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It’s the number one question asked while standing around at cocktail parties or braais: “So what do you do?” Simple enough to answer if you’re a neurosurgeon, but refill your drink before asking the CEOs of Blue Label Telecoms that question. Understanding what BLT does and the implications for its future prospects are essential for investors. They’ve been told it’s one of the smartest companies operating in South Africa, it’s delivered decent results and is growing revenue – R17bn, in fact. But where to from here for Blue Label Telecoms?
While perhaps not quite as intricate as digging around in brains, BLT handles a lot of complexity. It takes complicated transactions, throws on a layer of clever technology and methodology between the seller and the customer and profits from commission in the process. Some express confusion at its business model and perhaps the “Telecoms” bit of its name is to blame for that, at least in part.
Another part of the puzzle is that much of what Blue Label does is transparent to end-users. But it’s hardly a telecommunications company. Its name is an artefact of the business it cut its teeth on and continues to make a good deal of its revenue from – reselling prepaid airtime for cellular operators in SA. It did that job damn well and in the process patented ways of making the model work for virtually any transaction.
It also added a missing ingredient none of its competitors had mastered: the ability to handle cash transactions in rural parts of this country. The official line is “Blue Label Telecoms enables unbanked and under-banked consumers in emerging and developing markets to access first-world products and services conveniently and cost-effectively.” Why that’s tantalising to investors is because of the promise it holds for growing markets where prepaid services are a way of life and economic enablers – such as being able to run a shop in the middle of nowhere – are both vital and in growing demand.
Cellular airtime aside, there’s electricity, Lotto tickets and countless other things Blue Label can leverage into emerging markets. Its point of sales systems allow anyone to conduct cash and card transactions – no matter what they’re selling. Playing the enabler for such transactions is big business, and Blue Label has grown as its services are being called upon in increasingly more sectors of business.
The company posted its results last week for the year to end-November 2010. It managed to up its earnings from 23,15c to 25,2c – and that despite some setbacks we’ll explain later. Revenue grew by 8% to cross the R9bn mark but gross profit dropped from R621m to R573m. The group explained: “Although on a comparative basis overall gross profit margins declined, margins in fact exceeded those achieved in the second half of the 2010 financial year in the South African distribution segment, the major contributor to group profitability.
“With cash reserves averaging R1,9bn the deployment of cash to achieve additional discounts was a natural substitution for declining income earned from monies held on deposit due to lower interest rates.”
Blue Label’s current situation aside, prospects for the company to turn massive margins in the future is very real – if it plays its cards right and manages to attract the right contracts. The sky’s the limit. Dominating the South African market for what it does, Blue Label has spread its operations to Britain, Nigeria, India and Mexico and you’ll also find its technology offerings in countless other territories. Future prospects relate to economic growth in those regions and the rise of prepaid services, which are becoming increasingly prevalent. For example, consider the growth of prepaid electricity in SA. Another opportunity lies in new banking solutions.
At the helm of the company are brothers Brett and Mark Levy, who founded Blue Label Telecoms in 2001. This entrepreneurial duo – who have an impressive collection of electric guitars signed by rock stars – have guided the company since the get-go. They crack open a Johnny Walker Blue Label whenever the company completes a major deal and a mountain of expired bottles decorates the boardroom. It’s clearly been a busy decade.
Born in 1971 and 1975 respectively, Mark and Brett are a formidable pair and have made an impressive job of scaling the company. It listed in 2007 and has shown strong growth over the three-and-a-bit years that have followed.
Says Mark Levy: “What we’ve done is create multiple solutions that talk to a common back-end. We’re the spaghetti in the middle to ensure suppliers can get their products to as many different customers as possible.”
Blue Label has created an ecosystem that providers of just about anything can plug into. For example, operators wanting to sell cellular airtime. It’s also found a niche in regulatory requirements: Blue Label provides wireless terminals for RICA registration of cellphone accounts and is now making other transactions possible via those portable terminals.
