers has risen to 1.9 GB per month per customer. This is compared to 1.2 GB per month a year back. We have now completed the launch of 4G across all markets and are able to provide a high-speed 4G networks across all the 14 countries. Mobile money. Mobile money is a critical growth driver for our business. The mobile money customers have grown to 16.6 million, which is over a 20% growth over the previous year. The total transactions on Airtel money have now reached 8 [indiscernible] dollars for the last quarter, which is a 31.7% growth over last year. This helped Airtel money revenues grow by over 30% during quarter 3. During the quarter, we have entered into a number of exciting partnerships with MasterCard, Ecobank and Finablr. Just last week, we have signed another partnership, this time with Western Union. These partnerships with the international money transfer companies are helping us enable our customers to directly get international money into their wallets. With MasterCard, we have launched a virtual card, which will enable our customers to have access to all of MasterCard merchants and especially the online payment. One final point on mobile money, we are still awaiting for approvals regarding our Nigeria payment service bank license. We remain positive and are actively engaged in the ongoing discussions with all relevant stakeholders in this process. As you have seen above, data and mobile money are the key growth drivers for our business. Together, they contribute 37% of our overall revenues. And together, they are growing at about [ 38.4% ]. From an operating perspective, our underlying EBITDA is now at $399 million for the quarter, and this is a jump of over 19% -- of 18.9% on a constant currency basis, taking the EBITDA margin for the quarter to 45.2%. Now let me talk to you about the performance of our 3 markets: Nigeria, East Africa and West Africa. Nigeria continued to deliver an [indiscernible] with a growth in revenues of 23.9% during the quarter. Demonstrating the huge demographic opportunity, voice revenue grew at over 15%; data revenue, well over 70%. Data revenues contributed 32.5% of our revenue. That's almost 1/3 of our revenues come from data. And this, as I told you before, is growing at almost 73%. Data customers grew by 12% -- 12.2%. While the overall revenues grew at 23.9%, EBITDA grew faster at 35.6%, taking the EBITDA margin to 54.7% for the quarter. Now let me come to East Africa. East Africa revenues grew by 13.6%, driven by growth in both data and mobile [ money ]. Voice revenues also supported by growing at 4.3%, while customer base grew at 11.4%. Data revenues now contribute almost [ 50% ] of our revenues and mobile -- and mobile money contributes almost 18%. Data revenues, which contribute 26% has grown by [ 34% ], while mobile money has been growing at about 40%. Rest of Africa has shown [ considerable ] improvement in revenues coming back from a negative growth into being broadly flat in the quarter on constant currency terms. However, on a 9-month basis, we still [indiscernible] 1.9% compared to last year. EBITDA margin for the quarter was at 37.5% in West of Africa. Let me step back over [indiscernible] continues to show positive momentum and in line with our belief that due to the unique customer penetration at about 44%, 45% in our Sub-Saharan markets [indiscernible], there is an opportunity to grow voice revenues. Our strategy to invest in 4G has helped us grow data. Our commitment to financial inclusion and for that, building both a wide distribution for cash and float availability. And the partnerships that we have tied up for increasing the use cases on mobile money, have helped us grow mobile money business. The growth across voice, data and [ mobile money ] underpins our medium-term aspirations for revenue and profitable growth. These results are the effect of our clear and simple strategy backed with focus and [indiscernible]. And our unique position as a leading telecom player in the Sub-Saharan market and our best-in-class talent. I will now hand over to Jaideep Paul, our CFO, to take you through.

