Safaricom PLC (SCOM) Earnings Call Transcript & Summary

All right, thank you. Thank you for that, Dilip. Question here from Jacqueline. This is to you, Peter. How has the Eurobond default affected Safaricom or the country prospects moving forward?

So just repeat that, how has?

How has the Eurobond default affected Safaricom or the country prospects moving forward?

Yes. If you speak to the Ethiopian government, they will tell you that they have not defaulted. So I think it depends on who you speak to. The government says, well, they want to treat various bondholders in the same way. But of course, the narrative is not great. They believe that they can be able to resolve the issue in the next few months. I think we just have to wait and see how they resolve this matter. But from the perspective of giving confidence, of course, the headlines are not great. In terms of how that is eventually resolved, that show to determine -- would determine the future and how everyone looks at Ethiopia.

Thank you very much, Peter. A question here from Francis of [ Castro ]. So this is to you, Dilip. If you could give us an update on MTR discussions? And then secondly, speak about whether Ethiopia qualifies for investment tax credit? And what percentage of the investment value and for how long? That is on the investment tax credits.

Yes, Caroline. Repeat. MTR and then?

MTR discussions and when does Ethiopia qualify for investment tax credits? What percentage of the investment value and for how long?

So starting with MTR. Francis, what we have updated to all of you in the past is, there was -- what you call that? Intermediate determination of an MTR, which is what we are currently applying, and with an understanding and confirmation from the regulator that our proper cost study will be performed and then that will become the basis for a long-term MTR road map. So this -- we understand that the work was completed in quarter 3, and there was a report was expected to be released anytime soon, but we haven't had the report released yet, but the expectation is that the work got done and there will be a report.. And also best case expectation is that it it's lower than what it is today. And that's very important for a new business to set up where most of the calls would go to the other operator and then -- if MTR is not at the level where we can be competitive in the market, I think it puts us in a bit of a backseat. So the work was done, and we expect the regulator to share the study report and then therefore a long-term framework on MTR soon. And if we have any information around that, we'll not wait for the call. We'll definitely let all the investor in additional about -- investors in additional about what has happened on this.

Thank you. Thank you, Dilip.

Other question was investment. I think the biggest that we have is on the Customs [ DP ] relief as part of our capital goods input, which is what is actually a major relief for us. And then there are certain tax holidays with a certain year limitation of the investment. So at an appropriate time, we can also give you a little bit more details around what those are or that there is any positive. But I think the biggest relief is the customers due to really when you put it telecommunication groups.

Thank you for that, Dilip. Moving on to a couple of questions from Madhi. So I'll pick a few from there. So Madhi is asking, how is our cost control, given the high inflation in Ethiopia? And at what point do you think it will start becoming an issue? So that is on the cost aspect. The second piece is on comparators -- comparatives for the network quality, whether they are any network quality KPIs available between us and between Safaricom Ethiopia and Ethiopia -- and Ethiotel besides coverage. And how do we think the network stands in terms of download speeds, pricing, distribution, recharge. So it's more like comparative data between us and Ethiotel, with respect to some network KPIs, if we have any that we could share? That is from my Madhi of HSBC.

Yes. Thank you, Madhi for this question. And this is where probably I will seek a bit of help from Wim on this. But as far as we know, there is not a lot of publicly published data available for Ethiotel. So many of this information, what is available is through the what you call that market intelligence and also some of the studies that we have done before, including, if I'm not mistaken, it was Ookla. Actually, Ookla declared Ethiopia, our Safaricom Ethiopia network is the best network in Ethiopia. Not in only in Ethiopia, but entire Africa, in terms of the download speed. But that's quite obvious and quite natural, given that we are a brand-new operations. From a specific competitive side, I don't know whether Wim, do you have any competitive to give -- it's available, but we know for sure that -- the customer feedback is very, very good in terms of the -- if you see and also some of the other things like [ open signal ] and other, the download speed, the quality of the data, the Internet browsing is much better. So maybe, Wim, you can also cover from the cost control point of view, given the price levels that we are, what are some of the areas that we are looking at, and that's something that we are very keen, because the price levels are there where we are. The customers are going to pay you what the price levels are in the market. And obviously, we need to make sure that the cost supports that level of price. So Wim, very quick on anything.

