Why Airtel Africa has a Record Profit Margin even as ARPU dropped

Why Airtel Africa has a Record Profit Margin even as ARPU dropped

Few quarters ago, we received an email from an ICT operator and integrator from an African country where Airtel Africa operates. The CEO wanted to understand the implications of competing for one of the Airtel’s outsourced partner opportunities. A brilliant businessman but yet inexperienced, he needed guidance. We signed him up as a client and I was going to be his strategy coach [he has access to me on phone most times]. I had already explained to him that Airtel was not leaving Africa as Airtel’s home country (India) was becoming a Jio nation. With the unmatched pricing innovations that Jio had unleashed in India, it may be possible that Airtel may exit the Indian market to focus on Africa and other markets. The rumour of Airtel Africa exit did not make sense unless Airtel was planning to close shop.

So, we went ahead and the firm participated and won. Just like that from nation to nation, Airtel Africa has become a fully-outsourced telecom operator, shifting infrastructure risks to partners and freeing up cash to invest in customer service and experience. I knew that Airtel Africa was going to improve customer acquisition and profits (this does not debunk the global consensus that OTT like WhatsApp is reducing profits; Airtel could have done better without those OTT solutions. In short, its ARPU continues to go southward). It was evident because Airtel has ceased to become an (infrastructure) telecom company, transmuting itself into a quasi financial company focused on deals and partner management.

… Airtel upgraded its business model. Today, Airtel is leaving the infrastructure business, outsourcing all to partners across Nigeria. Typically, such enables companies to conserve cash. The impact is now visible in the subscriber numbers. Provided Airtel continues to find partners, it would continue to grow at a faster rate than its peers.

Telecom equipment leasing and outsourcing of critical infrastructure pose risks – your quality is determined by the capabilities of the partners. Most people like to be in charge of their destinies.

By doing that transition, Airtel Africa was bound to reap the kind of cost-to-income ratios typical in banking. Yes, moving from an infrastructure business into a pure service business, Airtel can add few percentages in its profit margins.

Of course, there is risk as I noted in the quote above: “your quality is determined by the capabilities of the partners”. But the good news is that most of these infrastructure integration jobs are matured which means it may not be an issue provided the relationships are properly managed. There are many good providers in the continent who can deliver with absolute quality, anytime and anywhere. My client was one of them. Unfortunately, they bear the risks as Airtel has no risk exposure in any way in most of its operations.

In a recent piece, tracking how Airtel Nigeria is adding users, I wrote: “I do believe that Airtel is well positioned at the moment to unlock more values in Nigerian telecom sector. Its business model is certainly better …”

The Record Profit Margin

Airtel Africa is having record profit margin. It made $155 million last quarter compared with $58 million in the last quarter of 2016-17. Its latest result is record profit margin since its debut in Africa about a decade ago.

Airtel Africa’s post-tax profit for the quarter that closed in March is $154.52 million, up from $57.5 million in the last quarter of 2016-17. This is a record profit margin in the eight years since the company commenced its African operations.

Airtel Africa CEO, Raghunath Mandava said, “Africa revenues grew by 10.7% year-on-year led by strong growth in data and Airtel money transaction value. Mobile data traffic has grown by 88% to 70 billion megabytes in the quarter as compared with 37 billion MBs in the corresponding quarter last year. Data customers increased by 48% to 24.9 million from 16.9 million in the corresponding quarter last year.”

The New Airtel Africa

Airtel Africa has a new strategy: move into service business, leave infrastructure to outsourced partners and then enjoy a great margin with good cashflow typical when assets are leased or financed. The company confirmed that in the statement credited to its Africa CEO.

“Our strategy in Africa is centered on strengthening our distribution model and enhancing the consumer experience via network modernization,” [Airtel Africa CEO, Raghunath Mandava] added.

Yes, the business is unambiguous: improve distribution model and enhance customer experience. That network modernization would be carried by those outsourced partners. With technology moving very fast, the risk goes to those partners to deliver continuous modernized infrastructure. If not, Airtel Africa moves on to something new. You can also see that vision in another part of that piece from the Global CFO.

Nilanjan Roy, Airtel global CFO said that the steady improvement  … by strict cost controls. “We have seen a net revenue growth of 13.4% year-on-year, while the operations expenditure has declined 5.4% in the past year. The business has entered into a sustainable positive cashflow era, …”

That summarizes the whole points: there is strict cost control, reduced “operations expenditure” and a business built on “positive cashflow era”. That “era” is indeed a new era because when you are improving revenue and experiencing record profits while reducing investments, you have a new era.

The ARPU Drop

Airtel Africa recorded marginal drop in ARPU (average revenue per user) of 1.8%. That number is very impressive (in a quarter) even though you can consider it a huge number if it keeps compounding over years. It is impressive because other telcos are seeing bigger drops. Airtel Africa managed that better because of its improved customer service which keeps getting better. In my village (in eastern Nigeria), at least, its services have improved that people are dropping competitors’ sim cards.

However, Airtel Africa’s average revenue per user fell by 1.8% to $3 year-on-year. At the end of March this year, Airtel Africa had a data customer base of 24.9 million, accounting for 27.9% of its total customer base compared to the previous year’s 22%.

The ARPU achievement is highly commendable if you see what OTT services have done to telcos. I noted here that MTN Nigeria has seen its ARPU dropped from $22 (in 2005) to $4.14.

MTN Nigeria Made N81.4B Revenue in Q1 2018; ARPU Dropped from $22 (2005) to $4 (2018)

All Together

Airtel Africa is growing and has become very profitable. Besides everything it has done, this is a testament that business model can be as impactful as technology-driven innovation. The way you structure your business and how you relate with partners and clients could be catalytic in your success. Do not make innovation to just focus on products (innovation), neglecting business models. Airtel is no more your regular telecom operator; its new business model (a quasi-financial service firm with telephony and mobile internet products) is the reason it is winning even as the products experience marginal improvements.


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