[Jaideep K. Paul, Chief Finance Officer]

Thank you, Raghu, and good morning, everyone. Let me start by summarizing our overall financial performance in Q3 '20 and run through our main markets. We delivered a strong and consistent set of results in this quarter. Our operational performance remains strong, and we [indiscernible] grew at the key lines level in both value and volume, as described earlier by Raghu. Sustaining our operational momentum allowed us to generate solid results. Reported revenue increased 12.8%, while constant currency group revenue growth was 14.2%. For the past 9 months, the foreign exchange devaluation, which has had -- which had an adverse impact of $54.2 million on revenue and $21.8 million on underlying EBITDA, largely driven by the devaluation of the Zambian kwacha and Central African franc. The currency exchange rates in other markets [ is ] broadly stable compared to the same period last year. Our blended ARPU increased by 3.5%, data ARPU increased by 23.6% as more customers are adopting 4G and also the data usage per customer continue to grow. Mobile Money ARPU increased as well by [ 12.5% ], while voice ARPU declined by 4.6%. We continue to grow revenues, but at the same time, we remain focused on our cost. And [indiscernible] Q3 '20 was $399 million in reported currency, resulting in EBITDA margin of 45.2%, up 184 bps vis-à-vis last year on a reported currency basis. Underlying EBITDA margin in Q3 '20 expanded by 178 basis points in currency terms. As a reminder, our effective tax rate for 9 months before exceptional items was 41.7% marginal increase due to higher withholding tax on dividend from the subsidiaries and expected to remain broadly the same [ this ] year. Our exceptional item in quarter ended December 2019 benefited from $27 million of one-off gain, largely as a result of reassessment of the life of customers leading to a deferment of customer acquisition costs. Additionally, I would like to share with you some more information of [indiscernible]. We have continued to deleverage and at the end of quarter 3 '20, our leverage ratio remained at 2.2x. As I highlighted -- as highlighted in H1 '20, we have [ translated ] [indiscernible] sustainable capital structure and cash distribution to the shareholders. In 9-month period, we generated free cash flow of $391 million, up 90.4% as compared to the last year. The increase in [indiscernible] contributed by underlying EBITDA increase, lower interest cost due to lower debt and partially offset by increase in CapEx due to network modernization as well as the rollout of additional sites. CapEx at the end of 9 months was $396 million, while the full year CapEx guidance remains $650 million to $700 million. Looking at Q4, I would like to remind all of you that our historical CapEx cycle is slightly skewed towards Q4. To do this, we may have a subdued EBITDA and FCF growth, while both still delivering against our full year expectation. That's all from my side. Back to you, Raghu.

[Raghunath Venkateswarlu Mandava, MD, CEO & Director]

Thank you, Jaideep. I now hand over back to the operator for the question-and-answer session. Jaideep Paul, and Pier Falcione, Head of Investor Relations, Airtel Africa, join me for questions, please. Over to the operator.

[Operator]

[Operator Instructions] And your first question comes from the line of Maurice Patrick of Barclays.

[Maurice Graham Patrick, Managing Director]

It's Maurice Patrick here from Barclays. A couple of questions from my side, please. The first question on Nigeria, where clearly, the very strong growth continues in the market. I was just curious as to how much of the growth is coming from new footprint areas rather than in-footprint. I note that there's very strong growth in the towers, some of that presumably is railroad expansion, some is in-fill, a mix of what's new growth versus the existing footprint? And just secondly, please, on the outlook for spectrum costs. So you paid, I see $70 million in Nigeria. Do you anticipate any other spectrum auctions or payments coming up in the next 12 months?

[Raghunath Venkateswarlu Mandava, MD, CEO & Director]

Okay. Let me answer the first part, and I'll request Jaideep to help me [indiscernible]one on the spectrum costs. What has been our strategy? If you see our strategy of our network rollout has been on doing a single brand network, which had 2G, 3G, 4G, as we want to progress it by doing a software upgrade and rolling out networks. The voice growth was 15%, which is a mixture [indiscernible] customers in the current areas that we service and a few new areas. So there is a mixture of both new areas and that is the wide growth. However, a [ large part of ] our data growth, which is coming due to 4G drive, and it has grown at 70%, comes heavily from the existing large urban towns. So if you ask me, there is a mix of both [indiscernible] largely as of now because it is more data-driven, while there is also continuous growth on why that is happening. So it's -- I would say it's a reasonable good mixture between the 2. As regards the CapEx and the costs -- I'm sorry, the cost on spectrum, I'll request Jaideep to take this one, please.