So thanks Dilip, on the quality of the network. Of course, our value proposition in the market is very much focused around data and quality data. We do have a few independent sources. You've mentioned, Ookla, there is also Facebook and others that publish. And of course, we have our internal statistics. We do drive tests all the time, and we do comparative drive tests. You put both networks. Of course, that is for internal consumption, but the bottom line of it is the same consistently. Also based on customer feedback is that our data quality is really better than our competitor, based on our own data and also based on customer confirmation and that is what we drive in the market as our key value proposition, both in terms of indoor quality, download speeds and others, there's a consensus in the market that we are definitely superior, which, of course, also to relate it, we have a completely new network, and we're just in the building and the ramp-up phase. So which would I say obvious that we are, by far, the better quality network. Stanley, CFO, maybe you can comment a bit on the inflation and the cost control.

When we realize that the pricing is not to what we were expecting, and it's not likely to change, we did a review of our cost base. And as a result what we got actually has already implemented quite a bit of the actions, which are necessary and especially on the network side, to be able to get to a good place from -- and to mitigate some of the pricing challenges. Part of that is done. Part of it is ongoing, and the biggest part is obviously to be ahead of the [indiscernible], such that is devaluation. You have most of your low-cost services in Ethiopia local currency. So those kind of works and localizing in sourcing where possible. You are really looking at the structure of the organization, while still keeping the mantra of quality data on top of mind. All that has already happened and some of the things have already been delivered. Some of the things are in flight, and we have factored that within our expectations. So we'll continue having a very tight rein on control of cost, because that we believe that from a -- although ARPU is wherever we think we have -- in terms of ARPU, our expectation is that possibly, that we are actually very low as it will be. But the main thing is that we still have to work on cost to -- especially for the future sustainability of the business.

Yes. And Caroline, if you allow me, on a lighter note, I would say to the investors, let's -- we are waiting for you in Addis next month, and then you can live the experience of our very, very good and fast data network yourselves. So we're looking forward to that.

Thank you very much for that, Wim. Looking forward to have you guys come and test it for yourselves in Ethiopia. So thank you -- thanks all for the answer together with Stanley our CFO, most appreciated. So Dilip, I'll take 2 further questions here, one from Mishra and I [indiscernible] one from John Davis. So from Mishra, the question is how is funding situation in Ethiopia? And do you expect to raise more debt in near term? But we can combine it with the CapEx question from John Davis. And the question is, do you plan to put more money in Ethiopia? Or has most of the CapEx being funded already?

Yes. So I think as you said, both are quite linked. In terms of funding, if you have seen the data pack that you have shared, YTD December, we have put in [ $1.6 billion ], out of which [ $1 billion ] is towards the license fee, that [ 854 ] GSM and then [ 150 ] for the mobile license that -- mobile financial service selection that we have paid. Beyond that is about [ $600 million ]. So to your question that what is -- okay, beyond that, what we have done, we have also have deferred payments from the vendor, the equipment vendor. And then we do have local the ETB denominated loan, which is about in excess of about $100 million. So other than -- sorry, and then about $100 million from as a debt from IFC. So beyond that, what we have put in is mostly the money which comes through quickly. Now to your question is, what do it? So we have spoken about our CapEx of anything between the peak period of investment that we call is the first 5 years. So -- or investment, about USD 1.5 billion to USD 2 billion. And towards that, we believe from a contribution from shareholder towards equity will be minimum for the rest of the funding that is required, the requirement would be more made through a debt. We did mention about when you did the deal with IFC, both for equity about $157 million and debt to $100 million, that it allows us to opportunity to even go beyond as we need it. So the answer is yes, we need more -- we need more debt funding. And the quantum would be determined by the speed of CapEx that you are able to do within the first 5 years, that's why it is a range, what I have spoken about. And objective is to make sure that we maximize debt, and then we also remain within the debt equity potential norms the National Bank of Ethiopia has put in [indiscernible]. If you recall, the money has mostly gone through equity. So we are now adding the further funding requirement through debt.

