MultiChoice Group Limited (MCG) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the MultiChoice Group FY '20 Results Conference Call. [Operator Instructions] Please also note that this call is being recorded. I would now like to turn the conference over to Meloy Horn. Please go ahead.

Thank you, Chris, and good morning and good afternoon, everyone, and thank you for joining us today. Our results for this financial year 2020 were issued yesterday. And if you are registered on our database, you should have received our investor e-mail with all the relevant information. You can view today's presentation on the webcast. And for those that have dialed in, the slides that accompany this call can be found in the Investors section of our website, under Results. But before we begin, let me introduce our speakers for today in the order that they'll be presenting. Imtiaz Patel, our Executive Chair, will go through the highlights and the strategy; Calvo Mawela, our CEO, will provide an operational update; and Tim Jacobs, our CFO, will discuss the financials. We will then provide you with an update on COVID-19 and consider our outlook for the year ahead. I would now like to hand you over to Imtiaz.

Thank you very much, Meloy. Good day, everyone, and welcome to our results call. To start the presentation, I would like you to turn to Slide 3. This slide shows a brief summary of our solid performance over the past financial year. We are very pleased that we have delivered on our commitments to shareholders. And the key measure of subscriber growth, we increased our subscriber base by 5% and our over-the-top user base by 39% year-on-year. We delivered strong financial results with highlights including further margin expansion, 38% growth in core headline earnings and free cash flow increasing by a substantial 59%. Our focus on local content, a key differentiator, yielded almost 4,000 production hours, bringing our content library to nearly 57,000 hours. We continue to optimize our cost base, delivering savings of ZAR 1.4 billion across the group and a substantial reduction in losses in the Rest of Africa. Our operating leverage improved with the growth in our revenues 5% ahead of the growth in costs. It has been a busy year as a group, and we have taken several steps to align with shareholders. We concluded the Phuthuma Nathi flip-up transaction, declared a date of maiden dividend of ZAR 2.5 billion and executed ZAR 1.7 billion in share buybacks. We also revised our remuneration policy through extensive shareholder engagement. But before we discuss these achievements in more detail, let me update you on our strategy. Starting with Slide #5. Like many other industries, the world of video entertainment continues to evolve, and we have changed with it from the early days of a single and net analog channel through a content aggregator and a multichannel service offering. With the advent of the Internet came streaming services and nowadays over-the-top players are producing their own content and reaching out to consumers directly. The multitude of offerings are leading customers overwhelm with what is called the paradox of choice and a need for greater simplicity. This is where we see the opportunity to continue our aggregated journey. We broadcast and stream our own compelling local, international and sport content and also make third-party streaming services available through our platform. All of this is to be found on 1 platform with a single bill, which provides convenience and choice to our customers through a one-stop shop. That brings us to Slide #6. Yesterday, we announced that we have concluded distribution agreements with 2 international subscription video-on-demand providers. These new territory for us and for them, the African market, and it will take time to iron out all the details. The plan is to officially launch these services at a later date as we do not want to preempt these PR campaigns, and we therefore prefer not to discuss things in more detail at this stage. These partnerships with global brands are a testament to our reach, our technical capabilities and our operational expertise. As Africa's leading entertainment provider, we offer access to almost 20 million households. Given our technological expertise, we are trusted to successfully integrate and protect our partner content and services. And our unique ability to navigate the operating environment in Africa to offer unified billing and collect payments and to manage in-country nuances means that we are a valuable partner for exposure to African consumers. We believe that extending our aggregator model to include over-the-top partnerships such as this is complementary and value-enhancing. Whilst local content and sport will be a key differentiator for Showmax, additional general entertainment content from other providers will offer our customers more choice. Ultimately, it enhances the customer relationship. It provides simplicity, convenience and a more comprehensive offering to our customers. Moving to Slide 7. In some developed markets, linear TV viewing is under pressure and over-the-top services are gaining traction. Whilst the change is most pronounced in the United States, trends are less severe elsewhere. Across Africa, pay-TV is still growing. Satellite remains the cheapest way of distributing long-form video content to the mass market, and it will remain so for some years to come. Low pay-TV penetration suggests that linear pay-TV still has a relatively long shelf life, which presents an exciting long-term opportunity for us. We now go to Slide 8. Sub-Saharan Africa lags the rest of the world in broadband penetration, quality and affordability. As the graph on the left side of the slide shows, household over-the-top penetration is likely to lag other markets for the foreseeable future. But over time, these technologies and costs will improve, as they always do, and facilitate growth in the recent over-the-top market. And since there is typically a very high overlap between a linear pay-TV and SVOD services as we have seen in other markets, we will also look to drive this growth opportunity. On Slide 9, we highlight that straddling both the linear pay-TV and over-the-top segments allows us to capture the best of both worlds and transition to areas where the greatest opportunity presents itself because different markets evolve at different speeds. Market estimates suggest that total addressable market for pay-TV video services in Sub-Saharan Africa would be around 50 million households. With less than 20 million subscribers at present, we believe there is plenty of upside for our business. Slide 10 shows our strategy to achieve success. An increased investment in local content is a key aspect of our differentiated content strategy. It is also roughly 40% cheaper than international general entertainment content, and it helps to reduce our U.S. dollar input costs. On the sports front, we remain committed to exciting customers with the best local and international sports, whilst carefully managing the cost of acquiring select sports broadcasting rights. We will keep exploring new opportunities to further expand our existing ecosystem, offering new products to enhance customer experiences and to increase our revenues. We are also looking to accelerate the uptake of our over-the-top products by differentiating and strengthening our content lineup and our product offering. Our ambition is to drive further subscriber growth [ paying incidental ] to a leading media and of cybersecurity business globally and continue building a sustainable business that delivers value for our stakeholders. And in the current environment, maintaining operational excellence and sustaining cost reduction continues to be a key focus area. As Slide 11 demonstrates, we made good progress in delivering on all our key strategic objectives over the last year. We mentioned some of them already, and we'll discuss the rest in more detail in the remainder of our deck. I will now hand over to Calvo to discuss our operations. Over to you, Calvo.

