Safaricom’s ‘helicopter strategy’ keeps tills ringing for shareholders

By Macharia Kamau and Jevans Nyabiage

Nairobi, Kenya: For the majority of Kenyans, the news and significance of Safaricom’s record profits has probably been replaced by another success, scandal or crisis. 

For Bob Collymore, Safaricom’s CEO, it is not unexpected.

“The financials are good for a day, but after tomorrow, people will start calling with all sorts of issues,” Mr Collymore reflected in an interview with Business Beat, a day after Safaricom announced it had made Sh23 billion in net profit.

“Many people will not remember the numbers a few days from now, but we will remember the school that we have built in Pokot and the Sh250 million dam we are putting up in Kwale,” he said.

“Working with Safaricom is satisfying — frustrating at times — but the joyous times have been much more. The reward is the success that comes with transforming lives.”

That Collymore chooses to focus on what has changed lives seems utopian and like something out of an NGO’s playbook, not a corporate like Safaricom. But this is what is helping the firm make money hand over fist. 

So what is his reward for holding together the behemoth that Safaricom has become? Most importantly, what is the wider significance of these results for the Government, shareholders and competitors? 

Business Beat asked Collymore the former question. He did not give a straight answer, but said since he is on assignment from Vodafone, Safaricom’s UK-headquartered parent firm, it is the one that rewards his hard work in Kenya.

“I do not get fat bonuses, but I am not complaining,” he said.

In jest, he added that the board had agreed to give him something special.

“Yesterday, they [the board] agreed to buy me a private jet,” Collymore said. He, however, implied that if that offer were ever to be put on the table, he would rather settle for a helicopter.

Collymore is fascinated by choppers. 

He has a miniature helicopter on his office coffee table and makes regular reference to choppers when talking about his strategy at Safaricom.

He said he takes a “helicopter approach”, where he is able to see things from a different perspective when he is off the ground.

Wider significance

“When you look at the CBD from several hundred metres above, it seems like a really small city and it gives you an opportunity to look further ahead. But the city is not so small when you are in it on a Friday afternoon, with the human and vehicle traffic.” 

He said that is the approach Safaricom is taking — looking further ahead and long term, as opposed to living for the day. And this strategy has put the telco in a most enviable position.

Safaricom’s revenue for its financial year that ran from April 2013 to March this year was Sh144 billion, up 16 per cent compared to the previous financial year.

The performance was driven by strong growth in non-voice revenues as customers sent more short messages (SMSes), used more Internet services and became more active on its mobile money transfer service, M-Pesa, increasing earnings from the innovative product.

Voice revenues remained Safaricom’s bread and butter, with Sh6 out of every Sh10 in revenue contributed by money earned from phone calls. Its voice revenues stood at Sh86.3 billion, an 11.6 per cent increase compared to the previous year. 

It was an impressive performance in voice, given that Safaricom’s competitors — Airtel, Orange and Essar — have tried hacking away Safaricom’s dominance by offering cheaper, and even free, calling rates.

Despite the telco’s network being the poorest among the four mobile phone operators, it keeps growing subscriber numbers. This defies all logic taught in business schools that great service equals more money. However, it underlines the truism that he who controls the market, controls the mind and the money.

Safaricom’s voice subscribers grew 11 per cent to 21.5 million customers in the 12 months to March 2014.

The firm has been able to stay profitable by keeping a lid on its direct costs (such as the commissions it pays out) and operating costs (such as salaries and rent).

Its financial results show direct costs and operating costs increased by 10 and 14 per cent, respectively, while revenues went up 16 per cent. 

Safaricom’s three competitors — Airtel, Orange and yuMobile — are making losses. The fate of Orange and yuMobile is unknown as potential suitors look to buy off their assets. The uncertainty is working in Safaricom’s favour, as some subscribers of the former two firms switch over.

But Safaricom cannot sit pretty. The exit of France Telkom, which is the majority owner in Orange, could usher in South Africa’s MTN or Vietnam’s Viettel into the market.

