Safaricom PLC (SCOM) Earnings Call Transcript

Good morning, good afternoon or good evening, depending on where you're joining us from. Welcome to the Safaricom Investor Briefing with Safaricom's CEO, Peter Ndegwa; outgoing CFO, Sateesh Kamath; and Interim CFO and Head of Investor Relations, Ilanna Darcy. I'm Cyndia Nguli, Senior Manager, Investor Relations. Peter and Sateesh will give brief opening remarks and return to your questions. [Operator Instructions] And with that, Peter, I hand over to you. Thank you.

Thank you, Cyndia. Good afternoon, everyone. I hope you can hear me. I meant you, Cyndia, just to confirm that you can hear me.

Yes, I can hear you, Peter. I can hear you.

Yes. So good afternoon, everyone, and it's great to have this call. We are looking forward to answer any questions that you might have. As we've said in the past, when we have had conversations with investors, we, at Safaricom, given the current situation we are faced with in COVID -- during the COVID era, we are not going to be giving any guidance at this stage in terms of our results. However, we are willing and ready to share the status of the key aspects of our business as an update to you as a group and also answer any questions that you have. And for those that I have not met, Peter Ndegwa is my name, CEO fourth month now, just over my 100 days. So clearly, process where I initially spoke to you, I can have a bit better understanding of the business and also some of the bold opportunities but also challenges that we are dealing with. I hand over to Sateesh to say a few words, and then we'll take it from there.

Thank you so much, Peter. Good day, ladies and gentlemen. First and foremost, I just wanted to say thank you so much for all the kind messages that I've received since my announcement of the new role. I really enjoyed interactions with you over the last few years, and I will be continue -- I'll continue to be available for Safaricom through the transition phase. Now the good news is, Peter has very modestly said that he has understood a bit of this business. To be honest, he has taken almost like duck to water, I have not seen many people picking up so much about this company in such a short period of time. So in whatever -- for whatever it's worth, I just wanted to reiterate the fact that we are -- we're very, very fortunate to have Peter take over the reins of the company. And he -- when he speaks, I'm sure you'll understand that you may feel that he's in the business for 2 years or more and nothing less. Peter, just checking with you. Do you want me to give a general overview or you want me to give it back to you?

No. I think why don't you go ahead with the general overview, yes.

