Neotel, which entered the market in August 2006, has hit the milestone of making a profit before tax, albeit it a small gain, for the first time in its history.
The operator, currently the subject of a multibillion-rand buyout bid by Vodacom, hit the target almost six months early, as it initially anticipated reaching that stage of profitability towards the end of this financial year.
Neotel attributes the gains in profitability to 21% revenue growth, gains in its customer base and increased use of its services. The pre-tax target follows on its previous milestone of being profitable at an earnings before interest and tax level last year.
The operator has launched four products in the past six months, including long-term evolution, a broadband booster and NeoConference.
In the six months to September, Neotel's voice offerings gained 24%, its data centre grew 32%, broadband by 20%, and managed services surged 125%. Its core business, network services, grew at the slowest pace, adding 10%.
Gathering pace
CEO and MD Sunil Joshi says Neotel is growing at between 12% and 15% faster than the fixed-line market, which is gaining at 1.4% a year. He says the group is taking away market share and it now has 7.5% of the base, with an ultimate target of 15%. "Neotel is making progress in the marketplace."
Neotel grew its small enterprise and consumer base 27%, to 175 000, year-on-year, while its business subscribers gained 24%, to almost 3 000. Joshi says although Neotel cannot claim victory yet, it is making progress and is "doing well".
The group aims to retain pre-tax profitability for the rest of the year before setting new targets next year.
In the black
CFO Steve Whiley adds the group will not have to pay tax for some time, which means the pre-tax profit falls to the bottom of the income statement. During the first six months, only July was not profitable for the group, he says.
As a result of the gains, Neotel's free cash flow grew 85%, the bulk of which is being pumped back into infrastructure at a rate of about R500 million a year. So far, R5.5 billion has gone into the ground as the operator rolls out.
Joshi was not immediately able to elaborate on its net debt position, apart from saying it is maintaining its debt-to-equity ratio of 60:40.
Nothing to say
Joshi did not comment on Vodacom's offer to buy Neotel as there is "nothing to share". He did say "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 SA".
A month ago, Vodacom confirmed industry speculation when it said it was bidding to buy 100% of Neotel to add it to its business unit. This will, if successful, result in SA only having one fixed-line operator: Telkom.
The deal has yet to go through the regulatory processes and is likely to be closely examined by the Competition Commission, which must liaise with the Independent Communications Authority of SA when telecoms issues come up.
Due diligence is currently under way and the deal could take as long as six months to wrap up, says Joshi. The Wireless Access Providers' Association has already come out against the bid, arguing it will cost jobs and trim competition.
Vodacom believes if Vodacom Business absorbs Neotel, it will create an entity that can better compete with Telkom, tackling the incumbent in its strongest area. Analysts have pointed out that Neotel has focused on business offerings, ignoring the man in the street, for whom it was meant to be an alternative to Telkom.
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