And then there are the mobile virtual network operators — such as Equity Bank and Tangaza Ltd — who have been given the licence to offer mobile phone services.

The new entrants will usher in what will perhaps become the third chapter in the making of the country’s telecommunications industry.

Billing system

The first chapter was written between 2000 and 2003, when Kencell (the grandfather of today’s Airtel) grew faster than Safaricom due to its high quality voice and data network, while the latter experienced teething problems due to its association with the then struggling Telkom Kenya.

Safaricom’s network was congested and prone to breakdowns.

However, from around 2002, Safaricom began rebranding itself as a “cheap” network. It began a billing system based on seconds rather than its rival’s minutes. Taking advantage of Kenyans’ peculiar calling habits, where the average phone call lasts a few seconds, Safaricom found a comfort zone. Kencell later changed its tariffs to per-second billing, but the damage had been done.

Chapter two of the industry was written with the launch of M-Pesa in 2007.

And now chapter three is being written with the collapse and re-emergence of Safaricom’s new competitors.

But there are two things that show Safaricom’s adaptability to change.

First, the SMS as a form of communication is headed the way of the fax machine. It is becoming obsolete as subscribers turn to free messaging applications like WhatsApp.

Safaricom knows this and in its financial year ended March 2014, the telco reported it had lost about 130,000 SMS customers. In 2013, Safaricom had 12.47 million SMS customers; a year later, this dropped to 12.34 million.

However, the loss in customer numbers has not translated to a drop in SMS revenues. Instead, these revenues were up 34 per cent to Sh13.6 billion — and this is despite a reduction in the cost of sending a text message.

Safaricom rolled out an SMS bundle service and the Bonyeza Ushinde promotion (that rewarded customers who sent texts with cash and other prizes), which helped grow revenues.

Defending its turf

Second, Safaricom sits on a pile of cash and is able to generate more easily.

Safaricom’s free cash flow as at the end of March stood at Sh22.7 billion, up 56 per cent from Sh14.5 billion a year earlier.

Free cash flow is the money that is left over after a company has taken the money it has generated from operations and invested some of it in capital expenditure, and paid taxes and interest.

Since Safaricom can generate Sh22.7 billion in free cash flow, it can choose to continue investing in its infrastructure, pour more money into innovations or increase the dividend payout, which it did. The dividend per share was increased to Sh0.47.

Hence, with the ability to generate free cash flow and the cash that Safaricom sits on (the mobile phone services company had Sh17.6 billion in the bank at the end of March, enough to fund the laptop project!), it is a foregone conclusion that the telco will be defending its turf against competitors.

Perhaps also fighting in Safaricom’s corner might be the Government, which is the second-largest shareholder with a 35 per cent stake in the telco (Vodafone holds 40 per cent).

In the last financial year, the Government received about Sh54 billion from Safaricom in the form of dividends (Sh6.6 billion) and taxes (Sh47.5 billion). Further, the Government and other shareholders have probably enjoyed Safaricom’s share price rally.

The firm’s share price has hit a high of Sh13.40 in the last one year. On Friday last week, the counter closed at Sh12.85.

This means that since the initial public offering in 2008, the share price has risen by about Sh8 per share, reflecting a gain of about 168 per cent. 

From a capital appreciation perspective — that is, the rise in the value of the shares from the time of the IPO to date — the Governments is sitting on a capital gain of Sh112 billion in six years. 

This raises an important question: will the Government ever come down heavy on a company that gives it so much money and continues to do so?

This probably puts Safaricom in a very strong negotiating position to protect its network and M-Pesa, and most importantly, keep the tills ringing.

“The record profits largely reflect Safaricom’s near-monopoly in, not just the telecom sector, but also the money transfer sector in Kenya. It is testament to an excellent money transfer platform and great marketing skills,” said Mr Peter Wanyonyi, a telecoms analyst.

“But it is also a worrying indicator for the other telecom operators, as well as for the sector in general.”

But Safaricom is not just a telecom. It is also in banking, insurance, health, agriculture and the media space.

For the first time, Standard Investment Bank (SIB) valued Safaricom separately as a financial services firm and as a telecommunications company. 