Sure. Sure. Happy to do that, Peter. So the general overview, in terms of macroeconomic situation, it's not any dissimilar with many of the countries. COVID specifically, we have now just over 10,000 cases, reasonably low death rates compared to what some of the other countries have seen. So at this point of time, the pandemic is an issue, but health issue-wise, still reasonably contained, and I'm saying relatively reasonably contained. The larger issue is economic and it is manifesting in many ways. To start with, tourism industry is impacted, a lot of SMEs are impacted aligned with the tourism industry. And none of which should be a surprise for you, but I just thought I should call it out any which way. In terms of the currency and ForEx, reasonably range-bound. We've seen like a 5% volatility in currency over the last 3 months. Sometimes going up to KES 108 to $1 and then stabilizing to KES 104 and then moving in that range-bound territory. So no significant depreciation in the currency. I'll speak a little bit more in detail about the line-wise what we are seeing, so I'll pause the impact on what does it mean for Safaricom till I finish 1 or 2 more overall updates. In terms of competitive space, the merger between Airtel and Telkom has been delayed, and we've got understanding that it will be delayed a little bit more. As we have always said, we are not against the merger, we are happy to have stronger competition as long as some of those clauses that we want is satisfied for, but we do understand that the merger is not delayed because of questions that we have raised, it is delayed because of shareholder reasons between the 2 companies, which we are trying to sort out. Moving on to another important topic Ethio Tel -- oh, not Ethio Tel, sorry, Ethiopia, I'm so sorry. Don't pick any meaning from what I said, I meant Ethiopia. So Ethiopia's process is underway. We have participated in the expression of interest stage. The current understanding of the timing is that it is more likely to get concluded towards end of the year and if there's a bit of delay possibly towards early part of next year. In terms of expression of interest, it was interesting to see the people who have come up with the expression of interest. We can speak more specifically if you have questions there a little later on in the call. One allied comment there. The current version of what the government has issued is without mobile money. However, as you know, our interest would be significantly enhanced if there's mobile money, and what we would be willing to put in down as license fee would certainly be different if there's mobile money and lesser if there is no mobile money. So we would continue to lobby in that direction. At this stage, I don't think we would be able to give more details because it will impact our competitive bids in the days ahead. In terms of coming back to Safaricom, if I look at -- if I can call out the bad news first and then get into the better news. On voice, we are seeing pressure, a good amount of pressure. We're seeing that consumer wallets are constrained and so they are really into a deal-seeking mode at this point of time. So we are seeing good amount of customers using, but they are using lesser from their wallet on voice. That's the phenomena that we are seeing. And it's fairly consistent between the 3 months that we have seen in the year, April, May and June. As a result, do expect voice to decline in this current year compared to the previous year. The other bad news that I want to speak about and the most significant bad news is the free P2P. The initial request from the government and the alignment with the Central Bank was for 90 days, which ended end of June. Central Bank has asked us to extend it up to December. We obviously are not happy with that recommendation and decision. We are continuing to have conversations with the Central Bank. In fact, we just spoke to the Central Bank as latest this morning, and while we are not in a position to tell exacts of how it will pan out, what I would like to assure investors is that we are working closely with the government. So while we do appreciate that we need to be supporting the country in some form or other over the next few days, the next 6 months we find is on the higher side, possibly in a safer environment, I would call it excessive. So we are working on it. At this stage, given the negotiations and conversations are happening, I would pause there and say we would give you a more accurate update when we have one. At this point of time, we are working with the government on that. Peter, would you like to add anything there before I go ahead?

Good afternoon, everyone. Just to reecho what Sateesh is saying, at this stage, I would say, we are working closely with the Central Bank. And we wouldn't -- we are not in a position to say anything until those discussions concluded. So I wouldn't look at the issue either way but just to say that currently, we are working with the Central Bank to see the best position that we can end up with.

Thank you, Peter. Moving on to other streams on -- sorry, let me complete M-PESA. Excluding the free P2P, we are seeing some interesting trends in M-PESA. In the last call, which was mid-May, I did call out the fact that we are seeing customers enhancing their confidence in M-PESA and instead of keeping money for rainy days in the more traditional way, more and more they are choosing M-PESA as the way of doing business. So we saw a 20% increase in M-PESA balances pre- and post-COVID. And by this time, we are seeing closer to 30% increase in customer balances, pre- and post-COVID. Now a quick reminder, when people keep money in M-PESA, till they transact, we don't make money. So what this indicates is that customers have confidence in us and are more and more getting used to M-PESA as a way of life even more than what it was. And when life starts becoming normal, in the new normal, we expect these to translate into as stronger loyalties, stronger revenues for M-PESA. So underlying M-PESA performance, excluding the free P2P, is strong and encouraging. Within this, we had a tougher April. We see a lot of activity returning back in June. So June compared to April is better, just to give you a feel of the direction of travel, not necessarily giving you numbers at that stage because numbers are volatile. Moving on to mobile data. We're seeing mobile data continuing to be strong. Mobile data is growing volume-wise high, like 30% to 40%, which is a trend that we have seen just when we got into the year as well. And we've got device financing, which I'm sure Peter will explain a little bit more in 2 minutes' time that we think will fuel the next level of consumption in mobile data. We are excited about device financing because it's a unique partnership and something which combines the capability of our company as a telco as well as M-PESA together, the uniqueness of it is something that is not easy to replicate. So we are really optimistic about device financing as a key differentiator in taking mobile data consumption and what my marketing colleagues call truly democratizing mobile data. Moving on to fiber. On fiber, on FTTB or the businesses, we initially saw a decline when businesses started closing down and starting either not operating or operating from home. Over time, from April to June, what we are seeing is most of the small businesses, which had negative impact because of COVID are switching on to alternate modes of using and a lot of them have moved into fixed LTE using 4G into temporary spaces where they are currently operating for. Overall, over time, while we saw a decline in April, we are seeing that fiber to the business is kind of now at a flattish space. Fiber to the home, on the other hand, has accelerated pace. We're seeing significantly better pace in this year compared to the previous year and no-brainer, it is with more and more people operating from home and using Safaricom as their service provider of choice. Peter already mentioned about the fact that guidance is something that we would stay away for the moment, given the volatility. And at this point of time, along with half year results, we think we'll be in a better position to guide for the rest of the year. With that, I just want to hand over back to Peter to see if he wants to add anything, and then we can go to questions and answers.

