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In Conversation with BLU: The Blue Label Telecoms story

Biznews were thrilled to host an interactive webinar in our studios last week, in conjunction with Standard Bank Webtrader. Alec Hogg chatted with Brett Levy of Blue Label Telecommunications. A fascinating discussion between the two covered everything Blue Label, from the company’s inception, interest from Microsoft at BLU’s listing in 2007, their recent acquisition of RMCU and how it truly has opened the world up to the company – not to mention the importance of the ‘grey hair’ factor and where the lads’ prospects lie in the future. Incredibly transparent and illuminating conversation from Brett, this one is not to be missed. – CH

Mark was also supposed to be with us Brett, but you’ve had a tragedy in the family, thank you for coming.

Thank you very much for having me.

We have a lot to talk about; not just the financial results but why I like Blue Label so much.  I think many other people who are now starting to see greater attractions in the Blue Label stock. We’re going to go straight into it.

230215 Blue Label slide images.001

We have the facility to make this as interactive as possible. While you’re listening, if you’d like to post questions, just go for it. We have Stewart, who’s sitting at HQ at Standard Bank Online Share Trading. He’ll be picking up the questions and putting them into a little box that I’ll see here from Biznews, and then we’ll pose them to Brett.  I’ll carry on with it and as the questions start coming through, we’ll bring those through as well. We are scheduled to carry on for an hour. We’ll see how it goes. Perhaps we’ll continue for that long.  We might not do it as long – whatever.  We’ll just see how the conversation goes. Gee Brett, there’s enough going on in your company to keep us here for six hours.

All right, let’s go onto the first of the slides. I think that’s the share price. If we go back to November 2007 when you guys listed, you came to the market at a price of R6.75.  The shares shot the lights out on day one.  A few days later, they got to an all-time high, which stood until recently and then it slid down.  Let’s just go back a little bit.  Seven years ago, you were in your early thirties and you decided to take this company to market.  It was in the boom of 2007.  There was a lot of excitement around it.  Looking back, did you maybe overprice the shares at the time?

Just to put it into perspective, just to go back to the time; we were pricing the listing at R5.50 to R6.75 with R6.75 obviously, being the high.  About a week before we listed, Microsoft decided to come into our listing.  As soon as the market heard that Microsoft were coming into our listing, we became 10/11 times oversubscribed at the R6.75 mark.

Why did they want to come in?

They wanted to take their product to the prepaid, independent world actually, and they’d headhunted us, quite strangely.  They’d picked this company in South Africa, called Blue Label. We weren’t listed at the time, so our exposure was already around the world. Their idea was to take products like Microsoft and Windows, etcetera, put it into a prepaid format and offer it into Cloud base, into the market. Today, we know of Cloud and it’s very popular but in 2007, it was obviously something new. Our partnership was really good.  Unfortunately, it ended round about 2010/2011 (on really good terms, though) and that was just because the machine that is Microsoft couldn’t deliver on a new market for them.

If we take your share price down to 2008, that’s not unusual.  What happened on the market generally was lots of excitement in 2007 and then a bit of a bust after the global financial crisis hit. All shares all over the world were affected, including yours.

I could be wrong, but in 2007, there were two more up days until the bubble actually hit, after the 14th of November and then of course, we went into this massive crash of 2008 where I think everyone was affected equally – I think everyone on the downside was affected equally, at least – and weathered through it.  We put our heads down, did what we had to do, traded straight away at a much higher number and then came back. Ever since then, the share price being secondary for us, ground in a way in making sure we deliver to the market. I’m sure the share price will take care of itself in the future.



I often hear CEOs saying exactly that but actually, you watch the share price. Come on.

I used to, Alec. It used to bother me so much that I decided it’s better for my heart to not watch it.

I remember Bernard Cantor. After they listed Investec in 1985, for a couple of years it did nothing. He was so frustrated about it.  I think you could have bought the shares at R2.00/R2.20.  Of course, look at them today.  You’d know that that’s the time to be accumulating the stock. Just going back over those six years, bringing us back to the present, things were okay and then towards the middle of last year, falling quite sharply. The share price was down to the R8.00 level and then you had the spike up to R10.00. That was around the time that you had an unsolicited bid. What went on there?