Levy says its strategy from the beginning has been device-agnostic, allowing its systems to operate with a number of disparate point-of-sales systems, including mobile phones. That allows it to tailor-make solutions to customers’ needs rather than force down a physical piece of hardware, as some of its competitors do. While many focus on the seller and customer ends of transactions, Blue Label has mastered the in-between bit while also pioneering solutions at each end.
“We’ve become very good at doing micro collections or payments. And we’re very good at banking and collecting cash,” says Levy. The trick with cash is it’s underestimated. Intuition tells us cash transactions are simple and that electronic transactions are complex, but the reality is cash is complex – especially for businesses in rural areas. Levy explains that by devising ways of dealing with cash, Blue Label is “taking the risk away from suppliers and we’re also enabling many more merchants to start vending non-traditional products. So we’re not a telecoms company – we’re actually a very sophisticated distribution-cum-financial services company,” he says. “We’re enabling people to produce more turnover with less cash.”
And while technology is a large part of what Blue Label does, it isn’t everything.
“It’s not just about the technology; it’s about the methodology. Of how you bank, get customers and retain them. Technology is certainly important but there are so many other facets to the business that are very difficult to replicate,” Levy says.
Testament to that statement is Blue Label’s market share in SA, where competitors have fallen by the wayside for the most part. The Levys are reluctant to point at an exact market share but Blue Label certainly enjoys the lion’s share – and then some. The plan is to make that true in the other markets in which the group operates.
Levy says a focus is now being placed on Mexico, Nigeria and India, where the company has already made strong headway. The strategy is to have at least 50% of Blue Label’s revenue come from outside SA, with 50% of that from non-telephony-related services.
Levy says India is the first country in which it’s achieved its goal of having more than half its revenue derived from business areas outside telephony. “There’s nobody that does what we do in India on an across-the-board scale. We’ve been there for eight years and must have seen about 15 [competitive] companies come and go in that time.”
Blue Label has been able to launch sophisticated services in India it has yet to replicate elsewhere, such as vending airline tickets and a prepaid model for digital terrestrial television. “You’ve got to design practical solutions for specific customers. And where we think our competitors have gone wrong is they try to shove down a specific hardware solution where it doesn’t necessitate it,” says Levy.
What Blue Label has done instead is to provide single devices with multiple functions, which Levy says is going to become increasingly important throughout all the markets it deals in as mobile merchants become more prevalent.
Taking transactional systems to every corner of a market does require some fierce competencies in the processes and technologies Blue Label deals with – and that’s where the Levy brothers have done well to attract the industry’s top skills. Its chief technology officer is David Fraser, an experienced engineer with a list of qualifications as long as my arm who has been behind Blue Label’s ability to deal with transactional spaghetti and deliver connected devices to some of the most remote corners of the world.
“We’ve developed our own NFC technology – near field communication,” says Levy. “And our reason was to capture the next generation of payment processing. Coupons – all those type of things that require a different interaction with the customer. The problem is you mustn’t create Rolls-Royces when you need Mini Coopers. With technologists you need to be careful you don’t over-engineer, because sometimes a simple solution is the most practical.
“So 80% of our business comes from a very unique market. And there’s no single customer dependency. We’re able to interact with multiple customers, which also gives us more credibility and allows us to grow our footprint more easily. We supply products and services to the masses of this world. It also ties in to our strategy of ‘take the product to the consumer’.”
Blue Label has run into some trouble in Nigeria (see separate report), where it had a contract with troubled Telkom subsidiary Multi-links. The termination of that contract will affect revenue from the region, but Levy is confident. “Our game plan in Nigeria was always bigger than Multi-links. It was a good anchor tenant for us: it gave us the ability to cement ourselves in the market. But it was always our intention to replicate our South African business model [of dealing with many providers].”