Thank you very much, Dilip. We take a question here from Maurice Patrick of Barclays. And the question is, can you explain the extent of cooperation with Ethio telco? Because of the 2,200 or so sites, I see almost half are colocated. So should we assume a similar rate going forward? And the second part of the question is, are all issues with interconnection of voice SMS data resolved? So that's 2 questions, sir, from Maurice.

Yes. Thank you, Maurice. I'll start with MTR first, which is what I've given update, I think, to a very specific question. Otherwise, you are talking about interconnect meaning, you're talking about mobile termination rates. So mobile termination rates, it's applicable for voice and messaging. Of course, data doesn't attract any mobile termination. So in a -- from an interconnect point of view, you are, we are connected with Ethiotel because you can't run a business without having connected with the -- on the operator -- other operators that we have. Now are we satisfied with the rate? That's what I was mentioning. The rate which was agreed, which is still applicable -- is the rate which was -- we call that as intermediate rate. In absence or in waiting for a final rate coming from the core study, which is -- which should be coming in as far because the work has now been completed. So I think that from an interconnection point of view, if the commercial is the rate which is yet to be agreed or yet to be to the level of expectation that we have. Otherwise, there is no other issue on that. Now coming to colocation, you're right. Colocation drives major part of our capital efficiency with Ethiopia and that was part of our understanding as well. In the beginning when there was a conversation around licensing of tower company in Ethiopia, which was -- which didn't happen. The alternate solution, which was brought by the regulator -- and there is a difference because regulator brought in and made it mandatory for operators to share their infrastructure, which includes Towers. So Ethiotel was obligated to share their infrastructure with us, to enable our rollout. Now I think we kept -- we have updated our investors on a list over a long period of time. We have -- initially, there's a lot of bidding issues. It took a lot of time to finalize the agreement because as long as it is allowed by the regulator to have the colocation, the commercial terms still needed to be finalized between 2 operators, which took a time. But once it took -- once we finalized that, it started the momentum. Now if you're asking that whether it is likely to continue, yes, I think colocation is an important and key element of our strategy in terms of capital efficiency, and I can't say that it's smooth, we do face challenges as much as there is obligation and there is also intent to do it, but when it comes to grassroot level of actual colocation, we do face challenges. The other challenges is in terms of quite large section of their infrastructure are not up to standard. They are not modernized. So that takes much longer. So then because of scarcity of dollar, it takes for them a longer time to modernize those sites. So the pace is probably is what could be faster than what you're experiencing. But if your question is that is this something that you bank on in the future? Yes, we do bank on Ethiotel colocation in the future. So there is no entry of what you call the tower company licensing in Ethiopia.

Thank you. Thank you, Dilip, for that. [ Marianna ], I see your question around ARPU from a calculation perspective. Maybe just to confirm the numbers in the report that has been shared exclude hyperinflationary input? So was on the revenue part. So just confirming that for the benefit of all of us. A few questions here from Tracy. So Tracy, and this is to you, Dilip. Will Safaricom come to retain it's target of 7 million active customers by end of this financial year, considering the moderation in subscription growth in this third quarter. Dilip, maybe you can take that and then I'll read some more.