Thank you, Imtiaz, and hello, everyone. I would like you to turn to Slide 13, where we'll begin our operational update with local content. As mentioned earlier, local content has become a critical differentiator in our savings offering. Our customers love stories in their own language, which resonates with them culturally. This result in local content accounting for a growing share of broadcasting minutes and gives disproportionately more viewing minutes as reflected in the graph. FY '20 saw us producing a massive 3,850 hours of local content, slightly down on the prior year, but reflected of an improved content utilization strategy. We get the [ perfect sense when we create content for our top end of care, and then we do it down to lower tiers of care ] over time. We have also taken steps to better leverage existing content across multiple markets. An example being the localization of our South African lead, The River, for the Kenyan market. Due to the impact of more expected port cover rates on the cost of our international content, local content spend remained at 40% of total general entertainment spend. Given the momentum in our local content strategy, we are on track to achieve our target of 45% by year 2022. During the year, we produced a variety of [ scripts this year ], including 28 drama series, which is 8 more than last year. We also created 2 brand new reality formats of our own and are now co-owners of the reality format Love in the Wild with an international developer, which we can use ourselves and license to other markets. In the year ahead, we will be launching 4 new local content channels. We are also looking to produce 2 new co-productions off the back of the highly successful saga. This includes a global box office movie, Rogue, starring actress Megan Fox, where we have already recouped our investment through presales to other broadcasters. Moving to Slide 14. The price of our sporting offering is evident from the 7,500 live events that we broadcast annually, 700 of which we produce ourselves. FY '20 was an action-packed year for sports fans, with 3 major events being broadcast. The highlight of South Africans being the [ spring of D3 ] and the Rugby World Cup. Following the success of WWE pop-up channel, we have now permanently added this channel to our lineup. On the international front, we launched 31 new channels including Da Vinci, which provides educational content for many of our younger viewers. Underpinning the international content offering are our relationships with the studios, producers and independent filmmakers, all of which gives us abundant access to fresh content. Content is key to our business. To continue our success, we are selective in what content we secure in [ pages ] and at what price. On Slide 15, we provide some detail on our -- about the operation. Subscriber growth was again driven mainly by the mass market, which continues to present an attractive growth opportunity. In addition to new subscribers, we target growth within our bouquet structure through specific upgrade packages, as this benefits ARPU and mitigates the impact of the change in our subscriber needs. Our retention strategy includes proactive measures to reward loyal customers and win back those that have left through targeted offering -- offers and incentive strategy. This year, our recovery rate on 10 customers was well ahead of target. We continue to evolve our entertainment ecosystem with new products and services such as our DStv Streaming product, which is now in field trials. We also streamlined the business for increased efficiency. Our self-service channels now accounts for 66% of all customer interactions and significantly reduce the need for [ in-person fun ]. This allows for the restructuring of our customer care division during the year. Slide 16 reflects the key performance metrics for the South African business in a year that was characterized by a tough operating environment for consumer-facing businesses. Although pay-TV has proven to be relatively resilient through economic down cycles, we are not immune to their impact. Challenges were more evident during the second half of the year, particularly in December, where along with other retailers, our [ 50s ] growth was not as strong as in prior year. And in January, where the [ full Christmas trend down ], consumer focus was more noticeable than before. Notwithstanding this trend, we are able to produce solid subscriber growth, adding a total of 500,000 customers to our subscriber base. With some uplifts attributable to the COVID-19 lockdown at the end of March. Our mass market segment grew 16% despite inflationary price increase at the start of the year. This was the first price hike since we launched the Access bouquet 9 years ago, and we implemented a similar price increase this year. Our competitive base remains flat, a reflection of the increasing level of indebtedness and financial trade up in this segment of the SA population, provide some relief in 2 stages and to keep competitive prices flat for this coming year. In the premium segment, our position was to increase prices in financial year '20, coupled with a strong performance in the Compact Plus bouquet, first stabilize the base sum. While the mass market ARPU grew a healthy 7% off the back of price increases and bouquet upgrades, the ongoing change in our customer mix due to the higher growth in this segment is affecting our blended ARPU and active days. Moving to Slide 17. Despite some macro challenges, there were areas of success in the Rest of Africa. We support our belief in its long-term prospects. As further numbers in many markets are at an all-time high, and we enjoyed the strong expected season growth in [ EPS ]. The business continues to focus on measures to improve retention, activity and ARPU. As such, real strategic and technical initiatives were launched. In the introduction of Familia bouquet in Angola and Mozambique, which encouraged almost 60% of the Access subscribers in these 2 markets to upgrade. And the step-up campaign to increase activity and content discovery as well as ARPU over time because the percentage of people tend to pay in the higher bouquet. We also made significant advancements in the area of customer service, such as the rollout of our digital product, which is now complete in all mega market. Slide 18 provides a quick snapshot of development in some of our larger markets. In Nigeria, our largest market outside South Africa, we are able to grow subscribers by 8%, despite several factors negatively impacting consumer spend. We also launched new bouquet towards year-end at slightly higher price point, which should bring some revenue uplift over time. In Kenya, our price-down campaign have been successful because the revenue impact was offset by subscriber growth within an 8-month period. Power-related outages in Zambia were during the second half of the year, increasing to 18 hours a day at times, which understandably resulted in subscriber loss. The Angolan economy continued to contract and currency depreciation remains for the margin. Following regulatory approval, we expected trade price increases totaling 47% as being debt. The effect that we saw a decline of only 2% in the subscriber base are just some resilience in this market. The economy collapsed in Zimbabwe have unfortunately shown little signs of easing, but our customer base seems to have stabilized during the second half of the year. Combining the impact of the many moving parts, Slide 19 shows modest subscriber growth of 4% to 11.1 million households. The underlying growth trends were disposed somewhat by the step-up campaign mentioned earlier, steering growth towards higher tier bouquet. We have provided normalized growth rates on the slide for comparison. We price our products, take into account the unique dynamics of each market. Over the course of the year, we implemented price increases in some markets, notably Angola, Ghana and Zambia, [ have prices played in areas ] like Nigeria and implemented technical price-downs in East Africa as discussed earlier. FY '20 ARPU decreased 4%, mainly due to unhedged, in-market currency weakness and specific pricing strategy as well as a pickup in subscriber growth towards year-end, which did not impact revenue by much. Another factor impacting ARPU was a 6% decline in 80 days, we trended down in the absence of the 8-week long FIFA Soccer World Cup in the prior year. We see several opportunities to increase active days through ongoing optimization of our content offering and [ shape ]. Despite some near-term challenges, the scale of the African continent and the appetite of its people for video entertainment makes it a key element of our growth strategy. Turning to Slide 20. Our Connected Video business, which operates under the Showmax and DStv Now brand, continues to gain traction in an early phase market, showing strong growth in number of users, frequency of views and overall engagement time. Showmax is a meaningful, value-added savings for our traditional pay-TV customers, but we are ramping up efforts to drive growth in paying subscribers through enhancements to our customer conversion process and the forecast on performance marketing has resulted in the paying base almost doubling year-on-year. We believe that we have the right assets to succeed. Our Showmax platform now hosts 50% local content, a key differentiator for us. The leverage of group assets such as select sports content, which we initially trialed on a test basis but are looking to expand going forward. And we also produce our own Showmax originals. During the second half of the year, we learned the mobile-only Showmax offering in South Africa, which follows an earlier launch of the series in Nigeria and Kenya. In total, mobile now accounts for around 30% of new Showmax subscriber addition. We keep driving improvements in the user interface of both DStv Now and Showmax platforms, including a significant enhancement to our Showmax Kids section this year. Slide 21 provides an update on our technology business engagement, which not only provides critical benefits to our own broadcasting operations, but also services more than 400 external clients around the world. Irdeto continues to gain market share in the media security segment and is currently the second largest player globally by volume. Our focus on diversifying the traditional revenue streams into new service lines is also yielding positive rebound. Android boxes and OTT premium security are both gaining traction. In the area of connected transport, we have secured wins with 2 large automotive OEMs to date. One of this OEM is already producing cars embedded with data technology. This multiyear agreement are typically based on volumes shipped, meaning that new contracts only part contributing meaningfully to revenue over time once design and testing's complete and production ramps up. To further enhance our positioning, we increased our interest in SafeRide Technologies during the year to 22.8%. SafeRide is a leading provider of cybersecurity and does end data analytics solutions for connected and autonomous vehicles. We are actively pursuing opportunities in other connected industries, too. This year, we launched a new product called Trusted Home, and are also engaging with potential partners and customers in the area of Connected Health. Through these ventures, we aim to scale our technology business by securing a future where people can embrace connectivity without fear. This concludes the operations section. I will now like to hand you over to Tim Jacobs, our CFO, to discuss our financial results in more detail.