Mexico is a relatively new frontier for Blue Label, and Levy is optimistic about the country. “In Mexico there are some very interesting things on the horizon and they boil down to products and partnerships. There are exciting things happening there, which if they come off would lead to ramped-up growth for us.
“That applies for each geography: there are a lot of exciting initiatives on the way. But where we see it changing is the need for modern day distribution. All of a sudden banks want to leverage off our footprint and do stuff with us. Our intention in all these geographies is to exponentially grow our bases on an annualised basis. And the speed at which you can do that is based on how many new partnerships you can create and how many more products you can introduce.
“We probably touch most readers every day without them even realising it – even if they do online Lotto buying through FNB. That’s our technology that provisioned the Lotto into the FNB wallet. So often you don’t even see us – but we’re everywhere.”
MICROSOFT & TELKOM
Battle with the big guys
Blue Label is currently experiencing strained relationships with shareholders and partners – namely, Microsoft and Telkom. Microsoft acquired a 12% equity stake in Blue Label Telecoms around the same time the group listed in 2007. An agreement was also put in place for strategic collaboration and preferred partnerships between the Redmond software giant and the South African distribution firm.
However, rumours have surfaced about a breakdown in that relationship. Joint Blue Label CEO Mark Levy confirmed the relationship is strained in areas but hasn’t broken down completely. “To explain what happened with Microsoft we need to go back to how we view a partnership and how they do. The problem in those big organisations is that you get lost. Because they’re so big you don’t necessarily get the relationship you want. There’s no real common alignment from a strategic point of view – and that’s where we battle with Microsoft. We know what we want, we know where we’re going – it hasn’t changed. But we’re not sure if we fulfil what their strategy is,” Levy says. “So I’d say the relationship is strained from a strategic point of view: what value we can add to them, and vice versa.”
There’s a possibility Microsoft will end its relationship with Blue Label and possibly disinvest. Levy says it would be a pity if that happened, but that Blue Label isn’t dependent on Microsoft. “We didn’t create dependencies on anyone but ourselves. So if Microsoft had to end the relationship tomorrow there’s actually no inter-company dependencies – bar the licence you buy over the counter.
“I think we both could get more out of this relationship. We’re seeing it dilute – not break down. I think we’ve missed out on opportunities, on both sides. So we’ll have to work it out. But for us there was life before and there will be life beyond. We’ve become a very self-sufficient organisation.”
Levy adds if Blue Label and Microsoft do work out their differences they would need to extrapolate more value from each other.
Another potential setback Blue Label has suffered is in Nigeria, where it had an exclusive contractual relationship with troubled Telkom subsidiary Multi-links. Blue Label’s Nigerian subsidiary, Africa Prepaid Services, signed a 10-year agreement with Multi-links in 2008 that was cancelled last year. Telkom had been trying to renegotiate the contract and outgoing interim Telkom CEO Jeffrey Hedberg claimed Multi-links wouldn’t survive unless the agreement could be restructured.
Multi-links is a telecoms company that provides CDMA voice and data services in Nigeria, as opposed to the GSM technology used by most other operators. Blue Label had exclusive rights to distribute those services, but Multi-links announced last year it would be exiting the CDMA market. The effective termination of the agreement is something Blue Label views as unlawful and is pursuing the matter legally.
But Brett and Mark Levy are adamant they’ll ultimately succeed in Nigeria. Says Mark Levy: “We had an interesting agreement with Multi-links and we didn’t think it delivered on its contract and we have now cancelled the contract after a lengthy debate with them. Ultimately, we’ll head off to arbitration to tell us who’s right or wrong.”
He continues: “Our game plan in Nigeria was always bigger than Multi-links … what the Multi-links thing did for us was to speed up what we need to do: we need to deliver a technical solution. What existed in Multi-links historically was very paper-driven. Over the coming months we’re rolling out thousands of point-of-sale devices in that region and I think Nigeria poses a massive opportunity for this group.”