Yes. Okay. Tracy, thank you for that question. And as you have seen that when we were guiding -- of course, we revised down our guidance from KES 10 million to KES 7 million. At the time of guidance, we -- the conflict or the emergency started around August. So we were still hoping that this is not going to linger as much as what we are seeing now. And that has created a significant loss of momentum in the way we are adding more customers. So it's not just about adding more customers. It's almost like 20% of our -- you can say 20% of our business sites were residing in Amhara region. So it's just not about adding more customers, adding more sites, adding more gross adds. It's also about customers who are not able to utilize use because of some of the restrictions which has been put on a spot of emergency. So it's almost you can say double whammy. We are not adding more gross adds, and we also start seeing many of them becoming inactive. So in our calculation, when we started guiding for a 7 million at that time, we are hoping that at least -- even if there is a slowdown on gross adds, but we would be able to keep those customers active because they will start using. Now right, at this point in time, I mean, it's -- you see the numbers, we are about 4.3 million, and the target is 3 million, which is like more than what we have done so far in this year. So looks quite challenging, and I think in terms of giving -- okay, do I expect it to be lower than 7 million? I think it will be lower than 7 million. Where do we land? What -- how much it would be shortfall? I think that's something that we are working out. And one of the things that we probably try and do is giving you a bit more color when we do the investor roadshow in February. But it is expected that 7 million is a very stress target, based on what you have seen in the disrupted environment in Amhara. So Caroline, you can go to the next question.

Yes. The next question is still from Tracy on Safaricom's target for M-PESA registered users in this FY. And you can combine that with the other question around still M-PESA, but on take rates. And the question is, how do we see the M-PESA take rates currently compared to Kenya when it launched in 2007? Will it be much cheaper? And how does the M-PESA take rate compared to [indiscernible]? Dilip?

Yes. So Tracy, I think my suggestion would be that you -- I mean we don't spend a lot of time in looking at the take rate at this point in time in just 4 months of our operations. Right now, Wim and the team is actually focusing on building the infrastructure. So we are in that build phase of expanding agents, signing the merchants and making sure that we build use cases. So we have, as I mentioned, there is deposits to drill, transfer the merchandise payments. All of these things are available. And the transactions are -- there is a lot of trial happening at this point in time. We want to make sure that we have a reasonable base of customers before we start talking about take rate. So take rate, you see that you have a revenue of about KES 45 million, and the new [indiscernible] transaction is very easy for you. It's very low at this point in time because there's a lot of trial happening. Until you get into a point where you have a reasonable size of the customers who are now experiencing and what you call there is a network effect right? So that's what I would say. And from a -- I think you cannot compare Kenya of 2008 -- and if we call Kenya M-PESA was launched 7, 8 years after the GSM was kind of -- GSM was launched before but when it became Safaricom, right? Around 2000. But the things are very different when we -- it was not known. M-PESA was not known in Kenya -- in many of the -- forget about Kenya, I think that concept of that this can solve customer problem will to exist. So there is a lot of efforts which we are educating customers what this means. Now is this required in Ethiopia? Maybe it is still required, but not to the extent this product knowledge about what it can do is fairly available in the market and also given that Telebirr has launched before us, which also -- and given their registered numbers, although I would say activity level is still low, which means that there is a reasonable understanding and acceptance and education about the M-PESA ecosystem, what it can do to the consumers, and that's why you see -- I mean, these numbers, although you can say it's still small, -- but from a registered customers point of view, 3 million registered customers in such a short period of time, of course, we haven't achieved in Kenya. I mean if I just compare back what we did in 2000, when we launched in 2008. I think a lot depends on when you get into a scale. So this business, please understand, is still in the build phase. This business is still under in that -- and looking for that sweet spot, what is that network effect will start coming in, backed by GSM customers which allows us now to then dry-down and then allow M-PESA to ride. With use cases, which we believe customers in Ethiopia find more attractive. So it's just cannot just copy paste from Kenya. But right now, the traction looks okay, if I leave aside the Amhara situation, I think on the customer side in the rest of the territories, the rest of the regions, I think we're doing quite fairly well. And we are still looking for those sweet spot through the trial and process that we are doing with the customers to be able to see, which is what finally giving -- will give us the best sweet spot ecosystem and also the network effect. I mean that's where I will rely on us to be able to scale this business to a level and then you start seeing the results coming through. That's where I believe. Back to you, Caroline.

Yes. Thank you, Dilip. I think -- let me take additional questions here from Tracy because there is a question here which keeps coming up, and I think it's an important one to still clarify, in terms of how we source for dollars. So please share details on sourcing for dollars in Ethiopia. Do you have priority in accessing dollars from the Central Bank, and what proportion of dollars requirements do you source from MB versus own sources? Dilip?

