Kenya: Safaricom Holds Dividend Steady Despite Drop in Profit

Mergers, Acquisitions and Financial Results

Telecoms giant Safaricom held investors' take home steady at Sh8 billion even as it announced a 13.2 per cent drop in net profits in a year that was marked by vicious price wars, high inflation and exchange rate turbulence.

That company will pay out 61 per cent of total profits in dividends or 20 cents per share.
Investors traded 502,000 Safaricom shares at Sh3.90 each, down from Sh3.95 on Tuesday in a market that closed just one and half hours before the results were announced.

The progressive dividend policy that Bob Collymore, the CEO, announced puts Safaricom in line with other big Kenyan corporations such as BAT, BOC Gases, Barclays Bank, beer maker EABL and Bamburi Cement that have made huge dividend payouts despite a decline in profits growth.

Safaricom returned a net profit of Sh13 billion compared to the previous year's Sh15 billion on the back of a Sh9 billion revenue growth to Sh94.5 billion signalling that the near halving of key voice call tariffs, though painful, did not push the firm off the growth path.

"This outcome shows that revenue growth is not all about price - it's about diversification in the provision of both voice and data services," said Bob Collymore, the company's chief executive.

Collymore acknowledged that the results had been realised in a difficult business environment marked by a steep rise in cost of living that deeply eroded disposable incomes of consumers and a weak shilling that significantly increased the cost of imported equipment.

The results, however, show that Safaricom is on course to establishing a more diversified revenue base away from voice calls that have been the key growth driver since the company was founded 10 years ago.

A diversified revenue base was critical to cushioning Safaricom from deep cuts in voice call tariffs in the second half of the year and its impact on the Average Revenue Per User (ARPU), the company's chief financial officer, Chris Tiffin, said.

"Overall rate of ARPU fall was less than five per cent to Sh437 despite tariffs having dropped by more 80 per cent in some segments of the business mainly because of strong ARPU growth in M-Pesa and text messages," Tiffin said.

Voice calls, however, remain Safaricom's biggest revenue driver that accounted for 66.9 per cent of total revenue last year down from 68.6 per cent in 2009.

Safaricom is banking on strong growth in internet penetration, whose revenue increased 80 per cent to Sh5.4 billion, accounting for eight per cent of total revenue.

The combined income from SMS, M-Pesa, data and acquisitions accounted for one-third of total revenue. Tiffin said Safaricom had sold more than 900,000 mobile phone handsets in the year one third of which were internet-enabled demonstrating mobile phone's position as the key platform for internet penetration in Africa.

The decline in profits despite the growth in revenues signaled that Safaricom walked through the year with a bigger cost burden whose management Mr Collymore promised will be the centerpiece of operations in the current year.

EBITDA - a measure of revenues less the cost of goods sold, general and administrative expenses - stood at Sh35.7 billion, down from Sh36.6 billion in what Mr Tiffin attributed to enhanced rate of depreciation in the company's assets, while operating expenses increased from Sh36.5 billion to Sh45.7 billion.

For Kenya's telecoms operators, 2010 must feel a lot like 2008. Three years ago the industry was in the throes of its first major price war but the operators earned more revenues as lower prices encouraged subscribers to talk to each other more. Last year, those same dynamics came into play once again as calling rates fell by an average of 70 per cent or from Sh10 to Sh3 for on-network calls within the network.

For Safaricom, a new competitor in the form of Bharti Airtel and the continued assault on its market share by Telkom Kenya and Essar meant lower earnings from each call. The average voice revenue per user for voice calls dropped to Sh300 compared to Sh376 in 2008.

In addition, many of the factors that initially led to Safaricom's fast paced growth - a lack of effective infrastructure and the need for cheaper communication - have been largely resolved over the last couple years, leaving mobile operators with the task of identifying value added services that keep subscribers on their networks.

To defend its position, Safaricom has increasingly turned to internet services, a segment that grew by 85 per cent over the last year for mobile subscribers and at over 400 per cent for corporate customers raking in Sh31.3 billion.

"The areas of focus for the company promise to remain data and M-Pesa, where earnings have been increasing over the last few years. This is a company that is looking for new revenue streams," said Eric Musau, an analyst at African Alliance.

Earnings from the money transfer service M-Pesa - which broke even a year ago and is now contributing to the firm's profits - grew by 56 per cent to Sh11.8 billion, with 81 per cent of Safaricom's subscribers now using the service to send money to each other.

"Our strategy in diversifying away from voice has delivered strong growth in data. This focus on data is more than just finding a new revenue earner, it is about finding a sustainable business that we can rely on for the next few years," said Mr Collymore.

As Safaricom works to alleviate its dependence on voice revenues, it will turn to new business segments that analysts say will provide it with a stable income generating machine as earnings from voice continue to shrink.

Over the last year, the company upped its investments on building its data business, inking agreements with partners and signing up large internet consumers in the corporate world to boost its earnings from the segment.

A new partnership with Chinese mobile handset manufacturer Huawei has seen Safaricom deepen its presence in the gadget retail sector. It has made aggressive in-roads into becoming a key player in the music industry, with its ringtone business Skiza being used by nearly 4 million subscribers.

Safaricom also diversified its M-Pesa offering, signing an agreement with Western Union that allows international transfers in 46 countries and moving into the e-commerce space with a M-pesa powered Visa travel card.

The company also intensified its efforts to become a player in the internet market through a new division named Safaricom Business, which focuses on providing solutions for SMEs and corporates.