[Jaideep K. Paul, Chief Finance Officer]

As we have [ said ] earlier, that we have intention to buy 10 megahertz of 900 spectrum at $74 million of principle amount. And plus, there will be some regulatory fee attached to it. We filed our application for the spectrum buying with the regulator, and it is yet to be approved [ by the regulator ]. So once regulator approves it, then we will make the necessary payment. So as of now, we have -- still haven't made the payment because we are waiting for the approval. As opportunity of spectrum, we continue to look at this opportunity of buying spectrum, either through auction or through the regulatory process. And that will continue, and we will see where we can buy additional spectrum in -- as we go forward. Thank you.

[Operator]

And your next question comes from the line of JP Davids of JPMorgan.

[John-Paul Davids]

Congrats on the results. Two questions from my side to start. Firstly, on Nigeria. In the introductory remarks on the PSB license, you said you remain positive, and we're in discussions with all stakeholders. Just wonder if you could provide us a time line around when you expect that license to be issued. At the first half, you seem fairly confident that, that would be done by this sort of time of year. And then switching gears to mobile money. Growth rates are still very strong at 30% in the quarter, but it does look like that has slowed from the second quarter. And if there is a slowdown, it looks like it is on the ARPU growth year-on-year, at least in constant currency terms. So just wondering if anything sort of changed or worrying you on the momentum in mobile money? Or is this just a base effect?

[Raghunath Venkateswarlu Mandava, MD, CEO & Director]

Okay. I'll answer the first question, and I'll request Jaideep to take you through the mobile money growth rates. Nigeria PSB [indiscernible] agreed there has been a delay from what we had expected earlier. But however, our application is still tight, and we are still waiting for the response. While I may not be very clear of the time lines as to when we should be getting it, but we surely still remain hopeful, and we are continuing to engage anyone. Over to you, Jaideep.

[Jaideep K. Paul, Chief Finance Officer]

Thanks, Raghu. So on mobile money. Mobile money is becoming a larger part of our business, as you see the contribution of [indiscernible] continues to expand in the overall business. It is still growing at [ 3% ], which is quite healthy growth rate and now contributes almost 10% of the [ total revenue ]. In quarter 3 '20, the year-on-year expansion compared to the same period of the prior period was slower due to the fact that [ last year ], we benefited from the extensive distribution rollout in markets like Zambia, Tanzania and Gabon. So we got a onetime significant [indiscernible]. But as we progress, it is, of course, coming to a steady-state level. And therefore, we've seen that slower growth. Having said so, I reiterate that all the KPIs for the mobile money continues to be very, very healthy and on a upward swing.

[Operator]

And your next question comes from the line of Jonathan Kennedy-Good of Standard Bank.

[Jonathan Kennedy-Good]

I just wanted to check with you given the movement on potential licenses being issued in Ethiopia, whether Airtel Africa would participate in that. And if so, do you believe the balance sheet is strong enough to kind of roll out without raising further capital? And then also in the Rest of Africa, obviously, seen some positive trajectory on the revenue side. Just some color on how we should think about revenue growth going forward there. And what are major drivers of the recovery, what kind of pace of recovery we can expect?

[Raghunath Venkateswarlu Mandava, MD, CEO & Director]

Okay. Firstly, the way I would look at our portfolio is this: We have a few large markets where we see still a huge potential for growth and investments. Our growth organically has been healthy, and we see huge potential, both on voice, which is a unique contribution of 44% and very big on data. There is also a mobile money opportunity across these countries. We are also looking at opportunities like wireless home broadband and the enterprise business for provide [indiscernible] growth impetus. At this stage, we may not look very positively towards investing outside beyond these -- beyond our [indiscernible] [ overseas ]. As regards to Rest of Africa, if you notice that while the rest of the East Africa and Nigeria first and East Africa started kicking into higher growth [indiscernible], Rest of Africa did lag behind. Part of the reason is also the way we phased out our 4G investments. Quite a few countries have got into 4G only in the current earlier part of this current [ year ] like DRC and Niger and Chad and others. So I do hope this 4G momentum will kick in, and we should be looking at a reasonable growth in these places. [ However, we won't ] be able to give any forward-looking statements on how much growth I would expect from Rest of Africa at this stage.