Thank you, Calvo. We'll start with our financial highlights on Slide 23. In challenging conditions, the group delivered modest revenue growth, while the tight cost control underpinned margin expansion. This led to a healthy momentum in core headline earnings and substantial growth in free cash flow. The balance sheet remains strong, which provides security in these uncertain times of COVID-19. Slide 24 provides a quick look at our financial synopsis of the group. I would like to highlight that the percentages that are shown in brackets on the organic growth numbers, which excludes the impact of currency translation and M&A. We delivered revenue of ZAR 51.4 billion for the year, representing 3% nominal and 2% organic growth from the prior year. Our trading profit grew 14% to ZAR 8 billion, or 29% organically. Our core headline earnings were up 38% year-on-year to ZAR 2.5 billion or 57% on a like-for-like basis after adjusting for changes in the South African minorities. Free cash flow was up a significant 59% to ZAR 5.2 billion. On Slide 25, we take a deeper look at our revenue numbers, starting with subscription revenue and its key driver subscriber growth. Just to remind everybody how the graph works, if we start with the graph on the left-hand side, we present 90-day active subscribers with the bottom of the stack being South Africa and the Rest of Africa above it. The corresponding subscription revenue numbers are presented in the graph on the right-hand side. As we had mentioned, conditions have been challenging this year, which coupled with the strong performance last year off the back of the FIFA World Cup, resulted in more muted growth than in prior years. While we did see a small uplift in subscribers due to the COVID-19 lockdowns, the close proximity to year-end had little impact on revenue. Subscription revenue in South Africa grew 3% to ZAR 28.4 billion, off the back of 6% subscriber growth. Revenue growth was impacted by the decision not to increase the subscription price for the premium to pay in April 2019 in the interest of driving retention. While we processed the 6% price increase in our Access bouquet for the first time, this did not fully offset flat premium pricing. In the Rest of Africa, we saw 6% growth in subscription revenues to ZAR 14.3 billion, driven by a 4% increase in 90-day active subscribers. This growth was off a high base given the FIFA World Cup last year and was solid in the context of country-specific challenges in several of our markets such as Zimbabwe, Zambia and Angola. Turning to Slide 26. Here, we look at the total revenue numbers for the group, with the graph on the left-hand side also incorporating our technology business data. Total revenue growth was 1% for South Africa, and 4% for the Rest of Africa largely as a result of lower hardware sales compared to the prior year. In South Africa, because of consumer affordability impacting sales of our high-end Explora decoder in financial year 2020. And in the Rest of Africa, due to higher event-driven decoder sales in financial year 2019. At our interim results call, we caution to a loss of sublicensing revenue due to financial difficulties at the SABC, which resulted in us licensing fewer major sporting events than in the past, including PSL matches. We are pleased to offset these losses through other sublicensing revenues from the Rest of Africa, resulting in a far less pronounced impact on our group revenues than initially expected. Our Technology segment showed continued momentum with 12% revenue growth year-on-year. Irdeto benefited from new customer wins, which offset lower media security revenues due to weaker pay-TV performance in the U.S. While Irdeto also enjoyed some one-off project revenue of $8 million during the first half of the year, it was also impacted by COVID-19 earlier than the rest of the group due to having customers and operations in China. This partially offset some of these project revenue gains. If we cross over to the graph on the right-hand side and look at revenues by nature, we see that over 80% of our total revenue is derived from subscription revenue, which grew 4% overall. Advertising revenue grew by 1%, which was a particularly good result in the context of a weak macroeconomic environment and the impact on growth from higher event-related advertising revenue in the prior year. The team made good traction in the Rest of Africa or [ be as operates ]. Slide 27 reflects our operating leverage on an organic basis. Our target is to keep organic growth and operating expenditure below revenue growth. This year, we were able to reduce our operating costs by 3% organically, off the back of tight cost control and the early implementation of cost-selling initiatives. Compared to organic revenue, which was up 2% year-on-year, this resulted in an improved operating leverage of 5 percentage points. Our cost-saving efforts continue to bear fruit with ZAR 1.4 billion in cost savings recorded for the year. This amounts to 3% of our total cost base and was well ahead of our annual targets of ZAR 1 billion. We have split our cost savings into those associated with variable costs such as the cost savings and our fixed cost savings. The cost savings were a key contributor to cost reductions, benefiting from supply chain consolidation and the launch of a lower-cost new HD set-top boxes period as well as flow-through savings from the Explora [ 3-day ] and GOtv decoders launched in the second half of the previous financial year. That being said, close to ZAR 1 billion in fixed costs were also saved through a broad range of initiatives across multiple cost lines in areas of the business. Cost savings are a driver that helps us to better weather economic storms and years of slower revenue growth. While some of these savings are reinvested in the business, the majority served to reduce the growth of our cost base below inflation. This coming year, we have stepped up our cost-saving focus again as a means of protection against the potential business impact of COVID-19. Slide 28 provides detail on our profitability. The group increased its trading profit by 14% or 29% organically to ZAR 8 billion. This resulted in a 2% margin expansion from 14% to 16%. Considering the trading environment, this was a very strong performance and was underpinned by our cost-saving efforts as we have mentioned. The graph on the right-hand side shows each of the different business segments. South Africa's trading margin remained stable at 30% and within a 30% to 32% target range. Growth in trading profit was impacted by 2 specific factors