Safaricom PLC (SCOM) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the financial results announcement for Safaricom PLC for the full year 2020, '21. On behalf of our Board of Directors, the management team and the staff of Safaricom PLC, we thank you very much for making time to join us virtually for this event. I'm glad and thanks to technology, which is our foundation of our business that we can virtually connect and engage this morning. We hope that you are all keeping safe, masking up, washing hands and observing the required precautions and protocols to help us manage the COVID-19 pandemic. We will start off with remarks by Michael Joseph, the Chairman of the Board of Safaricom PLC, followed by Safaricom PLC's CEO, Peter Ndegwa. And thereafter, Chief Finance Officer, Dilip Pal, will take us through the financial performance and results for the period under review. Should you like to keep your social media followers updated, our hashtag for today is #SafaricomFYResults. In staying committed to our promise on diversity and inclusion, our sign language interpreters for this morning are [ Joseph Ingeroo ] and [ Monica Morengi ]. It is now my pleasure to invite Safaricom PLC Board Chairman, Mr. Michael Joseph, to make his remarks.

Thank you, Steve. Fellow shareholders, representatives of the investor community, the Board, management and staff of Safaricom PLC, members of the media and the online community. Good morning. Thank you for joining us this morning as we announce our full year results for the financial year 2021 ending March 2021. As I mentioned during our half year results 6 months ago, we have operated this past financial year under very extraordinary circumstances. We started the financial year in April 2020 under government-imposed lockdown, and we close the financial year in yet another lockdown. During the year, the board closely followed the management's actions in order to ensure the well-being of our staff and customers. This included enabling and authorizing staff to work from home and taking preventive action in our shops to ensure our staff and customers remain protected and safe. Ladies and gentlemen, the year was marked with a slowdown of economic activity due to the COVID-19 pandemic across the country. However, I am proud of the actions that Safaricom took standing with the country and supporting the social distancing measures, such as working from home and the use of global money at reduced rates for payments introduced by the government to curb the spread of virus. Ladies and gentlemen, while the pandemic has had a serious adverse effect across this country, it's brought out a key value in all of us, our resilience. In April last year, we were anticipating an extremely difficult period ahead. However, despite the difficult circumstances, we have tried to find a way to make ends meet. When faced with tough challenges, our resilience comes forth and helps us forge ahead. The board takes note of our business resilience during this time. We are pleased with the performance, especially the recovery noted in the second half of the year. Our quarter 3 results show a solid performance with positive momentum leading to a return to service revenue growth across all sectors. This provided an opportunity to give back to our shareholders and support them during this difficult economic times. As a result, we issued the first-ever interim dividend of KES 0.45 per share, totaling KES 18 billion. The disruption has also allowed us to think about the future of our business. The board, together with Peter and the management team have been considering how to position Safaricom to be future-ready. During the period under review, the board approved a new strategic positioning that removes Safaricom from a telco business into a purpose-led technology organization. This strategy will see Safaricom focus on new business areas such as agri business, education, health care, financial services and support for small businesses, including regional expansion. The board will continue to monitor the execution and implementation of this strategy. To effectively execute the new strategic direction, Safaricom will need the right regulatory framework and support. The board looks forward to engaging with the relevant government functions to ensure awareness of the strategy and seek support in areas such as legislation, taxation, interpretation of laws, amongst others. We are well aware of the importance of Safaricom to this country. It is our commitment that we will continue to investing in our business in order to assist in the success of this country overall. In conclusion, ladies and gentlemen, as we go into the future, we are optimistic about the potential as management implements a new strategy of being a purpose-led technology company. I assure the shareholders that the board is committed to working with the management to deliver value to them, but most importantly, in ensuring that Safari continues to be there for Kenya, for its customers, its staff and the community at large and our motto, transforming lives. With these remarks, I now take this opportunity to invite our Chief Executive Officer, Mr. Peter Ndegwa, to talk more about our strategy and the performance highlights for the financial year 2020, '21. Thank you.