It at was the beginning of October last year. At Blue Label, we’d often get a lot of interest or people looking at us. This time, our Board felt that from a governance perspective that we needed to announce that there was a suitor looking at buying 100 percent of Blue Label. It’s not out of the ordinary for Blue Label. This just took a bit of a different turn and that’s why we had to announce it.  It is important to note that Mark and I are not sellers.  We’re really not looking for a sale. This came out entirely out of left field, and through good governance, we announced it. The share price spiked up literally ten percent in one day and then drove from there. We found ourselves trading at a little bit less than we did before the announcement. In the markets, you get the people who react to it, but our long-term shareholder base has remained. We’ve just put our results out. We’ve seen quite a few of them and I think we’re building up quite a solid base.

What stake do you and Mark have?

Together, we have just on 24 percent.

And you’re not going anywhere. You were not prepared to sell. Was that the reason why the deal fell over?

Not entirely.  I think there are many reasons why the deal fell through but very importantly, we would like to follow any deal that comes through Blue Label. We would like to see a bigger picture for us. Not necessarily financially, but we’d really like to take this business into the future. If it were a bigger company buying it, what role would we play in a bigger company? One thing we do have on our side is age and rather young management around us, and I think we have a lot to offer. We’re going to be around for a couple of years and I think that will be a good thing.

Is that an advantage for a business like yours?

I think so because (1) you really have people with heart and soul in the business. You have people with big interests in the business from a shareholding perspective (not that we look at it from a shareholder’s perspective). Everything we do, we do in the best interest of shareholders because we do have a large shareholding and we have the shareholders’ interest at heart.  More importantly, people grew the business.  We were the drivers.  We were the storemen. We were the salespeople.  We’ve been absolutely everything in the business, so the knowledge is great. What we’ve really done well over the last five or six years – especially since we listed – is bringing what we call ‘gray hair’.  A lot of good experience, especially on our Board.  A lot of good experience into management, and a lot of diversity.  From the original five or six people who started Blue Label, obviously the good thing is that remains but everything around us is new.

How many people do you have now?

If you exclude the call centres and international, in South Africa we have about 900 people.

From five or six. How many of them do you know?

This is the sad part actually, because I knew all of them and made a thing of going for lunch with mostly everyone. Now, I try to make a point of going around the office and saying hello to everyone at least once a week, but the truth is that I know many faces and I’m finding it quite hard to keep up with all the names.

With 900, no one can blame you for that.  Just to remind you, you can actually pose your questions to Brett by filling it in at the area where you can even go into the chat area or you can go to where the message area is.  Okay, let’s get into those numbers because the results were released last week.


After talking to you and Mark on CNBC, I got quite excited about it because of the broader trend.  When you look at what our attendees are seeing on the screen here, it’s for the half-year to the end of November. The gross profit is growing. The GP margin is growing. You’re now at seven-point-six percent. It’s a whole lot more than selling cabbages at Shoprite, but it’s not a massive margin. A couple of percentage points or even tenths of a percentage point increase in your gross profit margin would have a big impact on the bottom line, I guess.

Absolutely.  We’re working on massive revenues. The revenue that’s currently going through our books is about R45bn. What we’re actually show you is about R20bn so any single point is massive.

What’s the difference between the two?

One is what we call pinless top-ups, which means that you act as an agent and not the principal or the principal and not the agent. Essentially, the risk and rewards pass on to us where we actually buy the stock, bring the stock into our side, and then release the stock. We then bring in the revenue as well as the cost of sales itself.

I’m sure many people listening have a very good understanding of Blue Label. For those who’ve just heard ‘hey, this is the stock that we should be looking at more closely’…  In a nutshell, what is it that you do?

The first thing that I really want to put out there is we’re listed as Blue Label Telecoms but we’re not a Telecoms company.  I think it’s really important to stress that because sometimes we’re lost in what is happening in the telecoms world as such, and we’re really not affected, as the telecoms companies are. What we really are, is a financial/distribution house where we will digitise anything (in the prepaid ticketing world) and electronically, we will move it across countries and across the world, and make sure the product can reach the masses of the world and not be limited to just urban areas.

Explain that. Pay as you go. If I have a pay-as-you-go phone, is it a Blue Label Product that I’m going to buy from the café?

