Digital TV delays, SEACOM and regulation challenges

ALEC HOGG: It’s Tuesday September 28 2010 and in studio, Craig Venter, chief executive of Altech. Interim results out today, a bit disappointing Craig. I guess the most exciting thing about all of this is, is that you say the second half is going to be a whole lot better.

CRAIG VENTER:  I think, Alec, definitely, you are 100% right. I think when one looks at interim results, obviously full year is the full year when we pay dividends and it’s the full year results. The interim side, obviously timing plays a major portion in interim results and I think you would understand that I think you know that. The issues that were specific to the first six months and these are specific adverse issues, which were outside of our control that have nothing really to do with our health of our businesses, affected us in certain areas, in the first six months. Those things won’t recur, in fact they have been rectified already and as I say, they are not related to our internal businesses, they are actually external parties. We actually have a very high degree of confidence in terms of that. The results are just basically timing based. So yes, down on earnings but for the full year, very, very confident, I’m not being kept up late at night or not sleeping at night because of any problems in our companies. I’m very, very buoyant, very positive for the remaining portion of the year and I think Altech’s track record over the last ten years, in terms of positive earnings growth, will be maintained and we’ll go forward accordingly.

ALEC HOGG: It’s a lot of work then, the second half.

CRAIG VENTER:  Yes, a lot of work, no question but as an example, let me give you an example so that it’s not just words it’s actually factual information. The example is, the Rwandan government in East Africa indicated to us that they weren’t ready to accept a whole lot of SEACOM bandwidth from us because they were still building their internal fibre terrestrial network. They also indicated that they didn’t want us to traverse into Rwanda and build the Kampala-Kigali link from Uganda into Rwanda with our fibre, where we are burying fibre in the ground into Rwanda because they weren’t ready for it at that point. So, again, it’s timing. Now, that I respect, the Rwandan government, they’ve subsequently, not withstanding the delays, have now placed the contract on us for the SEACOM bandwidth. We’ve now sold all of the SEACOM bandwidth that we purchased through our strategic alliance with SEACOM. We’ve now accessed Rwanda through a duct, which they provided us, so all of that now has been rectified. So, that profitability is there and that’s one example of these things that won’t recur that actually are timing issue based. Another example would be, you put up a network of 6000 kilometres of fibre, you obviously want redundancy for your customers, you don’t want because of a fibre because the municipality is doing water reticulation or water works or whatever and they cut the fibre, you want to have redundancy and another ability to not affect the service to your customers. So, we kept our satellite network, if you will, for quite a long period of time in order to ensure that our customers weren’t affected through any cuts in either the marine cable or the terrestrial fibre cable.

ALEC HOGG: That’s more expensive obviously.

CRAIG VENTER: Obviously yes, it’s eight times more expensive and yes, SEACOM had two cuts in their undersea cable.

ALEC HOGG: Are you insured for that Craig?

CRAIG VENTER: Well, it’s not covered through an insurance policy Alec but it is covered in our agreement with SEACOM, our legal agreement. So, we made a claim on SEACOM and we were paid accordingly. It did not compensate us for the amount of disruption that it caused. We got $76 000 out of SEACOM.

ALEC HOGG: And you had to pay more to keep the service up.

CRAIG VENTER: Yes.

ALEC HOGG: East Africa, generally, looking at these results seems to have been very disappointing. Is it just a timing thing?

CRAIG VENTER: It’s just a timing issue Alec, as I’ve said. As I say, we kept our satellite network running, we now don’t need the satellite network, we’re only using satellite for very remote areas that fibre doesn’t get to. So, that cost is not there going forward for the next six months. That’s over R20m, the cost alone. As I say, Rwanda delays, we’ve now rectified that. Last year we got a once-off connection fee from SEACOM, R32m that came through in August of last year. We’re now August a year later, it’s a connection fee, it’s a once off, it’s non-repeatable. So, that’s obviously another issue.

