Safaricom’s announcement of a four per cent decline in its full year net profits marks the end of an era of super profits in the telecom sector, analysts said, citing higher operational costs and the ruinous price war that has been raging in the industry over the past few years.

The mobile phone services provider announced that its profits for the full year ended March 2012 declined by four per cent to Ksh12.6 billion ($151.80 million).

Safaricom’s first-half pre-tax profit dipped by 48 per cent. This is the second successive time that the mobile phone company has reported a decline in net profits, underscoring the increasingly turbulent environment it is operating in.

The company’s 2011 profits were at Ksh13.1 billion ($157.83 million) compared with Ksh15.1 billion ($181.92 million) in 2010.
Analysts at Morgan Stanley said that as big money firms such as Airtel continue to improve their network coverage and cut tariffs, East Africa’s telecoms industry will find it increasingly difficult to grow profits. MTN and Safaricom could see their revenues decreasing with their profits already taking a beating as inflation hits subscribers.

After three years of share gains, Morgan Stanley forecasts MTN will lose at least three per cent of revenue share over 2011-14.

Across the continent, mobile companies have seen their voice profits grow at a much slower pace, as the voice market matures.

In 2011, MTN Ghana saw its voice revenues grow by only four per cent, compared with data revenues which grew by 65 per cent. Vodacom South Africa grew its 2011 voice revenues by 4.7 per cent, compared with a 33.9 per cent growth in data revenues.

Analysts at Kestrel capital say they expect Safaricom to grow its non-voice revenues to cushion it against price cutting, which is prevalent in the market.

“There is immense potential in data as overall population penetration is still at 22 per cent relative to that of voice, which stands at 67 per cent. M-Pesa acts as a hurdle against customer migration to other networks,” said analysts at the company in a research note.

Bharti has a wider presence in Africa, cutting across 21 countries. Forty three per cent of subscribers in sub-Saharan Africa are in countries where MTN is not active.

Last November, MTN Rwanda announced that it had reduced its calling rates, a sign that it was preparing for the entry of Bharti, which is known for giving huge discounts on calls within its network compared with the dominant player.

Bharti currently offers large discounts on calls within its network in Ghana, Nigeria, DR Congo and Kenya, compared with market leaders in these countries, which has seen it gain customers.

Safaricom has more than doubled its revenues, as more people have connected to its network in the past five years, but its profits are back to the same level as those of 2007.

In 2007 it had revenues of Ksh47 billion ($566.26 million) and net profits of Ksh12 billion ($144.57 million).  In 2012, it has reported revenues of Ksh107 billion ($1.28 billion) but net profits of Ksh12.6 billion ($151.8 million). 

Safariom’s future could lie in transforming itself into a financial services provider. M-Pesa, the mobile phone money transfer service, contributed the most to Safaricom’s revenues in the full year 2012.

M-Pesa revenues grew by 43 per cent to Ksh16.87 billion ($203.25 million) compared with Ksh11.78 billion ($144.92 million) in the same period in 2011. About three out of every four Safaricom clients have an M-Pesa account.

Even as Safaricom grows its M-Pesa product, the need for increased investments to improve its infrastructure and operations is cutting into its profits. Its cost of sales and operating expenses have been growing at a rate faster than the company has grown its revenues.

Voice revenues have been coming under pressure because competitors like Bharti, Airtel, France Telkom and Essar have been slashing their calling rates to expand their customer base.

But these same competitors have seen their costs increase and most of them are hardly making money.

Early this year, France Telkom — trading locally under the Orange brand — was looking for additional cash from its shareholders. In 2011, the company made a historic net loss of Ksh18 billion ($216.86 million) after making sales of Ksh9.2 billion ($176.59 million).

Saving grace

Safaricom’s profits could have dropped by a higher margin were it not for the fact that it raised its calling rates by an average of 25 per cent.

In the six months to September last year, the company made a profit of Ksh4 billion ($48.19 million), a 47 per cent drop compared with the same period last year. After the upward tariff review, the company’s second half net profits doubled to Ksh8.62 billion ($103.85 million).

Revenue went up 16 per cent in half-two principally due to the mid-year adjustment in voice tariff.

With the increased growth in the voice segment, Safaricom has had to invest more in its infrastructure. The investments have over the past 10 years averaged at about Ksh19 billion ($228.9 million).

By EMMANUEL WERE and PETERSON THIONG’O