this year. The first being the additional content and marketing spend associated with having 3 major sporting events falling within the reporting period, namely the Cricket and Rugby World Cups and the Africa Cup of Nations soccer tournament. And the second relates to investments in Connected Video, which as we've mentioned, is a strategic area of growth for us. It is also important to note that in line with our conservative accounting policies, we expensed the full cost of our football rights for the month of March despite matches being suspended early in March due to COVID-19. In the Rest of Africa, we saw strong improvement in operating results with ZAR 814 million reduction in losses year-on-year. Consequently, the negative margin narrowed from minus 25% to minus 19% in the current year. The Technology segment saw an impressive 25% growth in trading profit or 40% organically, driven by strong revenue growth and tight cost controls. Moving to Slide 29. By now, you will be familiar with our trading profit bridge for the Rest of Africa, showing our progress towards moving this business back to sustainable profitability. On the left-hand side of the graph, we show the ZAR 3.7 billion trading loss for the prior period. Subscriber losses associated with the drought in Zambia and Zimbabwe that caused significant and continuous power outages impacted trading profit by ZAR 334 million. However, our diversified footprint allowed us to more than offset this with subscriber wins of ZAR 974 million in other markets. As you may recall, we took a strategic decision in the prior year to increase investment in set-top box subsidies to drive subscriber acquisition around key events such as the FIFA Soccer World Cup. This resulted in net savings of ZAR 560 million year-on-year to which we added a further ZAR 569 million of other savings from ongoing cost control. On a combined basis, we were able to improve trading losses by ZAR 1.8 billion or 47% year-on-year on an organic basis before the impact of currency depreciation. Our translated performance still faces points of currency volatility during the period, particularly with the weakening of the rand at the onset of COVID-19. We incurred a net foreign exchange loss of ZAR 955 million, with the largest drivers being the depreciation in the Angolan kwanza and Zambian kwacha plus the translation of the U.S. dollar losses into rand. The net result of those moving parts was a ZAR 2.9 billion net loss reported by Rest of Africa for the period, which reflects a 22% improvement on the prior year. Our medium-term turnaround strategy for the Rest of Africa is subject to normal currency depreciation. This year, we saw another year of rapid currency depreciation in markets such as Angola and Zambia at 47% and 25%, respectively, on top of the 60% and 21% decline last year. To date, we have been able to absorb these currency impacts without updating our turnaround guidance. But this will become increasingly difficult to do should these declines continue and particularly if similar trends emerge in more of our markets. The hedging of remittances, 12 to 13 months out in markets such as Nigeria and Kenya provide some certainty for financial year 2021, which is welcome in this time of extreme market volatility and given that the threat of currency weakness in all base economies such as Nigeria and Angola. Since the start of the global coronavirus pandemic, the kwanza has depreciated by a further 18% and the naira by 7%. We will continue to monitor these trends carefully to determine whether they present short-term fluctuations, which our business plan can absorb or a new normal, which may require us to recalibrate our breakeven guidance. Slide 30 shows our full headline earnings, which is up a meaningful 38% year-on-year at ZAR 2.4 billion. Growth was affected by a net 3.6% increase in minority shareholding this year or 4% on a weighted average basis. This increase comprised of 5% additional stake in MultiChoice South Africa that was gifted to the procurement RTBs in March last year, offset by a reduction in the minority shareholding as a result of the "Flip Up" transaction that occurred in October of 2019. On the right-hand side, we show the segmental drivers of this performance, noting that the narrowing of losses in the Rest of Africa and strong performance by technology were the drivers of this growth, with South Africa also contributing meaningfully when normalized for the above-mentioned change in shareholding. Looking at Slide 31. Our free cash flow performance was particularly strong this year, growing by 59% year-on-year to ZAR 5.2 billion. The graph provides some insights into key movements. So starting from the left-hand side, in the comparative period, we generated ZAR 3.3 billion in free cash flow. Free cash flow reduced by the ZAR 815 million in cash remittances from Angola that were recovered in the prior year, with the consolidation of Angola into our accounts from March 2019, such remittances no longer occur through working capital, [ assisting the cash balance ]. Cash EBITDA improved by ZAR 1.3 billion. We then saw a ZAR 2.2 billion inflow due to a lighter working capital cycle this year. Working capital can be lumpy as it's dependent on the timing of events and content rights payments. Some of these gains were offset by higher lease payments that were impacted by foreign exchange movements, an ending of our payment holiday on our South African transponders from October 2019. Lastly, there were some other outflows that included tax payments, offset partially by CapEx earnings. Our CapEx spend, while down this year, included ZAR 180 million associated with a multiyear program to future-proof the group's customer service billing and data capabilities. We intend to ramp up our investments in this program in the coming year. On Slide 32, we look at the strength of our balance sheet. Cash and cash equivalents have grown to ZAR 9.1 billion, and we have increased our available facilities to ZAR 5 billion. This gives us total funds available of ZAR 14.1 billion with no financial [ dividend ]. Our strong balance sheet is welcome in this time of uncertainty as the full impact of COVID-19 and the oil price pressure on currencies is still largely unknown. While we do take the conservative approach to the management of cash, the Board has declared a ZAR 2.5 billion dividend to shareholders. This concludes the finance section. I will now hand back to Calvo to share some thoughts on COVID-19, the implications for our business and the -- and our outlook for the next financial year.