Thank you, Sateesh. Just one additional point with respect to mobile data. I think Sateesh did referenced that we have seen a robust growth in terms of volume. That -- in terms of the usage, that does not necessarily translate into -- direct into revenue because of either mix of customers or actually offers that allow customers to access better value at a lower price. I think the second aspect that I wanted to mention, and I think we messaged it in the previous calls, is that as the economy got challenged, we saw a significant negative impact on SMEs, small- and medium-sized enterprises. As you know, we have a significant number of them using our Lipa na M-PESA. And therefore, you could see those sectors that have been impacted by the economy being affected more. However, we've seen some level of recovery, but the SME sector is still the one that is most hit. We do see an opportunity for us, both in terms of supporting the country as the COVID crisis evolves to support the SME sector, whether that is on providing better connectivity, providing solutions, but also working with others to see how they could restart their business. So those are the 2 points I wanted to add, but I'll hand over back to you. Is it Ilanna who is facilitating or Cyndia?

It was supposed to be Cyndia, but I think she's having some IT connectivity issues, so I can do it in her place. So thank you, Peter. Thank you, Sateesh, for the update. We've got one question so far on the chat so it's from -- oh, another one, sorry, let me spell, from [ Koranja ] from Faida Investment Bank. According to the Central Bank of Kenya data, there was a decline in the value of mobile money transactions in the second quarter of the year as a result of COVID-19 containment measures. Can you confirm this from your data, the magnitude of the decline, if any, in the last 3 months compared to a similar period last year, which M-PESA segment's P2P, we have been most affected? Do you notice changes improvements when containment measures are eased? So I can actually take that one myself if you want. So the information that the CBK is quoting, we do submit a lot of information to Central Bank of Kenya, understanding we're trying to seek guidance from them in terms of what they are reporting is the agent-related transaction value, so that's withdrawals and deposits. And yes, we can concur that we have seen a significant decline in withdrawals, especially in April, as people were encouraged to stay away from cash and also deposits because of restrictions in movement. So we can validate that and we have seen that run rate improve through May and into June as the economic activity has picked up. But withdrawals are -- and it is under pressure as people are restricted to movement and staying away from cash. I hope that answers that question. The next one is Christine…

Ilanna, I would just add one point to it. You're absolutely right in calling out that what the Central Bank reports is the agent-related one. When we look at it, we look at transactions happening through agents as well as transactions happening through banks and the overall, which is a combination of transactions from agent plus banks, is actually better at this point of time when compared to same time last year.

Yes. Thank you. Thanks, Sateesh. The next question is Anh Hoang from Wasatch. Many countries are talking about open loop and interoperability in any payment network. M-PESA has been a great closed-loop network. What is the possibility that Kenyan regulators will move toward an open-loop model? And what are the risks to M-PESA if that happens?

Sateesh, I'm happy for you to answer that one.

Sure, Peter. So great question. So if you stay back and look at what M-PESA already had pre-COVID in itself was a great open-loop model in itself. So M-PESA is interlinked with pretty much all the banks in Kenya, any bank of -- I think more than 40 banks or so. So people can easily move money from banks to M-PESA and M-PESA to bank as well. As far as our competitors are concerned like Airtel and Telkom, we are interlinked with their money wallets as well. So you can spend money from M-Pesa to Airtel and vice versa as well. So at this point of time, we don't need to make any urgent changes to the way we operate because of COVID and thanks to the fact that these interoperabilities were established systematically over time. What we are seeing is in the space of COVID, customers have got maximum convenience of what they can or what they need to.

