As Regulatory Fine Hits MTN’s Profitability…

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One of MTN outlets in Lagos

Statistics from the half year financial results of MTN have revealed how the fine imposed by Nigerian Communications Commission (NCC) impacted its profitability, writes Kunle Aderinokun

The Numbers

MTN Group last week published its consolidated interim financial results for the half year ended 30 June 2016,which showed that it raked in revenue of R79.115 billion ($5.934 billion), representing 14.2 per cent increase over R69.304 billion ($5.198 billion) posted in the corresponding period of last year. The results, which revealed MTN also generated R367 million ($27.525 million) other income, disclosed that the company reported R18.882 billion ($1.416 billion) earnings before interest, tax, depreciation and amortisation and impairment of goodwill (EBITDA).

However, further analysis revealed that the telecoms giant group declared a loss after tax of R6.253 billion ($468.975 million) whendepreciation and amortisation and impairment of goodwill as well as regulatory fine were deducted. Unprecedented in the history of MTN, the loss after tax was significantly as a result of R10.499 billion ($787.425 million) fine by the Nigerian Communications Commission, the telecoms industry regulatory authority, levied against its Nigerian operation, MTN Nigeria, which seriously weighed in on its profit from operations of R5.191 billion ($389.325 million) realised as at half year and a R8.632 billion ($647.4 million) negative impact on the group’s reported headline losses (attributable loss), which stood at R5.489 billion ($411.675 million) . Besides the regulatory fine, the depreciation of local currencies against the United States, dollar also had substantial impact on the group’s results.

MTN Speaks

Lamenting that, it “continued to operate in a challenging environment for the six months ended 30 June 2016,” MTN stated that, “The financial performance for the period reflects the confluence of a number of material issues, which created the “perfect storm”.” It, however, added that, “the Group has made strides towards resolving these challenges although many of these factors fall outside of its control.”

According to the company, “The Group’s reported results were significantly impacted by the Nigerian regulatory fine. On 10 June MTN Nigeria resolved this matter with the Federal Government of Nigeria (FGN) and agreed to pay the FGN a total cash amount of 330 billion Nigerian naira (US$1.671 billion, using the exchange rate prevailing at the time) over three years in a full and final settlement. This was agreed in addition to complying with certain other regulatory conditions imposed as part of the settlement reached. The 50 billion naira (US$250 million) paid in good faith and without prejudice by MTN Nigeria on 24 February 2016 forms part of the monetary component of the settlement, leaving a balance of 280 billion naira (US$1.418 billion, using the exchange rate prevailing at the time) outstanding. In June 2016 the first scheduled payment of 30 billion naira (US$124 million) was made. The remaining cash payable at 30 June 2016 amounted to 250 billion naira (US$882 million).

“The Group has accrued the present value of 280 billion naira (US$1.418 billion, using the exchange rate prevailing at the time), which in total had a negative impact of R10 499 million on reported earnings before interest, tax, depreciation and amortisation and impairment of goodwill (EBITDA) and a R8.632 billion negative impact on the Group’s reported headline losses, or 474 cents on reported headline losses per share. The reported impact on the Group’s statement of cash flow for the period amounted to R5. 870 billion, which equates to the 80 billion naira paid during the period.

“During the period, R1.324 billion costs were incurred on a range of professional services relating to the negotiations that led to a reduction of R34 billion in the Nigerian regulatory fine to 330 billion naira (US$1.671 billion, using the exchange rate prevailing at the time). The board has exercised its judgement and approved the quantum of the professional fees incurred taking into account global benchmarks and the value delivered culminating in the final settlement of the Nigerian fine.”

Regulatory Action

NCC had late last year imposed a fine of a whopping N1.04 trillion ($5.2 billion) fine on MTN Nigeria for not disconnecting 5.2 million subscribers with unregistered and incomplete subscriber identification modules (SIM) cards within the stipulated time.

The commission claimed it issued the telecoms giant such a huge fine “for allegedly undermining efforts by the Nigerian government to tackle security challenges and the war on terror and allied crimes, as the telecoms operator has allegedly refused to deactivate unregistered mobile phone lines on its network”. After engagement with NCC and out-of-court settlement, the fine was reduced to N330 billion.

Looking into the Future

Not daunted by the fine and the consequent loss in its half year results, MTN has put the issues behind it and moved on. This is evident in its massive investment in telecoms infrastructure, which the company has highlighted in its group results. According to the results, capital expenditure (CAPEX) increased by 26.9 per cent to R13. 772 billion ($1.033 billion)

Industry analysts are of the opinion that MTN Nigeria has the prospect of even growing bigger following its new business frontiers with the 2.6 GHz licence it got from NCC to stream TV contents. The MTN TV service, a digital pay TV, which pilot launch has already been done, is expected to converge telecommunications, broadcasting and media.

They said with its new business model, it could recoup monies lost to fines within the shortest time possible.

MTN has also rolled out Fourth Generation Long Term Evolution (4G LTE) across its market, exploring the possibilities of the technology to serve as revenue base and also impact/contribution to economic growth across board.

Already Visafone, MTN Nigeria’s subsidiary, has begun to test-run the 4G LTE internet technology service for smart phone users. The launch of 4G LTE services by the merged entity of MTN and Visafone will roll out superior high-speed internet services in major cities, empowering Nigerians with the latest mobile broadband technology, which is expected to drive broadband penetration in the country from under 10 per cent presently to the targeted 30 per cent by 2018, in line with the Federal Government’s broadband plan and target.

With this in place, there is therefore the need for the company to explore mobile money as the emerging platform to drive revenue and grow the industry.

Challenge for MTN

Because of its position in the telecoms industry and its strategic role in the economy, MTN Nigeria must not falter. That is why the management led by its new MTN CEO, Ferdi Moolman, must revamp and engage more strategically to manage in the short term the revenue dip and in the long-term, stabilise the operations cum revenue drive.

Way Forward

Following the manner MTN’s case was handled, stakeholders and watchers are wondering what will become the fate of the telecoms operators and the industry at large. Many of them have posited that in the face of economic recession, which has led to drought in many sectors, information and communications technology, notably telecoms, is one key sector that could lift the economy out of the woods . This, has therefore, necessitated their spirited call for responsible regulations on the operators that have been described as the proverbial geese that lay the golden eggs, so as not to wipe off the economic gains that had been recorded over the years.

Going forward, they advocated for progressive regulatory environment that acknowledges the importance of IT as a major contributor to economic growth and a major alternative to oil revenue. According to them, poor regulatory environment has grave consequence for attraction and sustenance of foreign direct investments (FDIs), and it is important for the regulator to always be mindful of the peculiar operational challenges that operators face daily.

Some of the challenges, they pointed out, are epileptic power supply, vandalism and theft of network infrastructure, insecurity in certain parts of the country, multiple taxation and over regulation leading to interference with critical network infrastructure by unauthorised persons and disruption to services. All the outlined challenges must be addressed in concert, so singling out telecommunications operators for condemnation and sanctions in the light of very obvious and unaddressed national infrastructural challenges would be unfair and unproductive, they noted.

As a panacea to the identified challenges, the industry stakeholders and watchers expressed the need for a national policy on the security of IT infrastructure.