This is the most exciting part for me. If I can just summarise Blue Label quickly, it works like this. If I am the main guy (Vodacom, networks, municipalities, or Eskom), they turned around after all these years and said ‘hang on, guys. We’re being silly. Why don’t we push more and more product into the prepaid world? We’re paid upfront for a product we’re going to deliver in the future. Generally, we charge a little bit more for the service because there is no loyalty to it.  For the same service, it would be a bit more.  Lastly, adding to the reason for it is zero bad debts because it’s prepaid.’  Subconsciously, you’re seeing this massive drive from all the players at the top, putting more and more products into prepaid.

They don’t call it prepaid (especially across the world) because prepaid is unfortunately, associated as a poor man’s product. That’s how it was developed initially. It’s really not a poor man’s product. It’s a product for everyone. What you’ve seen is this massive drive from the top end of more and more products going into prepaid. In the middle, you have the retailer/merchant who’s said ‘hang on one second. How can this be? The most product that I’m selling out of my store is a product I hold no stock of’.  Imagine if you went to people years ago and you said ‘listen, your #1 SKU in your store is going to be a product of which, you’ll hold no stock’ everyone would have thought you’re a little bit crazy. People thought Mark and I were a little bit crazy, and they probably still do.

You have this massive pool from the merchant who wants more and more product in this prepaid virtual world because they’re not holding any of the stock, and they can hold products across the board. They can now compete on an equal footing. Lastly, bringing this prepaid world together is ‘what is the customer’ because no matter where you are in the world, a customer wants to budget his/her life. They want to know at the end of the month that this is what they’re spending for X, Y, and Z.  No matter how hard you try in a post-paid world, it’s impossible because you overspend on your electricity. You overspend on your Internet.

Well, the banks give us credit cards.

We’re all the same.

That’s interesting. If that’s the case, then why aren’t you really, really big in the online space?  If it’s to do with the retail, online has always had virtual products whereas the retailer has SKU’s. Isn’t this a massive opportunity?

The future for online, is massive. For us, we offer an online service. You can have everything that we talk about, online.  The secret of what we’re trying to do is take the product to the unbanked or the badly banked masses of a country.  When we started out, we said ‘how come a person who lives rurally, doesn’t want shack insurance’.  They do want shack insurance. The reason why they didn’t have what we consider house insurance is (1) they couldn’t get it and (2) if they could get it, it was too expensive for them to pay for it, as they probably had to commute to do it. What we’re doing is we’re taking product to the masses of the world.

You’re a distribution company, not a telecoms company.

We’re absolutely a distribution company. Telecoms happens to be one of the products that we supply.

How do you grow as a distribution company?

With a distribution company, you have to concentrate on two things. 1.  You have to continuously grow your distribution.  2.  The key to it all is once you grow this distribution, it’s about sticking new products onto it. As someone said to Warren Buffett in an interview a couple of months ago, ‘why are you buying up all the railroads?’  He said ‘I’m going to give you three quick reasons. 1.  Once the first railroad is built, there’s no room for the second railroad.  2.  No matter what you’re in, there’s always going to be a product that moves on my railroad from A to Z.  3. If I want to maximise profit, I’ve built it, it’s moving, and all I have to do is add carts onto the back’. That’s Blue Label. We are a virtual railroad. Once you have our system in your store, there’s no need for a separate system. There’s nothing more that it can do and nothing less that it can do.

How big is your railroad?  How many stores do you have?

In South Africa, we have over 150 000.

What do they look like?

They range from Pick ‘n Pay to Shoprite/Checkers, all the way to a shebeen, spaza shop, Mom & Pop, or a merchant on the side of the road.  It’s vast.

What does that shebeen owner get for selling prepaid airtime that you’ve provided him with, to Cell C?