[Operator]

[Operator Instructions] And your next question comes from the line of Dilya Ibragimova of Citibank.

[Dilya Ibragimova, Vice President]

I had a couple of questions, please. First is on customer growth. In Nigeria, there seem to have been a slowdown in net customer acquisition and the churn has been trending up in the quarter. I was just wondering whether there are any one-offs maybe related to some of the biometric identification expense. [ I think that initiative] was ongoing last quarter? And whether you expect that to normalize? And second, on the customer growth in East Africa, whether you could give a few comments whether there is any geography in particular, which is driving strong net adds in the region. And last question is on Airtel TV. You mentioned that you've launched this service in a few countries and one of the countries is Nigeria. What is -- I was just wondering if you could give us a bit maybe some anecdotal comments on what the customer perception is like, whether it's a popular product, what you've -- whether that helps acceleration maybe of data customer growth, yes. Any snippets on what the -- how the product is received would be great.

[Raghunath Venkateswarlu Mandava, MD, CEO & Director]

Okay. To be very -- first is Nigeria customer growth. Nigeria, during the previous years, we used to have a service called the voice mail, which we've -- which we used to count in our customer numbers for having accessed it when they receive a voice mail message. However, we have corrected our system and stopped this, which was happening by default. So that, we took a onetime correction in customers and removed about 2.5 million of them. So that is the sudden drop of 2.5%. Otherwise, I [indiscernible] like-to-like basis, it would be up by 2.5 million more. That is the first reason why you are seeing a sudden slowdown there. Otherwise, I see them, the customer growth continuing. East Africa, I should say that we are quite pleased to say that it's more or less well spread out growth. As I spoke before, the unique customer [indiscernible] is about 44%, 45%. That means there is a potential to grow at least in double digits in each of these markets. And I think what you are seeing in East Africa is about a 13% odd growth in customer [indiscernible] numbers. And I think that is steadily happening with a few points here and there across all these geographies, all the countries. So we are seeing that very good steady growth across [ East Africa ]. Now let me come back and this growth in customers is what is driving our voice revenue growth. While most -- Africa is in a unique situation, thanks to its [indiscernible] where we are able to get growth in all 3 voice, data and mobile money. And as I've spoken before, this continues to get reflected in our results also. Now let me step back and talk to you about the Airtel TV that we launched. The availability of data in most of Africa and why 4G is a big trust area is the following. Unlike in most of the western world, where there was a fixed line data available in-house and home and people use the mobile phone and the mobile network data only when they were traveling, this was data while being mobile. But in Africa, mobile data is the primary source of data availability. Second, entertainment sources are also, firstly, if someone wants to watch a movie in Nigeria, it would be through a TV that you would buy at a few hundred naira or cable connections and others, which are not very well spread. We believe this entertainment has to spread, people should have access to start seeing this over their data networks. What we have is an Airtel TV app, in which there is a whole log of content, which we are continuously expanding, which people can see free. Large amount of this [ content ] will be able to see without any subscription charge. And this will just enable and enhance data usage in these countries. So that was the flavor of this. Currently, we have some [indiscernible] content and some Indian Bollywood content and various other music and also a large number of live TV channels so that people can start using this wherever they are and [indiscernible] there is no other service of reaching of these 2 -- these media. We believe this will encourage more viewing and more data consumption on our data networks has been the principal behind it. We've just launched it last December -- post mid-December. I guess it's a little too early to give more anecdotes, but we are seeing good usage.

[Dilya Ibragimova, Vice President]

And just a follow-up on this one, thank you for the comment. Is there a cost associated with the content?

[Raghunath Venkateswarlu Mandava, MD, CEO & Director]

Yes, there is a cost associated but as far as possible, I -- it is -- we would buy these content either on a fixed [ basis ] deals or we would also take it on a [indiscernible]. But a large amount of live TV comes at a very nominal cost.

