Once-off costs hit Huge profit

By Nicola Mawson, Contributing journalist

Johannesburg, 01 Jun 2009

Telecommunications company Huge Group has remained profitable, despite the challenging economic environment, it said on Friday.

However, shareholders took a hit in earnings and headline earnings per share as a result of once-off costs.

Huge said revenue improved 9% in the year to February, compared to the prior year, moving up to R605.8 million. Gross profit moved up 27%, to R125.9 million, and trading profit from operations rose 29%, to R47 million. Gross profit margin was 20.8%, up from the previous period`s 17.8%. The group`s first results after listing were for seven months.

The company`s results for the year include seven months of trading from TelePassport and one month of trading from CentraCell. As a result, the financials are not directly comparable with those of the previous period. However, the company said headline earnings on a per share basis decreased to 6.85c from 44.15c.

Huge said there were a number of once-off events that led to a reduction in operating profit that equates to 27.9c a share. The failed iTalk Cellular bid - the R3.4 million cost of which would have been capitalised had the bid succeeded - have been accounted for in the income statement, reducing earnings per share and headline earnings per share by 2.2c a share.

In addition, bad debts reduced trading profit from operations, impacting earnings and headline earnings per share by 2c a share.

Increased customer base

Retention incentives to retain staff - excluding the directors - cost the company R4.3 million, impacting headline and earnings per share by 2.9c. Integration and relocation costs were estimated to have cost the company R1 million, a 1c per share reduction in headline and earnings per share.

It said it had seen an increase in its customer base, revenue and gross profit as it expanded its operations in SA and Namibia. The company`s major operating division is Huge Telecom, which aids corporate clients, ranging from small businesses to major multinational corporations, to see reductions in their telecommunication costs through call management, alternative technology and least-cost routing.

Huge Telecom was formed out of the merger of TelePassport and CentraCell. Before the formation of Huge Telecom, both TelePassport and CentraCell were established least-cost routing operators, with 15 and six years` experience in the South African telecommunications industry, respectively. The results include a full year of trading from the merged entity.

Healthy growth

CEO James Herbst said the results were satisfactory, although there were obvious areas of disappointment. "We are operating profitably in a difficult economic environment, with revenue increasing and cash flow from operations showing very healthy growth. As this cash flow is predominantly annuity-based, it is a source of confidence."

Huge said cash flow from operations was up 306%, to R60.2 million, compared to the previous year.

The telecommunications company said its revenue was annuity-based and the book has a value of more than R50.5 million a month. This monthly revenue can generate annual turnover of R620 million and, assuming a gross margin of 21%, could contribute about R130 million to the gross margin of an existing competitor with a marginal corresponding increase to their overhead.

The value of Huge Telecom is, therefore, underpinned by this potential competitive marginal profit contribution, which it says underpins its inherent value.

"Despite current market conditions, we remain confident the group is able to build on its solid platform, retain its large strategic clients and grow further in the next year. Additional focus and effort will be expended on retaining existing clients and building new relationships."