Yes. So I think I did answer that, maybe through another question. We are sourcing our all hard currency dollar requirement, so far either through the equity, the shareholders are putting, the latest being Ethiopia coming in as an equity shareholder. And second, the IFC -- sorry, IFC coming in as an equity shareholder and then IFC also bringing in $100 million debt. So, so far, the foreign currency requirement has been met by all the external sources, either through equity or through the debt. Now to your question whether are we sourcing dollars from MB? No, we did not. And we didn't -- because we are not generating surplus yet to be able to. So we are basically paying whatever revenue we're generating, we're able to pay to the local suppliers from the cash flow that's coming through the revenue that you are generating, and from a priority, I think I made that point. We are still not in the priority list, which is what we are aiming for. This is what our effort would be towards, to make sure the telecom being the essential service is made as a priority sector, to have priority access to the dollar when you need to access, but that's not immediate. That's going to take more time. And we do have the foreign currency cover what you need for making payments at this point in time and the National Bank of Ethiopia is not the source yet. Thank you.

Thank you, Dilip. I see we have got into the 5 p.m. mark, but I'll take one last question. And for the rest of the questions pending I'll revert back to you directly from the Investor Relations desk. But let's take a question from [indiscernible] is asking, would it be possible to provide an outlook on future infrastructure projects, that is fixed data and fiber rollout? And secondly on data centers and outlook on future infrastructure projects. Dilip?

Maybe, [indiscernible], I suggest that we leave it for the Investors Day because there are quite a few interesting stuff that's coming up. Fixed is definitely an opportunity, given the very low penetration, but that also requires your investment priority, how we want to prioritize the investment. We will be very opportunistic when it comes to fixed there to make sure that we have our sites and with those sites are also fiberized. So -- and those areas are of fiber, I think it's much easier for us to do a fiber and the fixed operations, which is what the team would be very opportunistic and we'll be focusing on. That's part of the plan, and then I think in data center -- and data center is currently basically the captive requirement, but whether we'll do something around in future, -- it's not necessarily some -- it's -- you don't get into that level of what you call ambition, in terms of your capital allocation where you need to really build your GSM infrastructure to scale your M-PESA business, right? So I think data center would still remain as a key component of captive requirement. Should we have surplus and then we can serve other customers, and we will definitely explore that point in time. But infrastructure continues to be a big opportunity in Ethiopia, given where they are. But we need to be very selective about where we want to participate, given our investment levels and the returns as well. Right now, I think the more I see probably fixed with opportunistic -- fixed opportunity is something that will come in much faster than the other opportunities.

Thank you. Thank you, Dilip. Thank you, analysts and investors. So I think we'll bring this to a close. And as I mentioned, [indiscernible], we shall get back to you on the remaining questions that have not been answered on the call. So we shall be able to get that answered for you. In the mean time, Dilip any closing remarks before we close?

No. So I don't know, Caroline, do you want to talk anything about the 22nd and 23rd? If not, then just to say that thank you for joining this call. And I hope you got updated in terms of the commercial execution that we are doing. And as we say, we keep providing this update every 3 months, and we'll keep doing it in future. The -- as Peter mentioned, there are short-term challenges, but Ethiopia still continues to be a long-term opportunity for us and that we are very committed and along with all other constituted members to make this a successful venture. So with that, I want to conclude and back to you, Caroline.

Thank you. Thank you very much, thank you, everyone. I think [Technical Difficulty]. As Peter, Dilip and Wim said, we are excited and looking forward to hosting you in Ethiopia. So please ensure that you do not miss be a part of this particular investor day. And therefore, especially the [Technical Difficulty], if you are in a country that requires visas, we are happy to facilitate you as the Investor Relations team. So reach out to us and we'll be able to facilitate you. We still do have time, and you can still make it. Bye, guys. Have yourselves a good evening or a good day, and thank you for joining the call. Appreciate it. Thank you.

Thanks, everyone.