Okay. Our next question is from [ Jignesh ] of [ Mazi ]. And it's to you, Sateesh. When does Sateesh officially and effectively leave Safaricom? To Sateesh, when will you officially start your new role at Vodafone?

[ Jignesh ], thank you so much. I was not expecting you to be in a hurry for me to leave, so I will hang around for some time. So that was on a lighter note, [ Jignesh ]. I know you mean it in a very good sense. Ilanna has started acting in the role from 1st of July and I have started taking responsibility for my new role from 1st of July. However, I will continue to double-hat and provide support where necessary. So a lot of time-consuming operational elements have been thankfully taken over by Ilanna, but for places which are strategic in nature, Peter, I and Ilanna are under constant conversation with each other. So I will continue to provide support. I would provide the support as long as I can. It's an informal arrangement given 1st of July I start, but given the fact that I'm going within the group and not into an external company, there's a lot of flexibility of how we can operate with each other. I can see Peter is smiling, so I would like to think he wants to add something.

No, I was smiling, Sateesh, by saying that I'm holding your passport, so you're not going anywhere. But I agree with your summary. And as soon as we are able to get a substantive CFO in the future, we will announce it at an appropriate time.

Okay. The next question is from [ Robert ] of [ Westwood ]. Can you provide us with some color on M-PESA commissions and how you see that evolving over the next few years with respect to your margins? Is there a risk to the government providing support to M-PESA agents somehow?

Shall I take that?

Yes, go ahead.

[ Robert ], good question. Just to build on what we have disclosed in the past, we continue to provide -- this M-PESA agent ecosystem is something that we have built carefully, nurtured carefully. And during this tough time and for the days ahead, this is going to be an important partnership as far as Safaricom is concerned. We have continued to pay agents the level of commissions that we have always had, however, because of the fact that we add more and more products, which requires lesser human intervention, M-PESA commission as a percentage of M-PESA revenue has come down over time. So it is more the new product lines, which are digitally more efficient, resulting in margin accretion while balancing the need for having a strong channel and making sure that they are healthy and making money. This is a careful balance that we will constantly evaluate. At this point of time, we do not see a necessity for the government to interfere, but if the government wants to interfere and subsidize some of those agents, we will never say no. So I would say that's more a wish than a possibility.

Probably the one -- sorry, let me add to what Sateesh has said. As we continue to digitize, we do see us reviewing our route to consumer into the future to make sure that our both the agents, dealers and our kind of frontline partners supported. So we expect withdrawals will continue to be under pressure as cashless becomes more important. We expect that the top-up through M-PESA will continue to increase, we saw that during COVID. And therefore, we need to look for new revenue opportunities for our agents and dealers that supports the ability of that ecosystem to operate. Because we believe that the SME infrastructure we have is an important enabler of our business, but also touches every corner of the country. It is what gives our business and our brand ubiquity across the country but also it's available. So we need to continue to support it. The second thing that we'll also do is to think about incentives that allows our dealers and agents to access more incentives for what they do rather than purely what they sell. And the final thing is, as we think about new products, like we'll be launching the device financing, we will -- as we increase penetration of our 4G devices, we will look for all data dealers and also agents can play in the future to make sure that they are complementing what they are earning today.

Thanks, Peter. So just, I think with the change over of moderator, we might have missed a few questions, if I can just catch up on the ones that we missed. There was an earlier question from [ Jignesh ], which I think, Peter, you addressed in terms of the search for the new CFO. So we won't dwell on that one. [ Christine Philpott ] from AllianceBernstein. Can you quantify the revenue impact of the extension of free P2P through December? And also in Kenya, could a person divide up their P2P transaction to fall within the range, i.e. -- or is there a daily limit on the number of free P2P transactions per person?