Thank you, Tim. Moving to Slide 34. The COVID-19 pandemic has impacted our business in a meaningful way. But as an essential service provider, we have been able to provide an uninterrupted service to our customers. Our sports content offering has been most affected by the postponement of live sports. As since ours is an integrated content offering which does not include separate sports only bouquets, we're perhaps somewhat protected from a direct fallout. Our sports broadcasting contract also include no play, no pay. We are, however, very excited about recommencing the broadcast of football leagues with La Liga kicking off tonight. Next week, Wednesday, we'll see a restart to the India Premier League, followed by Serie A next weekend. Other content such as WWE, some golf in U.S. have already be on air and international rugby, cricket [ and Pravin ] will all be recommencing behind closed doors in July. Lockdown restrictions resulted in the postponement of all local content productions for a period of 5 weeks. Since the lifting of lockdown restrictions in South Africa at the beginning of May, our local production partners have been able to recommence their activities and several popular shows are now back in production. On the general entertainment front, we relied on the depth of our library content and our relationship with content owners to keep our offering as fresh as ever. We had a similar volume of new movies coming through in March to May this year compared to the same period last year. We have taken all the necessary precautions to help protect our part, and we also try to look up for the communities by contributing to safeguarding the local production industry and supporting public health assets. On Slide 35, since many countries are still under some form of lockdown and given that we have only evidence of 9 weeks of trading in our new financial year, it is not possible to provide you with the full assessment of the impact of COVID-19 as yet. Our plan is to keep updating you over time as since day out. At this stage, there are some positives that we are taking from the first few months of the year. Across South Africa and Rest of Africa, our subscriber numbers held up better than anticipated, and our subscriber base, therefore, remained relatively stable. The mix was, however, impacted by some down trading in the absence of sports. We are beginning to see some live sports retailing, which will positively impact customer growth and retention. Showmax is performing very well, and we are seeing good growth in users and engagement. The lockdowns have given us an opportunity to further drive digital behavior within our customer base and self-service usage is at an all-time high across the continent. This bodes well for future cost optimization and improved customer experience. Two areas of our business that have been negatively impacted to date are our subscription revenues from commercial customers, mainly in the hospitality industry and our advertising revenue. Commercial revenues account for a small percentage of group revenue. We have lost some customers in South Africa and Rest of Africa, and for those that have remained, we have provided sizable discounts. It will take time for this segment to recover. Our advertising revenues, while only 6% of the total revenue, are under pressure as advertising is undeniably linked to the economic cycle and to the cancellation of certain programming such as live sports events. While the resumption of business activity bodes well for some improvement in the situation and [ sports agreement ] will kick in again once the football leagues resume and will be -- this year will be a challenging year for advertising. Looking at Slide 36. Given these uncertain times, we are relatively well positioned. Our product is geared towards people spending more time at home. We have a large, diversified customer base and footprint. Our exposure to advertising is limited, and we have a very strong balance sheet that will allow us to navigate the storm. While potential macroeconomic implications are likely uncontrollable and will take time to materialize, we are taking steps wherever we can to count a potential future headwind. This includes taking a deeper look at our cost structures and implementing accelerated cost-saving initiatives across the organization. Going forward, we expect to continue optimizing our cost by implementing some of the learnings from COVID-19. For example, the reduced needs to travel. We will also be reducing content costs by negotiating better change and removing nonperforming content and [ routing in even the benefits of lower deployed out costs ]. On Slide 37, in the year ahead, we plan to build that on the 6 core pillars of our strategy by ramping up our investment in local content materially, maintaining and growing our subscriber base in the context of the economy and pursuing global leadership in new business to install data. We will also be launching our OTT premium product, DStv Streaming, and focusing on growing our paying Showmax subscriber base, driving new opportunities to expand our ecosystem and investing in strategic programs to enhance our customer service, billing and data capabilities. And to ensure acceptable returns to our shareholders in a challenging environment, we will remain focused on seller cost reduction. Turning to Slide 38. On the issue of returning capital to shareholders, we have honored our commitment made at the time of listing more than a year ago to pay a ZAR 2.5 billion dividend. We have also delivered ZAR 1.7 billion in additional returns through implementing share buybacks, ZAR 1 billion of which was done as a general buyback. All of these dividends and buybacks have resulted in an effective total yield of around 11% for our shareholders. As a highly cash-generating business, our intention is to keep paying dividends under normal circumstances. However, we do not find ourselves in normal circumstances at present. And since it will take time for the full picture to develop, we believe it is not prudent to make specific commitments for FY '21 at this stage. Thank you very much. We are now ready to take questions.