ALEC HOGG: You’re not unhappy about what’s going on in East Africa, it’s just a temporary dip in the results then?

CRAIG VENTER: Yes and things that are really outside of the control of our company and to a certain extent, things that have already been managed and that’s why we are so confident on year end.

ALEC HOGG: Other parts of the group though are also having interesting times, I guess you could put it that way. Well, to be down by 25% at a pre-tax level in the first half of the year tells you that it isn’t as good as normal. Autopage, maybe to start there, the slower growth, we are seeing more competition amongst the cell phone companies and clearly that would have a knock-on effect. What are you doing to overset or overcome these kinds of challenges?

CRAIG VENTER: I think the main thing you’ve got to do and what we have been doing is, at least we know what the playing field is, much unlike digital migration, where we are waiting for government, for the DOC in terms of the standard debacle, which is affecting the entire industry and the country for that matter and the ICT growth for that matter, in the country. Interconnect fees in cellular were announced, you budget accordingly and we budgeted accordingly. So, we’ve managed that interconnect cut, it’s had a very marginal affect on our profitability. I think that what we did do and what we believe is important is to make sure that out of the million subscribers that we’ve got within Autopage Cellular, that the ones that are suspect and are not being actively used, we clean out the base. We cleaned out a number of Vodacom subscribers off our Autopage Cellular subscriber base, which did have an affect on us not meeting our volume incentives with Vodacom. So we didn’t get our higher margin that we normally get. So again, that’s another reason why I know that won’t be repeatable in the next six months and again, gives me more comfort for Altech as a group for the year-end. So, we’re focusing very much on those kind of clean out issues, operational efficiencies, back office integration, making sure we can provide cellular communication at a much cheaper cost because of the interconnect costs etcetera or cuts. Our business, Autopage, met its budget for the six-month period and that’s in the segmental breakdown and it will meet as profit figures for year-end. So, we really haven’t seen a major downturn on the cellular side and it’s largely because we know what we’re dealing with, we budgeted accordingly and we’re doing the right things. I think on digital migration, I think at Altech…

ALEC HOGG: I’d like to talk about that, before we go away from Autopage though, Stephen Blewett, your former CEO there and Altech does seem to be a good training ground for many people. You’ve got some wonderful graduates all over the industry but he’s moved on to Telkom media, well, Telkom rather the mobile operation there. Is that going to be helpful to have someone, who was that close to you in the past, at the Telkom, at the new mobile player or does it actually count against you?

CRAIG VENTER: Alec, it’s good for us. I think Steven Blewett has been a colleague of mine for many, many years and I actually promoted him into that position at Autopage in the past. He worked very closely with me for seven years and quite frankly, I think you are right, we do have some exceptional people within Altech and we do provide good training I imagine but if I look at my executives and the ones that are around that are actually delivering the results, many of them have been with us for 20 – 25 years. Guys that are executives, Wessie van der Westhuizen, Johan Gellatly. So, Steven Blewett was with us for seven years, he’s joined…

ALEC HOGG: Is it going to be a good thing that he’s at Telkom?

CRAIG VENTER: Yes, he’s joined Telkom Mobile, he’s the sales manager there or sales director at Telkom Mobile.

ALEC HOGG: Maybe you can squeeze a better deal out of him. That’s what I’m getting at [laughing].

CRAIG VENTER: Yes, yes, I think it works to our advantage. We have engaged with Telkom Mobile to be there partner and we do plan to be very instrumental and we’ve followed that philosophy throughout.

ALEC HOGG: It’s been a good strategy that, Craig, that you haven’t stuck with one ship, as it were, that you are able to play with MTN or Vodacom or Telkom and, presumably, also with Cell C.