Levy’s argument is that the Multi-links contract was structured on commission for Blue Label. The more business it brings to Multi-links, the more money BLT makes. He says there might well be a short-term earnings blip on the radar due to the Telkom breakdown. “It’s just sad we have such a disruption for nothing.”
While perhaps not quite as intricate as digging around in brains, BLT handles a lot of complexity. It takes complicated transactions, throws on a layer of clever technology and methodology between the seller and the customer and profits from commission in the process. Some express confusion at its business model and perhaps the “Telecoms” bit of its name is to blame for that, at least in part.
Another part of the puzzle is that much of what Blue Label does is transparent to end-users. But it’s hardly a telecommunications company. Its name is an artefact of the business it cut its teeth on and continues to make a good deal of its revenue from – reselling prepaid airtime for cellular operators in SA. It did that job damn well and in the process patented ways of making the model work for virtually any transaction.
It also added a missing ingredient none of its competitors had mastered: the ability to handle cash transactions in rural parts of this country. The official line is “Blue Label Telecoms enables unbanked and under-banked consumers in emerging and developing markets to access first-world products and services conveniently and cost-effectively.” Why that’s tantalising to investors is because of the promise it holds for growing markets where prepaid services are a way of life and economic enablers – such as being able to run a shop in the middle of nowhere – are both vital and in growing demand.
Cellular airtime aside, there’s electricity, Lotto tickets and countless other things Blue Label can leverage into emerging markets. Its point of sales systems allow anyone to conduct cash and card transactions – no matter what they’re selling. Playing the enabler for such transactions is big business, and Blue Label has grown as its services are being called upon in increasingly more sectors of business.
The company posted its results last week for the year to end-November 2010. It managed to up its earnings from 23,15c to 25,2c – and that despite some setbacks we’ll explain later. Revenue grew by 8% to cross the R9bn mark but gross profit dropped from R621m to R573m. The group explained: “Although on a comparative basis overall gross profit margins declined, margins in fact exceeded those achieved in the second half of the 2010 financial year in the South African distribution segment, the major contributor to group profitability.
“With cash reserves averaging R1,9bn the deployment of cash to achieve additional discounts was a natural substitution for declining income earned from monies held on deposit due to lower interest rates.”
Blue Label’s current situation aside, prospects for the company to turn massive margins in the future is very real – if it plays its cards right and manages to attract the right contracts. The sky’s the limit. Dominating the South African market for what it does, Blue Label has spread its operations to Britain, Nigeria, India and Mexico and you’ll also find its technology offerings in countless other territories. Future prospects relate to economic growth in those regions and the rise of prepaid services, which are becoming increasingly prevalent. For example, consider the growth of prepaid electricity in SA. Another opportunity lies in new banking solutions.
At the helm of the company are brothers Brett and Mark Levy, who founded Blue Label Telecoms in 2001. This entrepreneurial duo – who have an impressive collection of electric guitars signed by rock stars – have guided the company since the get-go. They crack open a Johnny Walker Blue Label whenever the company completes a major deal and a mountain of expired bottles decorates the boardroom. It’s clearly been a busy decade.
Born in 1971 and 1975 respectively, Mark and Brett are a formidable pair and have made an impressive job of scaling the company. It listed in 2007 and has shown strong growth over the three-and-a-bit years that have followed.
Says Mark Levy: “What we’ve done is create multiple solutions that talk to a common back-end. We’re the spaghetti in the middle to ensure suppliers can get their products to as many different customers as possible.”
Blue Label has created an ecosystem that providers of just about anything can plug into. For example, operators wanting to sell cellular airtime. It’s also found a niche in regulatory requirements: Blue Label provides wireless terminals for RICA registration of cellphone accounts and is now making other transactions possible via those portable terminals.