Yes, maybe I can go for it and then Peter may add -- may want to add. So [ Christine ], the impact is roughly KES 1.5 billion per month. However, it's a bit tricky as to how you calculate this impact. One of the things that we are seeing is the increase in volume in M-PESA as I spoke earlier on, as a result of which we are seeing higher impact when the volumes are going up. A portion of that higher volume is because of exactly what you called out earlier splitting of transaction, but a good portion of it is genuinely customers using more of M-PESA. So I would say from a base revenue, the impact will be more like KES 1.5 billion. However, when the volumes go up, we will start quantifying KES 1.8 billion, KES 1.9 billion impact. But some portion of that volume may not have been there in the base at all if it was not for free P2P. So indicatively, please use KES 1.5 billion per month as an indicative run rate number.

The other question was around the limiting the number of daily transactions. So [ Christine ], at the moment, there is no limit, unfortunately, to the number of repeat transactions that people can avail of. Okay. [ Ivo Lutin ] from NN Investment Partners. How is the Ethiopian market difference from Kenya? What is your strategy to gain market share here? And what is the difference in expected profitability?

Okay. Ilanna, I'm happy to answer the Ethiopia question, probably I'll hand over to Sateesh at the end to talk about profitability. But in essence, why is Ethiopia important. We have messaged to the market that Ethiopia is probably one of the very last markets that is available for GSM license and, therefore, for us, it is about an attractive market, more than 100 million people and with only one player. So clearly, it is a market that is attractive for a player like us. So a growing population, only one player and also an accelerating GDP per capita growth given the work that the government has been doing. Clearly, there are some challenges, as Sateesh spoke about, in terms of the process of acquiring a license. A license that doesn't include a mobile money. License will significantly reduce our level of profitability, and therefore, in essence, a bid price for the license, but also a profitability and payback period. And also, of course, once you bring in competition with 3 players in the market, you'd expect actually average revenue per unit to actually reduce. But long term, the attractiveness of the market is intact. I think it will depend on how the economics relate to whether the license is issued with mobile money or not. Sateesh, any other point you want to add?

I think, Peter, you have summarized very well, so what I would just add to what Peter has said would be that what I wanted to assure the investors is our approach. We are cognizing to the fact that with and without mobile money, the profitability will be different. We are also aware of the fact that things like currency depreciation is something that we need to be really thinking realistically about. We would factor all of those in the business case and would look for a hurdle rate. Now I won't be able to give the specifics of that here because those are part of the competitive bid that we would make. But the approach that we would be doing would be a very logical approach, and it would be one, I hate using this word, but it will be brain ahead of heart and not the other way around.

Okay. Thank you, Sateesh. Ali from Vergent, interested in hearing about M-PESA business. What's been the uptake so far? And what are some of the most popular use cases? Also interested in hearing from Peter and the team on the potential for this platform service.

Ilanna, what was the last one, the platform, I didn't understand that one.

Interested in hearing from Peter and the team on the potential for this platform, so the potential for M-PESA.

Okay. So I'll go and answer the question. Sateesh, feel free to add. So I think M-PESA has been a very strong propositional platform for us. Of course, started as a primary payments and withdrawals, now expanding into loans and advances. We believe that in future, subject to regulatory approval, we'll expand -- on the retail side, we'll expand the penetration of the product set to include savings and wealth. But that is subject to regulatory approval and we would only announce that when the relevant regulatory approval has been achieved. So on the retail side, it is about expanding the product set that we can sell to a franchise of customers of about 25 million. On the business side, I believe there's a lot more headroom to utilize the M-PESA platform. We are already doing a lot of work in that area, where, for example, if you are Lipa na M-PESA merchants, which are the merchants that pay -- that allow customers to pay through M-Pesa, we are starting to expand how they can use their -- till to do more to pay employees, to pay suppliers, to transfer to bank. So it becomes a universal kind of payment platform of choice for small -- especially for small and medium-sized businesses, but also even for large enterprises. But certainly, we believe that it's a big opportunity on the business side on the -- to use M-PESA as a payment platform of choice. As we improve functionality of M-PESA, both for retail and business customers, they would be able to do more with the platform. User functionality is an important driver of uses and we are already starting to do that. Last weekend, we did a bid upgrade of the M-PESA platform that allows us to deliver better functionality, create greater resilience. And when we are making maintenance efforts, we can do it without having significant service impact. So we are excited about what we can do with M-PESA on the retail side, but also on the business side. During COVID, we have also seen that the actual wallet size has started to grow, as Sateesh has said, partially because customers were unsure about how the economy will pan out, but also because they believe and trust the platform. And that's one of the reasons why we believe that given cash today is still a significant proportion of what is transacted in the country at 60% plus, there is still a lot of headroom to grow the business through M-PESA. Sateesh, any additional comments?

