Takeover target, Neotel, shows profitability growth

South Africa’s second national fixed telecom line operator, Neotel, has turned the financial corner which makes it even more attractive as a takeover target.

The seven years old operation, Neotel, reported yesterday that profits before tax have turned positive for the first time. Neotel is a subject of possible takeover after mobile phone network giant Vodacom, a JSE listed subsidiary of London based Vodafone, expressed interest. The combination of a fixed line operator and a mobile player could be a real game changer, at least on the commercial side of things, within South Africa’s tight telecoms market. But then there are all sorts of hoops to jump before such a deal can become reality.

Neotel announced yesterday that it achieved 21% growth in revenue during the first half of the 2013 financial year. Earnings before Interest, Tax, Depreciation and Amortisation (EBTDA) showed 105% growth year-on-year.

“We are proud of this performance and could only achieve these results with the support from our valued customers and our energised staff,” said Neotel CEO & MD Sunil Joshi.

The plan, said Joshi, was to turn EBITDA positive in FY12 and this was achieved. “Then we set a target of being EBIT positive in FY13. Neotel did this too. Now we have achieved our target of being PBT positive ahead of plan.”

Joshi said it was remarkable that the business was growing in the current market condition. The market, said Joshi, is characterised by low levels of growth (1.4% for fixed line) and price erosion. However Neotel sales growth is 12-15 times the industry growth rate.

“The sales growth has been possible with the support from our customers, the launch of new and innovative solutions, a real focus on improving customer experience, cost control and by growing our people. Our customer numbers have increased. New and existing customers are buying more from us because they see value from our service and they reduce their costs. The combination of these key focus areas has delivered these results for the company.”

He said Neotel grew revenue across all its business units, including Managed Services (125%), Network Services (10%), NeoVoice (24%) and NeoInternet and NeoBroadband (20%). This has resulted in sustained customer services growth of 27% in the Small Enterprise/Retail segment and 24% in the Business segment.

About the possible takeover Neotel made minimal comments.  The company said the finalisation of the transaction is subject to the successful conclusion of commercial negotiations and receiving the requisite approvals.

Joshi said “A combined entity would be better placed to offer an expanded product range and level of increased funding and as a consequence, enhanced customer choice as well, while enabling Neotel to extend its footprint in South Africa.”

Neotel’s main attraction is its fibre optic network which was rolled out over the past few years. The company now boasts the largest fibre network in the country featuring over 15 000km of national long distance fibre and about 8 000km of fibre in major metros. This has positioned the company in an advantageous position to exploit the ICT revolution under way in South Africa and is well placed to plug into the southern Africa region.

Joshi highlighted the launch of Neotel’s LTE offering during the second quarter. “With the launch of the LTE service, Neotel has a full suite of Internet and Broadband products for their enterprise and SMB customers with the best performance of Internet, as per the June 2013 MyBroadband survey”.

The company’s mobile smart landline is a space worth watching. A first for South Africa, the product behaves like mobile phone where Neotel infrastructure support can be accessed.


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