Thank you, Michael. Fellow shareholders, representatives of the investor community, the Board, management and staff of Safaricom PLC, members of the media and the online community, good morning. I've spent a considerable amount of time in my first year dealing with matters to do with COVID-19 pandemic. As Michael has indicated, COVID-19 has altered the environment for all businesses. And as Safaricom, we were not spared. Our purpose of transforming lives, however, was our guiding light in decision-making when the pandemic was declared in the country. I'll now briefly talk about our commitment to this purpose of transforming lives. In pursuit of our purpose, we continued investing in community initiatives to help Kenyans weather the impact of the pandemic. We supported more than 1.1 million Kenyans through the Ndoto Zetu Campaign across all the 47 counties. During this period, we launched the Safaricom sustainable series, which aims to bring together business leaders to discuss how to tackle some of the most pressing challenges of this decade. As a company, we've integrated sustainable development goals into its operations. We remain aware that for business to effectively support the achievement of the STGs, a shift in leadership mindset and redefine the business model is required. In staying committed to our promise of diversity and inclusion, we've enhanced our governance to attain a 50-50 overall gender split with 34% women in leadership. In addition, 2.4% of our staff are people with disabilities. Ladies and gentlemen, on matters environment, we reduced our travel emissions footprint by 38% year-on-year, even though our overall carbon emissions rose by 8%. Now I'll talk briefly about our performance, in particular, giving you an indication of our H2 performance. Ladies and gentlemen, the government has deployed various measures in a bid to mitigate the spread of coronavirus. In response, we moved to provide solutions to our customers, easing their burden and helping in building resilience. We supported working from home by doubling bandwidth to our home fiber customers for an initial period of 90 days, and furthermore, made the offer permanent at the end of the period. To ensure our school-going children continued with the education, we zero-rated websites hosting education material and provided access to SME -- to SMS-based learning material. For business, we provided support via the extended M-PESA wallet where possible and offered generous credit facilities and upfront payment for services and goods to our partners and suppliers. We continue to make a difference in the lives of the most vulnerable in society with initiatives such as Bonga For Good. In addition, we invested KES 339 million cash through our foundations, supporting communities weather the pandemic challenges. But perhaps the most impactful was facilitating reduced cash handling through a temporary zero-rating of all transactions below KES 1,000. Over 1.7 billion transactions valued at KES 14.4 trillion were zero-rated during this period. Following return to charging on zero-rated M-PESA transaction, we also reduced our M-PESA tariffs by up to 45% for lower-value transaction bonds. We also made it easier for our customers to pay hospital bills by zero-rating pay bill cost to help facilities across the country. In addition, Safaricom hosted the National COVID-19 toll free line, our call center that provided information and support to the country with over 300 of our call center agents on standby to support. But our most critical support to our country was and remains ensuring network stability to keep the country connected. During this period, we accelerated network rollout, specifically for 4G, with over 1,000 new sites set up. Now let me talk about delivering on our strategy and our mission towards a customer-obsessed digital fast organization. Our 4 transformative pillars are critical to the delivery of our 5-year strategy. We remain focused on bridging the digital divide through initiatives such as Lipa Mdogo Mdogo, double data on home fiber and increased investment in 4G rollout. We've seen a 40% growth in 4G devices on our network. This growth is driven primarily by accelerated 4G network investment and Lipa Mdogo Mdogo propositions which supports our customers in acquiring entry-level smartphones by paying as little as KES 20 a day. From a regulator's data, we are currently holding about 69% voice traffic share and 36% for fixed data subscriptions. We continue to be the technology partner of choice for business by offering relevant solutions. This segment has grown by 6% year-on-year to 726,000 customers. To support our micro and small and medium-sized enterprises, MSMEs, we introduced Pochi la Biashara, M-PESA Business App, the Business Manager, merchant transacting till and self-onboarding process. We are set to launch the M-PESA app for the rest of the customers in the next few