CRAIG VENTER: Correct Alec. We decided that right in the beginning when we started the business 13 years ago or 14 years ago. We’re very close to Cell C, I just spent a lot of time with Lars Reichelt, the CEO of Cell C, recently in the last two weeks. Vodacom, MTN long lasting partners for 13 years. Telkom Mobile now. Neotel, Ajay Pandey and what Neotel is doing, we are a partner of theirs. So, we are a partner in supplying airtime through ATMs, ABSA, Nedbank ATMs, which we’ve done very effectively on behalf of all of those operators. For us to be independent and give the customer the choice has been a good strategy.

ALEC HOGG: You’ve mentioned digital migration and the frustration that this is   causing for you, particularly at UEC, which makes the set top boxes. Is there any update on when South Africa will finally take a decision to migrate digitally?

CRAIG VENTER: Alec, unfortunately no, there’s no real clarity that is coming through. I’ve asked to see the minister a number of times, he’s been very busy and hasn’t been able to see me but I do believe that clarity is required. This is not an Altech issue, it’s not a specific Altech issue. e.tv, M-Net, Multichoice, I think a number of companies have expressed and have had press conferences relating to these delays, which seem to be quite unexplainable because cabinet decision comes from cabinet three, three and a half, four years ago saying DVB technology convert, SABC, Sentech convert all of their broadcasting transmitters. Industry, Reunert is asked to do a pilot, Altech is asked to do a pilot for two years. Results are exceptional based on DVB technology, it’s four times cheaper than ISDB technology and the DG gets invited to Brazil and Japan and the red carpet gets rolled out and all of a sudden, she comes back and there’s a re-evaluation on the standard, when industry has spent R700m plus on DVB technology. So, to me, UEC tomorrow can start with ISDB technology. We have the ability, we have 386 software engineers, we’ve been in this business for 15 years, we have a company that does over R1bn worth of sales to 48 countries around the world. We’re supplying digital migration set top boxes right now to Australia, 24 000 boxes for their digital migration programme and surprise, they are using DVB technology. So, we’ve already done that and supplied it to Australia, we’re already supplying other countries in Africa already, even though the digital migration programme in South Africa hasn’t been finally approved and it’s not going forward, we’ve supplied through UEC to other countries in Africa.

ALEC HOGG: So, we’re dropping behind again in South Africa just through dalliance on which technology to go with?

CRAIG VENTER: I can tell you Alec, it goes beyond that and again, I’m not speaking on behalf of the Altech group here, I’m talking in terms of ICT sector growth. As Moneyweb and as a company, you know about frequencies, you know about broadcasting and the scarcity of frequencies in this country. What concerns me is that we as Altech will be, probably, in a more powerful position if it went ISDBT, the Brazilian and Japanese standard because we’re the only company in the country that could do that from tomorrow. However, there would be a three to five year delay because the ITU, International Telecoms Union contract would have to re-signed with the South African government, which binds all of the southern African countries. So that would take a tremendous amount of time. You have to then get each country in southern Africa to agree to go ISDBT instead of DVB, which is going to take time.

ALEC HOGG: It will be lucky if you can do that in three to five years. Interesting how the Brazilians and the Japanese have been such a potent lobbyist with the government here. Then of course it causes ructions further down the scale. We’ll be watching that closely Craig but I think as closely will be the second half of the financial year. That your shareholders will be hoping that you can claw things back, that you can get those profit margins back above 10% and in fat, that you can lift your profits for the year as a whole. Are you confident that you can do it?

CRAIG VENTER: Very, Very confident Alec. Altech’s track record has been there, I’ve been CEO for 13 years, I’ve worked for Altech for 22 years. I think our positive earnings growth year on year for the last ten years has been there and we stand behind it. We call a spade a spade, we work hard and I think people need to know and I think the shareholders will know that the confidence is there and there’s no issues that are really concerning within the Altech group and we’re confident for year end.

ALEC HOGG: That you will be able to lift the earnings?

CRAIG VENTER: Undoubtedly, yes.

ALEC HOGG: Craig Venter, chief executive of Altech.

First published on Moneyweb

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Digital TV delays, SEACOM and regulation challenges