Very well summarized, Peter. Just one observation for the moderators. I've seen a similar question from Dilya and looks like this answers both questions.

Okay. Thank you. The next question is Kuria from SBG, sending congratulations to you and I, Sateesh. So number one, with the reduction in gaming taxes, are you seeing the gaming M-PESA revenue begin to come back? And number two, what makes your device financing approach different and unique? So I'm happy to take the first one. And Kuria, it's early days, but yes, we are seeing a little bit of an uplift. I suppose there is still an impact from what's going on with coronavirus around the world and people's ability to bet so I still doubt it will come back to the level that it was. And we are seeing a little bit of uplift in the early days. And Sateesh, maybe I'll let you or Peter talk about the device financing?

Ilanna, I'm happy to. So on device financing, we believe that it's a really exciting opportunity for us. We haven't launched it yet. We believe we'll launch it in the next week to 10 days. It is unique because it allows a customer to pay $10 or KES 1,000 as deposit and then pay KES 20, which is USD 0.20 every day until they're able to pay a phone -- for the full cost of the phone, which is about KES 6,000, which is about $60, $55 to $60 over, I believe, a 9-month period. A lot of those customers would be 2G holders -- phone holders. And there's a lot of interest because through the pilot, we have seen a lot of interest from customers who cannot afford to get a 4G-enabled phone, and this financing scheme would allow that to happen.

Thank you, Peter. The next question is from Sunil, HSBC. We've heard the impact on data volume trend, any light on the revenue trends. Sateesh?

Sorry, Ilanna, what was that question again? Impact on data trends?

Wanting to know the revenue trends, the data, not just the volume trend.

Right. So I'm trying to figure out how do I exercise the best choice of English words so that I make you feel like I've answered but I've not violated anything by giving an answer. So historically, you would notice that our volumes increases and when the volumes increases, the revenue don't increase at the same pace. The reason for that is a lot of volume increases happened with much more for more type of offers with a customer base a little bit more to get a lot more of data. Data volume explosion is the way we would earn revenues, and it is less likely that the volume increase and the revenue increase will ever be proportionate. So that's how the trend would be. The trend that you can expect this year is kind of similar to the trend that you saw in the second half of last year. So that should give you an indication of what we are looking at. The only thing that I can further confirm is we are seeing an increase in ARPU. So we're seeing an increase in ARPU of low single digits, which, again, is similar to the trend that we saw last year.

Thank you. Thank you, Sateesh. The next question is Dilya, Citi, which I think you've already answered in terms of the M-PESA piece. Dilya, if there's a follow-up question, please just post it through, but I'm going to take that one as being answered. Next one is Ali from Vergent. Would management consider it a good outcome to come to an agreement with the Central Bank on capping the number of zero-rated P2P transactions or continue to have that zero rating in place past December 2020. I'll let you answer that and then I'll go to question number two, because it's quite long.

Can I -- so I'll answer that, Ilanna. So on the whole piece around Central Bank and the P2P transactions, I would suggest that we leave it with the answer that I gave, which is we are currently in discussions whether on the time frame, but also on the limiting of transactions. It's unlikely anyway that would get limiting of transactions. But I would say, at this stage, we leave it until we guide you on how the Central Bank and us have -- if there's any conclusion on that piece.