days. Our growth strategy is also driven by cost leadership. In the reporting period, we delivered KES 6.9 billion in savings by driving a cost optimization journey, and we are doing this in order to fuel new growth areas. I'll now briefly touch on our strategic focus on digital transformation enablers. We started the execution of our strategy in line with our goal of becoming a purpose-led technology company. To support this goal, we are evolving our organization model in order to become a truly agile organization. We are transforming our ways of working in order to sustain customer agenda and achieve deeper employee engagement, create a more intimate connection with our community and deliver more value to our shareholders. In terms of our business ambition, we've launched the M-PESA Africa joint venture partnered with Google and Facebook for device financing. We are also leading a strong consortium and have submitted a bid as part of the competitive process for Ethiopia. Should we be successful, this will allow Safaricom access new growth opportunities for the long term. We are on track to deliver our ambition to deliver 100% 4G coverage, which is currently at 94%. And earlier this year, we launched 5G trials, which will continue to drive the digital propositions that we want to offer to our customers. We continue to leverage on data and analytics to drive growth and usage through personalized offerings. In terms of our underlying KPIs, we see continued improvement. So despite the COVID-19 disruption on our business and the economy, we've seen a recovery trajectory on our underlying KPIs, particularly in the second half of the year. This growth is attributable to sustained investment in our network and our customer engagement. The trajectory realized in this KPI is also a positive sign of business resilience and opportunities for future. Let me now talk about our performance in the context of our earning guidance. Ladies and gentlemen, we faced quite some turbulence here in the past 12 months. However, our business has delivered on the higher end of the guidance range, generating solid returns to our shareholders. We've achieved an EBIT of KES 96.16 billion, ahead of KES 91 billion to KES 94 billion guidance range. We continue with our strategic investment in our network, achieving a CapEx investment of KES 34.96 billion, in line with our guidance of KES 35 billion to KES 38 billion for the year. Our intention is to continue to drive smart investment aimed at delivering on our target coverage, enhanced customer experience and business continuity in key performance indicators. At this stage, therefore, I want to welcome Dilip Pal, our new CFO, to take us through the numbers in great detail.

Thank you, Peter. [Foreign Language] I wish to welcome you all to our FY '21 full year results announcement. I hope you all are keeping safe, and thank you for taking time to join us this morning. Before I start, I would like to remind you that the presentation materials will be available shortly on Safaricom's website. As Michael and Peter noted, we are operating under extraordinary circumstances and the effects of this pandemic are far reaching, including its impact on our performance for the period. I will now take you through this in a bit more detail. The impact of our response to COVID-19 in zero-rating M-PESA transactions weighed heavily on our performance. However, we saw gradual recovery in half 2 with service revenue posting 4% year-over-year growth from a decline of 4.8% in half 1. EBIT was flat in half 2 from a decline of 10.5% in half 1. We will unpack this a little more in subsequent slides. As Michael said earlier, faced with tough challenges, our resilience came forth and enabled us to force forward. Our strong balance sheet has allowed us to continue to make significant and important investments in the business to support its sustainability for the long term. I am pleased to note that through the cost leadership pillar of our strategy, we were able to yield cost savings that helped elevate the pressure on EBITDA margin. We saw OpEx reducing 3.2% year-on-year driven by smart procurement, digitization and operating model transformation. I'm also happy to note that our continued focus on providing relevant products to our customers yielded a 9.9% increase in our 1-month active subscribers for the period, with customers growing across all revenue streams as Peter noted earlier. Now looking at service revenue in a bit more detail. As the chart on the top left of the slide illustrates, there was a marginal decline in service revenue mainly attributed to voice and M-PESA revenues. I'm happy to note that mobile data and fiber to home growth nearly offset the decline in voice and M-PESA in the period, which we'll speak a bit a little later. Fiber to home performed very well for the period, driven by increased demand necessitated by working and schooling from