Levy says its strategy from the beginning has been device-agnostic, allowing its systems to operate with a number of disparate point-of-sales systems, including mobile phones. That allows it to tailor-make solutions to customers’ needs rather than force down a physical piece of hardware, as some of its competitors do. While many focus on the seller and customer ends of transactions, Blue Label has mastered the in-between bit while also pioneering solutions at each end.
“We’ve become very good at doing micro collections or payments. And we’re very good at banking and collecting cash,” says Levy. The trick with cash is it’s underestimated. Intuition tells us cash transactions are simple and that electronic transactions are complex, but the reality is cash is complex – especially for businesses in rural areas. Levy explains that by devising ways of dealing with cash, Blue Label is “taking the risk away from suppliers and we’re also enabling many more merchants to start vending non-traditional products. So we’re not a telecoms company – we’re actually a very sophisticated distribution-cum-financial services company,” he says. “We’re enabling people to produce more turnover with less cash.”
And while technology is a large part of what Blue Label does, it isn’t everything.
“It’s not just about the technology; it’s about the methodology. Of how you bank, get customers and retain them. Technology is certainly important but there are so many other facets to the business that are very difficult to replicate,” Levy says.
Testament to that statement is Blue Label’s market share in SA, where competitors have fallen by the wayside for the most part. The Levys are reluctant to point at an exact market share but Blue Label certainly enjoys the lion’s share – and then some. The plan is to make that true in the other markets in which the group operates.
Levy says a focus is now being placed on Mexico, Nigeria and India, where the company has already made strong headway. The strategy is to have at least 50% of Blue Label’s revenue come from outside SA, with 50% of that from non-telephony-related services.
Levy says India is the first country in which it’s achieved its goal of having more than half its revenue derived from business areas outside telephony. “There’s nobody that does what we do in India on an across-the-board scale. We’ve been there for eight years and must have seen about 15 [competitive] companies come and go in that time.”
Blue Label has been able to launch sophisticated services in India it has yet to replicate elsewhere, such as vending airline tickets and a prepaid model for digital terrestrial television. “You’ve got to design practical solutions for specific customers. And where we think our competitors have gone wrong is they try to shove down a specific hardware solution where it doesn’t necessitate it,” says Levy.
What Blue Label has done instead is to provide single devices with multiple functions, which Levy says is going to become increasingly important throughout all the markets it deals in as mobile merchants become more prevalent.
Taking transactional systems to every corner of a market does require some fierce competencies in the processes and technologies Blue Label deals with – and that’s where the Levy brothers have done well to attract the industry’s top skills. Its chief technology officer is David Fraser, an experienced engineer with a list of qualifications as long as my arm who has been behind Blue Label’s ability to deal with transactional spaghetti and deliver connected devices to some of the most remote corners of the world.
“We’ve developed our own NFC technology – near field communication,” says Levy. “And our reason was to capture the next generation of payment processing. Coupons – all those type of things that require a different interaction with the customer. The problem is you mustn’t create Rolls-Royces when you need Mini Coopers. With technologists you need to be careful you don’t over-engineer, because sometimes a simple solution is the most practical.
“So 80% of our business comes from a very unique market. And there’s no single customer dependency. We’re able to interact with multiple customers, which also gives us more credibility and allows us to grow our footprint more easily. We supply products and services to the masses of this world. It also ties in to our strategy of ‘take the product to the consumer’.”
Blue Label has run into some trouble in Nigeria (see separate report), where it had a contract with troubled Telkom subsidiary Multi-links. The termination of that contract will affect revenue from the region, but Levy is confident. “Our game plan in Nigeria was always bigger than Multi-links. It was a good anchor tenant for us: it gave us the ability to cement ourselves in the market. But it was always our intention to replicate our South African business model [of dealing with many providers].”
Mexico is a relatively new frontier for Blue Label, and Levy is optimistic about the country. “In Mexico there are some very interesting things on the horizon and they boil down to products and partnerships. There are exciting things happening there, which if they come off would lead to ramped-up growth for us.