[Operator Instructions] Our first question is from JP Davids of JPMorgan.

Congrats on the results and the maiden dividend. Two questions or I guess, themes I wanted to explore with you guys. The first one, just around OTT. I fully appreciate Imtiaz's comments around -- we'll find out the details in due course. But just wondering how you conceptually think about the risk of OTT on the platform as a Trojan horse. So in the near term, it's something that can sort of add to the platform and the ecosystem, but over the medium term, it makes those consumers to a content that frankly, they like and then want to downspin, too. And so that's question one, really around sort of the threats around OTT, trying to balance that against the opportunity of adding it to the ecosystem. Then separately, just on Africa, so picking up your, I guess, views around the growth prospects for that asset loud and clear in the addressable market, but I guess as it remains very clear that the risks of operating in Africa remain high. And as hard as you guys are working, these seem to be undermined reasonably consistently by FX headwinds and macro instability. So wondering, at what point, if there is a point, where you would need to take tougher strategic decisions with the asset and with the portfolio of assets and what that could take the shape of. So for example, could you see a smaller portfolio, a more managed portfolio going forward?

Thank you, JP, for the question and I'll ask the team to add to my response. On the OTT side, I think if we can take a step back and look at pay-TV as a multichannel offer. And JP, what you realize is that from the beginning of multichannel environment, what we had is that we had [ same budget ] channels that we added on to the platform. We also had content that we produce ourselves and put that content together in the form of channels. We also had programs that are third party that we put them together and create a channel sort of third-party programs. And with all that, then pay that to care that we only sell to our customer. With the OTT going direct to consumers, we think it's a natural progression for pay-TV because we have always been a one-stop shop wherein people come in to enjoy content of us from anywhere in the world. And this, we believe, is the right strategy to get us to continue to be a one-stop shop where people go through us to get content, it doesn't matter where it comes from any of the OTT [ pairs ] that are coming into the market. In that way, we make sure that we remain relevant and people find the convenience of paying just one deal and gaining to us. We should also not underestimate our ability to collect payment and to collect cash across the continent. That helps also with the OTT being -- staying with us on our platform. Among the things that we have on our side, JP, is the local content and sports, which we will continue to invest in because it's our key differentiator as compared to all the international players that are coming on the OTT side. And we have heard many, from Europe and the U.S., where traditional pay-TV operators like ourselves have brought this onto their platform, and it has improved digitizing their customers and customers have valued these initiatives. On the growth prospects for the Rest of Africa, we are very excited about the prospects for the Rest of Africa, and we are still seeing good growth year-on-year as we have already raised that. Except that in the past year, we have experienced drought in Zambia and Zimbabwe, which impacted our subscribers badly in those areas. And we believe that our scale helps us in that we can absorb [ soft ] as they happen in some of the markets -- some markets then are able to continue to grow. And we believe that there's still good market out there for us to get. I will now hand over to Tim to respond specifically on the ForEx question that you have raised and also on whether we can go to an extent of cutting back on some of the territories. And remain with a smaller footprint on the continent.

Thank you, Calvo. And thank you, JP, for the question. So guys, I mean, we have articulated this view before. I think the first thing that you've got to do if you're going to operate in Africa is you need to have a reasonably medium- to long-term time horizon. There are times when the African currencies are very volatile, and we're seeing that at the moment. But the way that we look at this is on 2 levels. We first look at the operational improvements that we're seeing from the team that operates the Rest of Africa. And for the last couple of years, they've been doing a fairly exceptional job of really delivering an outstanding operating performance. You're quite right in that we have lost some of that benefit through currency exchange rates. But remember that we are operating a largely fixed cost business. So more than 80% of our costs are fixed. We have long 10-year remaining lives on the leases or satellites, and we have reasonably long content contracts as well. And when -- what we do, do is that when we have operations that are in loss making, we have an internal decision tree that we run through. And one of the key factors that we always look at is what is the consequence, the net financial consequence of closing the business down relative to not being able to extract or remove some of that fixed cost base from the cost structures in a reasonable period of time. Because the minute you shut down an operation, what you will get is you immediately use the revenue side of the equation, but you're retaining over 80% of the fixed cost saves. So we do look at it. We look at it fairly regularly, in particular, for the countries that are loss making. And I think as long as we are still firmly on the path of returning the Rest of Africa business around, that's not something that is immediately on the cards for the African operations. So is it technically feasible to be able to do it? I think the answer is yes. But it would come at a significant immediate cost if we were to try and shut certain of our markets down.

Tim, that's very helpful. If I could just come back with one follow-up. Just in terms of the, I guess, the risk profile of Africa. In terms of your relationships with the big studio houses going forward, I'm just trying to understand whether there's any part of the risk that can be passed on to them in some shape, form or another. I mean it seems to me you guys are taking on sort of a disproportionate amount of risk in terms of ForEx, et cetera, to deliver their content into Africa. Just wondering if there's any scope for -- I'm not expecting that to change over the next 12 months, but sort of on a 5-year view, that type of relationship or those type of agreements could become more flexible.

Yes. Answer this point -- to that, yes, JP, there is an opportunity for us to engage, and we have already started engagements with our content suppliers, specifically speaking to our risk exposure as a result of currency depreciation. We have seen some traction in some of the content suppliers where they are also understanding of the situation that we are in and are prepared to share the risk with us. Of course, it's a difficult discussion to have with some of the bigger studios. But we have begun those engagements, and we hope that some synergy will prevail as we engage them because the facts on the table really show that we really need to -- them to come on board with sharing of the risk going forward, otherwise, we'll have a much bigger problem if we do not address this.

The next question is from Jonathan Kennedy-Good of SBG Securities.

Just a quick one on your trading profit. I was just simplistically looking at it, was up ZAR 1 billion. And then if I look -- just look at your set-top box revenue versus costs, you made a net saving, at least on my estimates of about $600 million. So it looks like 60% of the increase in trading profit came from savings on set-top box subsidies, technology gains, call it what you wish. But just trying to understand whether we're going to see more such gains coming through in the next year, how to kind of think about that in light of the rand depreciation and presumably some African currency weakness coming through.

Tim, do you want to take that?

Sure. So you're 100% correct. The number was about ZAR 560 million in savings on set-top boxes year-on-year. But of course, the way that we look at our business, we save costs across a broad spectrum of -- in the business. Some of that gets reinvested, which is why we can't peg a specific cost to the improvement in trading profit because we are reinvesting parts of that in different areas of the business. But I think your primary question, if I understand it, is do we have scope to save further costs in the coming year, and I think the answer to that is yes. In fact, we have -- so typically, we set our targets at around about ZAR 1 billion of cost saving a year. That's our normal threshold. Because of the risks that we see in COVID-19 and because we are concerned about the strength of the consumer in the middle to latter part of the financial year, we've actually accelerated again our cost savings, and we've upped our internal targets from the levels that we've had in the prior year. So we actually think that as a target setting, we've actually lifted the bar. And of course, we once again hope that you will at least achieve or overshoot on that target.

Great. And so we should be comfortable with SA trading margins in the range of 30% to 32%, I presume then?

We're not giving specific guidance for this current year because we really don't know what the impact on our top line is going to be. We have seen, for example, in South Africa, that a number of companies have started announcing retrenchments. Those retrenchments, depending on how it extensive they are and whether they are in single-income households, could it potentially have quite a big impact on our business? So until we have better visibility on how this plays out in the year, what we are doing is we are understanding that there's a multiple number of scenarios that could play out. Assuming closer to a worst-case scenario and then driving our behavior accordingly to try and see if we can mitigate for that. But at this point, we're not giving any guidance on either dividends or all operational metrics at this point in this time.

The next question is from Omar Sheikh of Morgan Stanley.