home. The graph on the bottom left demonstrates voice performance was under significant pressure in half 1, but as Peter called out, strong customer value management offerings yielded a much stronger performance in half 2. Moving across to the right of the slide, you can see that our service revenue profile has changed in this period with M-PESA now accounting for 33%, down from 33.6% last year, of course, impacted by free fees in P2P transactions in this period. Of interest is debt, M-PESA bounced back in half 2, contributing up to 35.4% of service revenue compared to 33.5% in a similar period last year. We continue to see growth in the profile of mobile data and fiber to home now contributing 17.9% and 1.4%, respectively. The chart on the bottom right of the slide reiterates that we saw a lot of pressure in the first half with some recovery in the second. And we are encouraged by this momentum as we move into the new financial year. Now to look at M-PESA in a bit more detail. Transfers was the most impacted segment within our portfolio, posting a year-on-year decline of 15%. As I called out earlier, the decline is driven by the zero-rating of transactions, which affected transfers and payment withdrawals recovered in the period from a decline in half 1 attributed to the first quarter movement restrictions. On a positive note, international money transfer continues to perform strongly, growing 54.3% year-on-year. The last bucket in this graph is lending, which performed very well for the period, driven by Fuliza. In half 2, we observed improved M-PESA performance as we illustrate in the bottom left graph. From a decline of 14.5% in half 1, M-PESA performance improved to a growth of 10.1% in half 2 year-on-year. Looking at the graphs on the right-hand side of the slide, you can see a V-shaped recovery pattern across all main revenue streams, which is encouraging. It is driven by an easing of restrictions, opening up of the economy, continued innovation of our offerings and a shift in consumer behavior more towards cashless transactions, a behavior we hope will remain in the future. Looking at the same information this time from the perspective of values and volumes, the story looks more positive and the underlying health of the M-PESA ecosystem is evident. The value of M-PESA transactions increased 58.2% year-on-year with zero-rated transactions accounting for 19.9% of the total. Likewise, the volume of M-PESA transactions grew 29.8% year-on-year with zero-rated transactions accounting for 14.8% of the total. This is supported by the innovations made during the period, some of which Peter spoke about, with our transacting till as an example now contributing more than KES 40 million a month in revenue. In the period, we also accelerated our merchant tills with 1-month active tills almost doubling close to 300,000. The strength of the underlying KPIs, along with the innovation pipeline, will ensure that we are well positioned to drive recovery in M-PESA as we continue to expand the number of use cases, enhance our offerings and drive convenience for our customers. Just to note, more details on M-PESA performance can be found in the booklet on our website. Let me now move on to mobile data where, as digital adoption accelerates in our market, we are pleased with the commercial progress we are making. Looking at the top left of the slide, you can see consecutive growth half-on-half with an overall year-on-year growth of 11.5% for the period. Moving down the bottom left, you can see that growth is driven by enhanced 4G coverage, content aggregation and device financing. We continue to drive the 4G penetration strategy through device financing with over 200,000 devices sold under this program. Looking at the box on the top right of the slide, you can see bundled customers grew faster than overall customers at 12.4% year-on-year. Similarly, you will also note that data customers consuming more than 100MBs and active 4G devices grew at a much faster pace of 19.6% and 39.8%, respectively, signifying an increase in data penetration in the period. Looking at the box on the bottom right of the slide, you can see that while the effective rate per MB has continued to decline, the usage per subscriber has continued to grow and at a faster pace. Thus, overall ARPU for the period increased 3.7%. Now moving on to fixed data. As I mentioned, we are very pleased by the strong acceleration of our fiber to home business, which benefited from the work and study from home shift. This was the main growth driver for this revenue stream, growing 49.1% year-on-year. Moving across this chart to the right, you can see that fixed enterprise did not perform so well, impacted heavily with the closure of offices and some customers downgrading their packages. We have, however, seen a significant increase in the number of customers as can be seen from the graph at the bottom right of the screen, mainly