The ICT sector is posting losses as costs outpace revenue, something has to give

As we know, you don’t want to get caught by a dying horse’s kick. Yet, we all were brutalised by the last kick of the ZWL currency in Q1 2024. The telecoms sector was not spared from this and now that the Postal and Telecommunications Regulatory Authority of Zimbabwe (Potraz) has released the Q1 report, […] The post The ICT sector is posting losses as costs outpace revenue, something has to give appeared first on Techzim.

The ICT sector is posting losses as costs outpace revenue, something has to give

As we know, you don’t want to get caught by a dying horse’s kick. Yet, we all were brutalised by the last kick of the ZWL currency in Q1 2024. The telecoms sector was not spared from this and now that the Postal and Telecommunications Regulatory Authority of Zimbabwe (Potraz) has released the Q1 report, we can see just how that all transpired.

There is a lot we can glean from the report but one of the major highlights is just how challenging the Zim economy is to operate in. We have self inflicted policy stuff and climate problems only exercebate the challenges.

Rising revenues

The sector saw the following growth figures:

  • Mobile network operators (Econet, NetOne and Telecel) saw their revenues rise by 65.6%,
  • IAPs (Liquid, TelOne, etc) by 63.43%,
  • Postal and courier services by 62.51% in real terms

Seeing this, you would think it was a solid quarter but you’d be half right.

Do note that the above growth figures are adjusted for inflation and so are not inflated by the massive depreciation the ZWL faced in Q1. In any world, in any economy, the growth figures above are impressive.

For MNOs and IAPs, this growth was mainly driven by growth in data and internet usage. Zimbabwe still has aways to go in the internet usage game even though we have had steady growth for years.

In Q1, mobile internet/ data usage increased by an impressive 24.9%.

There is room for even more growth because the country still has an internet penetration rate of just 75.3%. Which is not as impressive when you factor in multiple device ownership in certain demographics.

So, conservatively, there is at least a third of the country yet to be served. Of those with internet access, their usage is capped by their financial challenges. Should internet access trend cheaper and economic challenges begin to reverse, usage would spike.

Anyway, there is room for growth and it appears the sector managed to capture it in Q1 2024. The problem comes when you consider how much it cost to get that growth.

Faster-rising costs

Here’s how much operating costs rose by in real terms:

  • MNOs – 140.97% (compared to 65.6% revenue growth)
  • IAPs – 78.94% (compared to 63.43% revenue growth)
  • Postal and courier – 127.55% (compared to 62.51% revenue growth)

You don’t need to be an accountant to know that when costs outpace revenue like this, you have a problem. The problem is that this has been the case for years. Operating costs have been outpacing revenues and we have had the challenging economic conditions to thank for that.

This is a huge problem because this cannot continue on indefinitely as there will be serious financial sustainability questions that would be raised.

We have to remember that this is a capital intensive sector and prolonged periods of low profits affect investment into infrastructure, which impacts the quality of service and capacity to serve the underserved. Which in turn will affect revenues. It can become a spiral to the bottom.

Some have argued that the rising operating costs are due to poor cost management and operational efficiency. It’s not entirely out of the question but I would argue it’s not the main cause.

In Q1 we were in a transitionary period as we prepared to say goodbye to the ZWL and welcome the ZiG. That only served to muddy the waters. Otherwise we are familiar with some of the reasons for the crazy operating costs:

inflation, currency depreciation, power supply issues, infrastructure maintenance, regulatory compliance and customer service demands.

If the ZiG manages to hold on to its value better than the ZWL did, the sector might be looking at improvements going forward.

However, as Potraz notes, there are some serious challenges that are likely going to weigh down on whatever positives a more stable currency would give.

Upcoming challenges

We are still feeling the effects of El Nino. Here’s how the drought it caused will affect operators:

  • Demand-Side Impact:
    • Expected to reduce aggregate demand as consumers prioritise essential expenditures like food over telecommunications services.
    • Lower disposable incomes, especially in agro-based sectors, may lead to a contraction in demand for data services and discretionary ICT applications.
  • Supply-Side Impact:
    • Potential power generation issues due to low water levels at Kariba Dam could increase operational costs and impact service quality.
    • Increased reliance on alternative power sources could further strain financial resources.

So, although ZiG is more stable than the ZWL was in its last quarter in action, these challenges may delay the benefits of the improved macroeconomic conditions.

Profits

Back to Q1 performance, we saw how operating costs grew faster than revenues. How were sector profits though? We do not have the full picture as we only have operating costs, which don’t include stuff like depreciation, taxes, interest expenses, and other non-operating expenses.

However, we can still get a basic picture of what it looks like.

Mobile operators recorded revenues of approximately ZiG 910.46 million against ZiG807.6 million in operating costs. This makes for profits of ZiG102.86 million (about $US7.6 million).

When you consider the boatload of expenses still to be deducted from that basic profit, you can clearly see that operators did not have the best of quarters.

See, we find that for Econet, in their annual report, direct network and operating costs plus staff costs were less than depreciation and exchange losses. Non-operating costs as a whole slightly beat out operating costs.

So, if we conservatively estimated non-operating costs to be equal to operating costs, we would see that the mobile network operators posted losses in Q1. Econet did post massive losses in their year ended February 2024 and I think we can conclude that the other 2 fared even worse.

For IAPs, revenues reached approximately ZiG 451 million whilst operating costs reached approximately ZiG371.4 million, making for profits of ZiG79.6 million (US$5.9 million). Again, after factoring in non-operating costs those profits would be much lower.

The situation is downright depressing when it comes to postal and courier services. Revenues reached approximately ZiG30.3 million whilst operating costs reached a crazy ZiG46.9 million. Which means a loss of ZiG16.6 million (US$1.2 million) before we get to non-operating costs.

Operating costs have been higher than revenues in this subsector for 4 quarters in a row.

Not the prettiest picture

Zimbabwe as a whole is struggling and so you would expect to see most sectors struggling too. So, the above is not a surprise. We shall see if the more stable ZiG will help the sector recover.

The saving grace for the sector is the opportunity for growth. In the relative short term, the drought may impact demand for internet services but in the long term, there is massive potential for growth and whichever companies have the infrastructure to serve the nation stand to reap the benefits.

There is that whole disruptive satellite technology about to swing in like a wrecking ball and so not all will capture the growth we talked about.

Whatever the case, it’s going to be interesting.

Also read:

The post The ICT sector is posting losses as costs outpace revenue, something has to give appeared first on Techzim.

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