I've got 3, if I could, please. Maybe the first couple for Tim. Maybe starting with the Rest of Africa, Tim, if I may. I just want to clarify something you said in your prepared remarks. I think you mentioned that there may be circumstances in which you would recalibrate the guidance for Rest of Africa breakeven at the medium term. I wonder whether you could just clarify what that is, what those circumstances might be. And then thinking about the pace of loss reduction that you reported last year is ZAR 800 million thereabouts. Are you sort of -- is that the sort of pacing of loss reduction that we should think about for 2021? Or do you think it might be a bit better or a bit worse? That's the first question. The second question's on -- again, for Tim, on working capital. And the cash flow performance last year was tremendous. And you can see from the slide that a lot of that was driven by working capital. The comments you made were that it was -- it's lumpy and was driven by rights payments and so on. So should we assume that, that working capital inflow that you saw in 2020 may not be repeated in '21? I just want to clarify what the message is for working capital. And then thirdly and finally, maybe a question for Calvo. I was thinking about the change in strategy towards aggregating OTT services. I know you don't want to talk about -- specifically about the services that you signed with, but could you just talk about the rationale, the thinking behind doing those distribution agreements now. Has anything changed about your thinking in terms of the -- what you think the pace of over-the-top penetration in the core South African market might be over the next few years? Do you think -- is this a response to you thinking that OTT penetration might step up a little bit? And then just on the timing of when these services will be available on your service, could you just clarify how many boxes in the field today are enabled or each enabled and will allow subscribers to access one of these OTT services. And what -- if there aren't that many today, when those will be rolled out into the field. Those are my 3 questions.

Thank you very much. I'll start by responding to the OTT question, and then Tim can respond on the rest of your questions. On whether there has anything changed with regard to OTT, we have already said and when we came up with Showmax a few years ago, we knew that everywhere in the world, we are seeing people moving to online consumption of video, despite the continent still struggling with infrastructure, we knew that we needed to start very early to own the habit, as we call it, of people that are going to consume content online so that as infrastructure improves, then our products are out there and people are able to consume those products. We do not think there will be a significant shift in terms of infrastructure rollout on the continent that much. However, we are preparing ourselves for that eventuality when it happens. And we believe we need to start very early in preparing ourselves to make sure that we take the opportunity in every stage and we become a platform of choice for people to consume these OTT services. And that's how we look at the OTT services. And just to think about it is that people will go for where content is available. With the proliferation of all these OTT, there will be people that will want to get access to this content. And if you are a one-stop shop where they can get all the services, we're positioning ourselves very well in the market for us to gain customers out there. In terms of how many boxes and the timing and so forth, and that's where we ask you to please bear with us because those are the discussions that we are having with the OTT players in terms of how to go to the market, when is it going to happen. They have to say that there will be a new decoder that will be coming on to the market that is able to allow this kind of service to be accessible through those decoders. Our current decoders do not support this. So the next version of our Explora decoder is the one that is going to accommodate the OTTs on our platform. I'll now hand over to Tim to respond to the first question.

Okay. So all right. Let me start with Rest of Africa and recalibrated guidance and what would cause that. So if you have a look at the Slide 29 of the deck, which is our Western Africa waterfall graph in terms of what makes up the different movements from 1 year to the next. If you take a look at the improvement from financial trading loss 2019 of ZAR 3.7 billion, and the organic trading loss at the end of this year, it's a 47% improvement in results, okay? If we look at last year's -- the same graph last year, we also saw a significant operating improvement in results. So the reason that we don't feel that guidance is warranted at this point in time is that if the currency shifted and stabilized and the team is able to deliver these kinds of improvements, operational for [ full ] performance on a year-on-year basis, we will -- we are likely to then achieve the guidance that we outlined at the beginning of last year at the time that we listed. Obviously, if the currencies do not play ball and currencies continue to depreciate, then that could start changing the outlook that we're seeing. Now the reason that we can't call it now is because we don't know what these new builds are going to look like. We don't know the impact of COVID-19 on -- potentially on revenue numbers. We do know what we are actively, busy doing in terms of taking costs out of the business, but this is a multifaceted model and scenario planning. And until we see better direction as to which these scenarios are likely to play out, it's just simply too early to call it because it's -- we'll just be speculating. So as soon as we get a better scale directionally as to where we see the currency movements and operational performance going, as soon as we get some better visibility of where COVID-19 is impacting the business, I think at those points in time, we would come back and update the guidance that we gave to you guys. Then you had a second question, which was -- well, I kind of answered it in relation -- well, I can't answer it directly because we don't give specific guidance. You asked if a loss reduction of ZAR 800 million is something that you should look at for 2021. Well, we didn't reduce the loss by ZAR 800 million, right? The operating savings was actually ZAR 1.7 billion. And we were impacted by exchange rates that then tempered that back down again to ZAR 800 million. But I can't -- I mean I can't give you specific guidance on that, and we've indicated why. COVID-19 is uncertain. We don't know what's going to happen with the currencies. But what we are fairly comfortable with is that our operating team is very focused, and we are pretty confident that we should be able to deliver a cost-saving number during the year as well. So there's a couple of uncertainties in there, coupled with some stuff that's more within our control and we're more comfortable with. And then your third question was on working capital, and you asked if we were going to see an inflow like we did in some prior years. We've got a slide in the [ AFS, ] Slide 50, that gives you some working capital over the last couple of years. Most years in this business, working capital is an outflow. Because we're growing and because we've got events that happen periodically, what happens is that the depth of the investment in working capital tends to fluctuate. So if you just go back on that graph, 2017 was an outflow of ZAR 580 million. That increased in financial year 2018 because we had a number of -- where firstly, we had trap cash in Angola. And if you recall, that was an agency business at the time. So when we -- when the cash balances started growing, there's a big growth in the cash balance that grew in debtors, and we had sports prepayments in that year. So we ended up with an outflow in working capital of ZAR 3 billion. Then last year, we saw some relief as we got the money back. We managed to collect quite a lot of that money and return the agency business in Angola into a [ subsidiary ]. So that release working capital, we ended up with ZAR 1.7 billion. And this year, we're back in line with 2017 with the [ light ] working capital cycle again. So the working -- the reason that it's difficult for us to predict what happens in working capital is we don't know the exact timing of when we're going to conclude transactions and contracts, especially on big rights, whether that's general entertainment or more predominantly sports rights that require prepayments. I mean, clearly, in the current environment, we're going to negotiate as hard as we can not to get prepayments brought into the contracts, but that's nothing -- there's nothing certain about that.