Firstly, we’ve given the independent market a chance to survive.  I think I need to explain that more because this is very important.  If you don’t take the independents such as the Mom & Pop or spaza shops and give them technical power; in a number of years, they will diminish.  You have these great, big companies like Shoprite or Walmart who are really doing an unbelievable job by opening up on every corner, offering consumer champion stuff, and doing a really, good job.  If you don’t give technical power to these stores, they can’t compete on baked beans or bread because they buy ten loaves compared to one million. If you give them technical power, they can have the exact same range of products as Shoprite.  They can sell at the same price (if not better) and therefore, grow. This is what you’re seeing in the Blue Label world. What do we give them?  We give them technical power through a hardware device, to which we’re agnostic.  It’s all about what’s good for you as a store.  How it connects must be good for you as a store, so it varies – via satellite or via GPS.

What does it cost to install that?

We subsidise it for a lot, but it can cost anywhere from R1000.00 for the device and installation, etcetera, up to a freestanding vending machine, which costs R30k or R40k.

Where do you find new outlets?  One would presume that 150k is a big chunk of the outlets that are available in South Africa.

Thirteen percent of our world is what you’d consider formal, similar to Shoprite et al. Eighty-seven percent of our world is what we consider the independents.  That’s the Mom & Pop/spaza shops.  There are millions of these stores.

They’re popping up all the time.

Yes, they pop up all the time. It all depends on the type of device you can deliver from a cost point of view. More important than the cost is the service point of view. You have to be able to deliver different kinds of hardware devices and service levels in order to make one of our merchants (who is a customer) do R2000.00 in profit in the same way as a customer who does R100k.  That’s the balance of what you do.

Brett, it’s quite a simple business model, then.  You get mass distribution and products that you put into that distribution chain. Clearly, as we look at that graph again – the gross profit, the GP margins – it’s showing us that you’re moving into the right direction.  There has to be a balance, though.  In the insurance industry for instance, they know that their cost of acquisition can be higher than what they’ll get back in year one, for example. However, if they’re doing a 20-year product then much of that margin goes straight to the bottom line in years two, three, and four.  Is it similar with you?

It is similar but our wait is far shorter. Our ROI, it changes, but it’s between eight and ten months on the device.  Remember, all of that is sunk around the telecoms sector.  No matter where we are in the world, we sink the entire cost around telecoms and as you add these new products, they sink directly to your bottom line because the infrastructure’s paid for already.

Well, the railroad’s there.

Moving on to the hard numbers for a while – the income statement – this was for the six months to the end of November. You can see in there that the GP margin (7.63) is slightly down on the last year but nothing really, to worry about. I guess the bottom line – the real number there – is that 284,000 headline earnings as against 246,000. We can really become bogged down in the numbers, but the 15 percent growth is the number which, if you want to be fixated on anything, that would be the one. Is that where you’re pegging yourselves now, into the future?

It sounds like your kind of business model.  Fifteen percent could become much higher if you turned off a few taps here and opened some elsewhere.

We’re very excited about the future, Alec.  We’re in an industry, which is really growing. When we started, we had to wait for products to load onto our system. Now, it’s a matter of us choosing what we believe are the right products because there’s just so many of them. From a distribution point of view, we have one of the most comprehensive distribution channels anywhere in the world if you compare us to absolutely anybody. When we listed in 2007, our GP margin was below four percent. It’s now sitting at over seven-and-a-half percent.

Can it go much higher?

As we add our new products, it will continue to go higher.

They’re coming in at a very high margin because you have a railroad in place.

They’re almost coming in at 100 percent margin.  It doesn’t matter if we make one percent, five percent, or ten percent. It’s almost 100 percent because of that. Secondly, the barrier for entry in the independent world is much harder. When you’re dealing in the formal world, it’s much easier for people to compete. Our model is simplistic, but the actual methodology and the years it takes you to set up in an independent, rural world is really, our strength.

What would it cost you to replicate?

One-hundred-and-fifty-thousand points in South Africa alone would cost us over R1.5bn, and approximately five or six years to get to the same position.

If you had R1.5bn elsewhere to put into that, it’s still going to take you five to six years. You can’t find a competitor springing up tomorrow.

No. Our competitors are different (and we do have many of them), but they’re more regional-based. What we find ourselves doing is fighting in different regions and different products. Take KwaZulu-Natal.  We’ll have a very strong competitor who has cornered two or three thousand merchants in KwaZulu in solely electricity and airtime. We very rarely fight about the whole basket of fruit countrywide, but regionally and product-wise, we fight all the time.

READ THE FULL INTERVIEW HERE.

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