[Operator]

[Operator Instructions] And your next question comes from the line of [ Christan ] of Nation Media.

[Unknown Analyst]

So I just wanted to ask in Uganda, the licensing format has been changed, and the deadline that has been given for telecoms to apply. I wanted to know that has Airtel applied for a license and which type of license? And how much is it likely to cost?

[Raghunath Venkateswarlu Mandava, MD, CEO & Director]

So the Ugandan government has applied for the various licenses they have put up. One of them is called the National Telecom Operator license. There were the other licenses called the PSB, which is a Public Service Broadcaster license. And the Public Service Infrastructure license and many others. There are about 5 licenses. You could choose and apply for one of them. We are the leading -- one of the leading players in Uganda, are -- we intend to [indiscernible] for [indiscernible]plus the NTO license. The deadline for expressing of interest for these licenses is March 30. And -- sorry, January [indiscernible]

[Jaideep K. Paul, Chief Finance Officer]

31st January.

[Raghunath Venkateswarlu Mandava, MD, CEO & Director]

The 31st January, my apologies. 31st January, and we would be applying before that for the NTO license. As of now, we are still in discussions with [indiscernible] and we have no clear indication of what it could cost.

[Operator]

And your next question comes from the line of Dilya Ibragimova of Citibank.

[Dilya Ibragimova, Vice President]

Just a quick follow-up on the conditional approval of the merging in Kenya, whether you've made any comments whether you see those conditions as acceptable? And what's the timing that you think the transaction will be completed?

[Raghunath Venkateswarlu Mandava, MD, CEO & Director]

Okay. The process for application has been on course. We have received preliminary approvals from [indiscernible] agencies. But however, the final approvals have not been received. We are also in discussions on certain criteria and conditions that have been applied. So I guess, as of now, I should say that the approval is still in process and it's very difficult for me to give a reasonable time frame on this. So hopefully, it should go through with all the relevant conditions being met.

[Operator]

Your next question comes from the line of JP Davids of JPMorgan.

[John-Paul Davids]

Just following up with a couple of housekeeping questions, please. On the cash flow statement, your cash PP&E and cash intangibles gets quite close to $600 million. The P&L CapEx is $400 million. Should we expect those to converge in the full year results, so cash and P&L is similar? Or are you expecting some big sort of spectrum numbers in there, which could...

[Jaideep K. Paul, Chief Finance Officer]

Yes. So eventually, these 2 will definitely convert. But what happens is there is a timing difference for the cash CapEx and the actual CapEx book. And that difference, technically, at some point, should be [indiscernible]. But this difference remains, and that's the reason when we calculate the free cash flow, we take the full CapEx instead of cash CapEx, so that the [indiscernible] is factored in, in the free cash flow.

[Raghunath Venkateswarlu Mandava, MD, CEO & Director]

What was the second?

[Jaideep K. Paul, Chief Finance Officer]

Sorry, what is the second question?

[Raghunath Venkateswarlu Mandava, MD, CEO & Director]

I think it was spectrum.

[Jaideep K. Paul, Chief Finance Officer]

David, we seem to have missed. Is there any other question?

[Operator]

[Technical Difficulty] [Operator Instructions]

[John-Paul Davids]

And then just a quick follow-up on the Malawi IPO, will those proceeds be received in the fourth quarter? Or have you already received them in the third quarter?

[Jaideep K. Paul, Chief Finance Officer]

The IPO, the book closes by end of January. So once it goes through, the proceeds will come in quarter [indiscernible].

[Operator]

There are no further questions at this time. [Operator Instructions]

[Raghunath Venkateswarlu Mandava, MD, CEO & Director]

As there are no more questions, thank you all for being on this call. I do hope we will once again catch up end of next quarter, which will also be the time when we will be announcing our annual results. Thank you. Still in January, a very [indiscernible] to all of you. Thank you, and a good day, please.

[Operator]

Thank you, gentlemen. Ladies and gentlemen, that does conclude your conference for today. Thank you for participating, and you may now disconnect.