driven by SMEs taking up our LTE offerings. However, this customer uplift is offset by ARPU erosion from a lower value offering. This customer segment remains a key focus for us as we expand our customer base beyond the larger enterprise space. The graph on the top right shows good momentum on home customers and also penetration, now with more than 50% of the homes pass being connected. Ladies and gentlemen, as I called out earlier, earnings before interest and taxes recorded a decline of 5.3% year-on-year in the period and 3.2% on an underlying basis adjusted for one-offs. The decline was driven by the loss of revenue from the zero-rating of M-PESA transactions, which put pressure on our contribution margin. We have also seen a shift in consumer behavior around M-PESA with deposits and the associated commission actually growing in the period. More details on the breakdown of our costs can be found in the booklet on our website. Moving across to the right, you can see a significant OpEx saving as the business focused on cost leadership to help mitigate the impact on our top line performance and some of the adverse cost movements in the period. Thanks to sustained operational efficiencies, we continued to observe improved OpEx intensity reducing from 18.2% in FY '20 to 17% in FY '21. Lastly, looking at CapEx, we sustained investment in our network and systems with our capital additions for the year at KES 35 billion. 68% of this CapEx was spent on growth areas aimed at securing revenue for the future. We continue to enhance our network in support of traffic growth, coverage and experience and investing in our IT capability, for example, in M-PESA, where we rolled out the latest version of the platform to facilitate faster product rollout and easier integration of KPIs. I will now hand back to Peter, who will take us through FY '21 dividends, guidance for FY '22 and some concluding remarks.

Thank you, Dilip. Ladies and gentlemen, I'll now talk about our proposed dividend. As you've seen from the numbers, we've not been spared from a tough operating environment as evidenced by the dip in our service revenue, earnings before interest and tax and net income. Despite this, we are committed to investing in the business and maintaining a consistent dividend payout ratio in line with our current dividend policy. During this period, the Board declared the first -- for the first time an interim dividend of KES 0.45 per ordinary share held amounting to KES 18 billion. The final dividend per share of KES 0.92 dividends per share amounting to KES 36.86 billion has been proposed by the Board for approval at the next Annual General Meeting. Let me now talk about the financial year '22 guidance. Whilst we anticipate facing subdued operating climate in the short term and as we recover from the impact of the pandemic, our business is well placed to cope with the challenges arising from the pandemic. We are hopeful that the global and local efforts to stop the spread of the coronavirus through prevention actions such as vaccination will have a positive outlook for the mid to long term. In the meantime, we continue to leverage our strong balance sheet as we implement a new agile way of working that will ensure our total focus on the customer and build a stronger and more resilient business for our employees and all our stakeholders. As such, our guidance for the financial year 2022 is at the range of KES 105 billion to KES 108 billion for earnings before interest and tax. And for capital expenditure, our guidance is in the range of KES 40 billion to KES 43 billion. So therefore, in conclusion, ladies and gentlemen, I want to thank the Board for their support during my first year in office. I look forward to continued support as we scale to new heights to achieve even more value for all our stakeholders. To my colleagues, thank you for your hard work, your dedication and your commitment, especially through this challenging year. Truly, you have embodied our purpose of transforming lives. I encourage all of you to stay on course as we go beyond on our journey to become a purpose-led technology company. To all our stakeholders, I thank you for your confidence in us. It is an honor to lead this great company into the next phase of our growth, and I'm excited to exploit the next opportunities that lie ahead. I thank you all for your time, and thank you very much.

Thank you, Michael, Peter and Dilip. Ladies and gentlemen, we have now come to the end of our full year results announcement. For the members of the media and bloggers present today, you will have an opportunity to ask your questions at a separate virtual press conference, which will take place shortly. Invites for this event have already been sent out to you. Once again, we appreciate you making time to join us this morning. On behalf of the entire Safaricom family, [Foreign Language]. Have a good day, and stay safe.