“We have attempted to value M-Pesa using relative multiples, considering it as a payments processor in the league of Visa or MasterCard. We believe separating the financial services and telecommunications will help improve visibility on the value drivers for Safaricom,” the analysts said a research note before the release of the results.

SIB valued the core telecoms business at Sh6.92 per share, while the financial services business was valued at Sh5.61 per share. The total value of the business per share was Sh12.53.

This is an interesting way of looking at Safaricom. What if some time down the road Safaricom decides to list the financial services as its own entity at the stock exchange? Would there be more value in breaking up Safaricom in two and trying to grow the businesses separately?

However, Collymore has always maintained that both sides of the business have to be looked at as one.

Analysts remain bullish about Safaricom’s prospects, attributing their confidence to the firm’s dominant position and diversification of earnings.

SIB says it does not see major downside risks to its valuation.

But there are two uncertainties: one relating to the proposed national roaming regulation (mandating sharing of both telecommunications infrastructure and mobile money agency network); and the other the mobile termination rate (MTR).

Biggest asset

The next MTR reduction is set for July and will see operators paying Sh0.99 for call terminations to other networks, down from the current Sh1.15. According to industry figures, Safaricom accounts for 77.5 per cent of voice traffic, meaning it terminates most of the calls.

“This is unlikely to have a major impact on retail tariffs, in our view. With regards to the proposed sharing of infrastructure, as long as there is a fair tariff-setting mechanism, we do not feel that this will be a major concern, though the competitive strength of Safaricom may be loosened.

“Implementation will, however, be challenging, depending on the type of roaming adopted. East African nations are also discussing eliminating international roaming costs, which will have a positive impact on traffic volume.”

The biggest asset for the mobile operator is its innovation machine. M-Pesa has become the latest push around mobile payments, and it is giving the mobile operator a headstart in e-Commerce. The recent introduction of Lipa na M-Pesa — which enables cashless merchant payments— will likely be a hit this year.

And it is poised to be a big beneficiary in the new regulations that ban cash payments in passenger service vehicles (PSVs) from July 1. It has signed up about 3,000 buses, matatus and taxis to its Lipa na M-Pesa platform.

Collymore likens Lipa na M-Pesa to M-Pesa, both in its potential to grow revenues for the company and change the payments culture in Kenya, where cash is king.

“We do not expect huge returns in the short term because, again, we are not a short-term company. In a few years, we will look at this in the same way that we look at M-Pesa now,” he said.

“I was on the Safaricom board in the early days of M-Pesa and we would constantly ask Michael (Joseph), ‘When are we going to get a return on this thing?’ I have learned to look at things more like Michael.”

The telco is also working on a number of innovations in the public transport space, some on its own and others with partners such as Google.

While it may be delivering record numbers for its shareholders, Safaricom’s network is its biggest undoing. Top of the woes among customers is the number of dropped calls and M-Pesa downtimes.

Dropped calls

Collymore conceded the poor network has been its main headache. 

“In the CBD, for instance, the rate of dropped calls is higher than I would like it to be … we already know what the problem is,” he said.

“Data traffic doubled over the last year while voice has increased by 30 per cent; we primarily need spectrum.”

The firm — together with Airtel — had proposed to buy Essar Telecom’s (yuMobile’s) assets in a deal that is dragging on longer than expected, partly because of the tough conditions imposed by the Communications Authority of Kenya (CAK).

Collymore said while Safaricom still needs the spectrum it would get if the deal went through, it is not prepared to meet the CAK conditions.

Among the conditions the firm deems unacceptable is a requirement to share its infrastructure and open up its mobile money system to competition.

Collymore said the three operators — itself, Airtel and Essar Telecom — had expected a “yes or no answer” from CAK.

“The regulator is asking too much for what seems to be a fairly straightforward transaction. And if anything, there is no framework to work with … if there was a framework, we would consider it.

“Passive sharing of infrastructure is largely practiced in the country, but I do not know anywhere else in the world where you have active sharing of infrastructure.”

bizbeat@standardmedia.co.ke