“That applies for each geography: there are a lot of exciting initiatives on the way. But where we see it changing is the need for modern day distribution. All of a sudden banks want to leverage off our footprint and do stuff with us. Our intention in all these geographies is to exponentially grow our bases on an annualised basis. And the speed at which you can do that is based on how many new partnerships you can create and how many more products you can introduce.
“We probably touch most readers every day without them even realising it – even if they do online Lotto buying through FNB. That’s our technology that provisioned the Lotto into the FNB wallet. So often you don’t even see us – but we’re everywhere.”
MICROSOFT & TELKOM
Battle with the big guys
Blue Label is currently experiencing strained relationships with shareholders and partners – namely, Microsoft and Telkom. Microsoft acquired a 12% equity stake in Blue Label Telecoms around the same time the group listed in 2007. An agreement was also put in place for strategic collaboration and preferred partnerships between the Redmond software giant and the South African distribution firm.
However, rumours have surfaced about a breakdown in that relationship. Joint Blue Label CEO Mark Levy confirmed the relationship is strained in areas but hasn’t broken down completely. “To explain what happened with Microsoft we need to go back to how we view a partnership and how they do. The problem in those big organisations is that you get lost. Because they’re so big you don’t necessarily get the relationship you want. There’s no real common alignment from a strategic point of view – and that’s where we battle with Microsoft. We know what we want, we know where we’re going – it hasn’t changed. But we’re not sure if we fulfil what their strategy is,” Levy says. “So I’d say the relationship is strained from a strategic point of view: what value we can add to them, and vice versa.”
There’s a possibility Microsoft will end its relationship with Blue Label and possibly disinvest. Levy says it would be a pity if that happened, but that Blue Label isn’t dependent on Microsoft. “We didn’t create dependencies on anyone but ourselves. So if Microsoft had to end the relationship tomorrow there’s actually no inter-company dependencies – bar the licence you buy over the counter.
“I think we both could get more out of this relationship. We’re seeing it dilute – not break down. I think we’ve missed out on opportunities, on both sides. So we’ll have to work it out. But for us there was life before and there will be life beyond. We’ve become a very self-sufficient organisation.”
Levy adds if Blue Label and Microsoft do work out their differences they would need to extrapolate more value from each other.
Another potential setback Blue Label has suffered is in Nigeria, where it had an exclusive contractual relationship with troubled Telkom subsidiary Multi-links. Blue Label’s Nigerian subsidiary, Africa Prepaid Services, signed a 10-year agreement with Multi-links in 2008 that was cancelled last year. Telkom had been trying to renegotiate the contract and outgoing interim Telkom CEO Jeffrey Hedberg claimed Multi-links wouldn’t survive unless the agreement could be restructured.
Multi-links is a telecoms company that provides CDMA voice and data services in Nigeria, as opposed to the GSM technology used by most other operators. Blue Label had exclusive rights to distribute those services, but Multi-links announced last year it would be exiting the CDMA market. The effective termination of the agreement is something Blue Label views as unlawful and is pursuing the matter legally.
But Brett and Mark Levy are adamant they’ll ultimately succeed in Nigeria. Says Mark Levy: “We had an interesting agreement with Multi-links and we didn’t think it delivered on its contract and we have now cancelled the contract after a lengthy debate with them. Ultimately, we’ll head off to arbitration to tell us who’s right or wrong.”
He continues: “Our game plan in Nigeria was always bigger than Multi-links … what the Multi-links thing did for us was to speed up what we need to do: we need to deliver a technical solution. What existed in Multi-links historically was very paper-driven. Over the coming months we’re rolling out thousands of point-of-sale devices in that region and I think Nigeria poses a massive opportunity for this group.”
Levy’s argument is that the Multi-links contract was structured on commission for Blue Label. The more business it brings to Multi-links, the more money BLT makes. He says there might well be a short-term earnings blip on the radar due to the Telkom breakdown. “It’s just sad we have such a disruption for nothing.”