The next question is from Catherine O'Neill of Citi.

I had a couple of questions. One is on sort of payment collection and what you're seeing, whether you're seeing any change in the ability to collect payment from consumers, especially markets where it's cash heavy, just some of the behaviors, that would be great to understand. The other question I had was on really pricing differential between OTT or your OTT service and DTH and what the gap is, how we think about if you sort of reach pricing equivalents at any point longer term. And then finally on regulation, I just wondered if you could give us an update on sort of current regulatory reviews and court cases going on and what the sort of possible outcomes might be.

Thanks for the question, I'll respond to that and Tim can add as well. On the payment collection, I think what we have seen as a result of COVID-19, which then made people stay home, we are seeing a substantial increase in terms of people using our self-service applications. Our self-service applications allow people to be able to make payments and also to do all forms of engagements with us. We saw a significant growth in that. And we have seen record numbers in terms of people using some service to do payments. So it's a very positive sign, and we hope that it stays that way because it improves our ability to get more customers on to our base going forward as people don't have to walk into our agencies to make the payment. Of course, we still have a strong distribution where people still prefer to use cash, and that's a trend that we also use for us to continue to get customers onto the platform. On pricing equivalent as compared to OTT. As you know, our pricing in terms of our bouquet platform, a very low level on the DTT side and going to the higher levels at the premium level. On the DTT side, we are at, in some instances, even lower than the OTT pricing. As to whether there will be some pricing that comes in and very comparable to OTT, I think we need to remember that this is not a like-for-like type of a product. Our product comes with a lot of local content, live news channel. It also comes with lots of sports, which are more costly, and therefore, that needs to be taken into account the road. However, if you look at our Showmax offering, which is a pure SVOD like an OTT player, on pricing, we are as complicated as it can be as compared to all these other OTT players. The third question that relates to regulation. I think that we started in South Africa, we had 2 inquiries that we are facing in South Africa in the past year. One was on the sporting event of this noninterest where we have made good progress subsequent to the regulator having received responses from everybody that said they are going the wrong way, and they really need a review. The regulator in its last appearance before the parliamentary committee, they presented a new position that they are going with regard to that regulation. We showed that they've listened to what the industry has said, and they are going back to the old regime that was well received by industry and globally. It used to be an exemplary of how to regulate [ sports ] to ensure that you balance access as well as making sure that sporting bodies are able to -- are sustainable going into the future. So that was announced 180-degree turn from [ Mikasa ], which also helps in terms of our engagement going forward on the pay-TV inquiry, that they are prepared to concede where they've missed important aspect in terms of where regulations will go. We are continuing engagements on the pay-TV side. We hope that [ transparency ] will prevail because with all -- what's happening in the market, around online is -- also on the OTT side, with our announcement that we are signing deals with OTT players and perhaps we'll be able to see the light as to what's happening in the industry. But as of the continent, we always have normal regulations that will be up for debate. So far we have managed them very well among the issues that will always come up when regulators would get pay-TV. We'll be looking at exclusivity and trying to see if they can have interventions there. What is -- has happened that as a result of -- for instance, in Nigeria, where local content producers are beginning to see the value in terms of having content that they have produced that is exclusive and also OTT players coming in and looking for content on the continent, they realize the value of exclusivity. So any attempt by regulators and government to try to change the rules around exclusivity, we find that we have got more voices now coming in and saying, no, you're going to destroy the industry and they need exclusivity to form parts of this and part of pay-TV and video entertainment as a whole. So we have not had a really typical debate on the regulatory results, but we have got a very strong regulatory team on the continent that has been working with regulators for a number of years. And we'll continue to safeguard our interest in all the markets that we operate.

The next question is from Jacques Conradie of Peregrine Capital.

Well done on a great set of numbers. I've just got a question related to the COVID-19 impact on the business. If we look at the African broadcasting data, it seems like the viewership of most of the top shows is up like in the 50% to 100% kind of range in the last few months, which I guess indicates probably much higher utilization, but probably also a decent subscriber jump. So I'm just interested to see or to hear where that trend has also happened in Africa where we can't necessarily get this kind of data. And then perhaps as we've seen some of these African markets ease lockdowns, I know it's very early, but do you have any kind of data on your ability to hang on to those subscribers as we have some kind of return to normality perhaps in the next 3 to 6 months?

Yes. Tim, do you want to respond to that?

Okay. I don't have the answer to the top shows, but let me answer the one about the -- what trends we're seeing. So very much by South Africa, towards the end of the last financial year, we saw an uplift at certain of the countries in Africa waiting to lock down. And what we've seen in the first 2 months is, I would say, probably a more normalized historical trend. In other words, we haven't seen anything materially different to what we've seen in prior periods. But what we have been able to do is hang on to those early gains that we got at the end of last financial year. So we're seeing the overall base is higher. What -- the counter to that is because of the lack of sports, we have seen a mix shift as people are downgrading because there were packages where they were getting a certain level of sport content. We've seen those customers or some customers downgrade where they can still get general entertainment that they're looking for until the sport comes back on. I think that's partly why we're quite excited that the European football leagues are coming back this week and next week because we're hoping that, that's going to be the stimulus to try and get the guys to start moving back into the higher-tier packages in the higher ARPUs.

I mean if I could maybe just do a follow-up based on what you touched on now, Tim. I remember in historic years, you've always flagged that you have a bit of a drop-off in the African subscriber base during the break in the Premier League season. I mean there's very strange timing we've got this year around where the Premier League looks like it's going to be like June and July, which is normally the quiet months. Does that potentially help you deal with that drop-off and get through that better than you've done in previous years?

Yes. We're in a little bit of unknown territory, but we certainly are optimistic that this is going to help. I think having this long break, especially because when the guys come back, there's been a lot of interest in the fact that Liverpool could win the league. I think the standard of the season has been pretty high. It had good momentum when they had to shut it down. So I think certainly, we are hoping that when they -- when these shows do come on that we can buck a trend here.

Gentlemen, we have no further questions in the queue. Can I ask you for closing comments?

Ladies and gentlemen, that concludes our conference call for today. We hope you found our feedback useful and would like to invite you to reach out to us if you have any additional questions. Until our next results announcement in November, take care and stay safe. Thank you very much.

Thank you very much, sir. Ladies and gentlemen, that then concludes this conference call, and you may disconnect your lines.