Kcell outlines growth strategies for 2020

After a 75% stake was acquired by Kazakhtelecom from Telia and Fintur Holdings at the end of 2018, Kazakhstan-based mobile operator Kcell has continued to grow its business backed by the new shareholder, with net sales up 2.4% year-on-year to KZT 114,170m (US$295.6m), while EBITDA excluding non-recurring items also increased year-on-year by 31.0% to KZT 47,997m (US$124.3m), all in the first nine months of 2019.

Kazakhtelecom’s acquisition of the stake in Kcell was a significant M&A play in the Asian region, notably winning the Telecom M&A Deal of the Year – Asia at TMT M&A Awards 2019 organised by TMT Finance on November 26.  

Kcell has been listed on the London Stock Exchange and Kazakhstan Stock Exchange since 2012.

Talking to TMT Finance, Kcell’s CEO Kaspars Kukelis outlined the business’ development and its growth strategies for 2020.


Q: As the MNO market leader in Kazakhstan, would you please give our readers a brief summary of the business, the services provided, current subscriber base, market share, spectrum acquired, infrastructure portfolios, etc?

A: If we’re talking about the market leadership, every telecom operator in the market could legitimately call itself a leader in a certain aspect. In the past, the market was dominated by two players; and now it has three reasonably competitive players. If looking at the market from a revenue perspective, we are the largest operator in the market. In terms of our market share, however, there is not an independent way to measure this properly, so we, together with our competitors, do not really release that information publicly.  

On subscriber base, we are in a market that has a relatively high penetration rate of 114%. Recently this figure has been decreasing but overall the level remains high. While there has been a slight decrease in the company’s subscriber base, we have seen a substantial growth in our revenues and ARPU. If you look at our ARPU, the year-on-year growth is around 19%. The growth comes despite the removal of inactive mobile SIM cards which has been countered by customer optimisation for our service.

Also, we have been consistent for a while with our customer acquisition policy where we have focused on the quality of customer acquisitions and not just the quantity. So even though we are deleting more inactive SIM cards from our base than that we are acquiring, but we would like to make sure that we are acquiring active customers, which would bolster our long-term revenue base.

In terms of spectrums acquired, I think we are well positioned as a standalone operator. We have certain pieces of spectrum that could potentially be utilised for 5G. We also have a pretty good spectrum portfolio in LTE where we continue to optimise its current usage as we slightly shift from 3G frequencies. It makes sense to carry less 3G traffic when it is possible and it’s also practical for LTE where we can better utilise every MHz we have.

We have also launched new layers in 2,100MHz for 4G in major cities that we've seen as very effective to manage the capacity where it's necessary. Basically, we have our portfolio in variable spectrum in 2,600MHz for the future when it becomes necessary, and we are also bidding to collect rights spectrum at 3,500MHz, so I think in terms of spectrum, we are well positioned.

As for infrastructure portfolio, currently we are running a standalone network. We are in a sharing agreement on LTE with Beeline, which is VEON’s subsidiary. But we have received the termination letter from Beeline, so we are now in the process of the two-year exit from that sharing agreement with Beeline. In terms of telecom towers, we don’t disclose the number of towers, but we say that our network is mostly rooftop-based.

Q: Do you have any plans for building more towers in the next 12 months?

A: It is dependent on the decisions made within the group about future infrastructure development, because there are two mobile operators within the Kazakhtelecom group, so different options could be explored, but there are possibilities to substantially optimise the footprints and expenditures of all the companies within the group.

Q: We have seen a big growth in the financial performance of Kcell for the first three quarters of this year, compared to 2018. What are the highlights and what have been the drivers for the growth?

A: Growth has been driven from, among other things, the monetising of our existing base by the further bundlisation of customer base, so more users going from pay-as-you-go to bundles. Also, as mentioned before, we have increased the quality of the new customer acquisitions.

Q: Kazakhtelecom acquired a 75% stake in Kcell. What changes has the new shareholder Kazakhtelecom brought to Kcell? Any significant changes in terms of the business plan from Kazakhtelecom comparing to the previous shareholders, Telia and Fintur?

A: One of the most significant changes is that Kazakhtelecom does not accept a decline in revenues, so there are major changes in the expectations. But we're delighted that we have been able to respond in terms of meeting those expectations.

Q: What is your business development and growth strategy for 2020?

A: First of all, we have a lot of things that we had to when Kazakhtelecom acquired us. Basically, the improvements in performance that we have achieved can be attributed to the things that we implemented quickly. There are certain things that take some time, however, there have been also some technologically important improvements which could take six to 12 months to fully implement.

The Implementation of this new technology will also require procurement of a separate hardware and software and delivery installation. Those are things that are currently in progress.

Therefore, for us, it is very important to deliver minimal level of quality in the network in the retail in other areas. The most important thing is to stop losing market share, that had been happening for extended period of time, and ensure that the company remained sustainable. We have been able to focus on these key strategies so we can substantially grow the financial health of the company.

Q: What’s the strategy of telecom infrastructure, like telecom towers? We have seen some trends like mobile operators divesting their towers in Europe and Southeast Asia, what do you think of those moves?

A: For us, probably some kind of restructuring of assets might be considered for the group in the future. But that's a separate subject for a formal discussion. In the market we haven't seen any substantial players that would come up with a tempting offer to buy infrastructure and, at the same time, I can't say that we are keen to sell.

We’re running the company in a pretty conservative and a reasonable debt to EBITDA ratio, so we don't have any huge motivation to sell towers. Also what we've seen from some of the operators in developed markets who did early deals around seven years ago, not all of them turned out to be profitable and we saw some of them even attempting to buy back their assets at double the price they were sold. So I don't feel like this is something we would like to go through.

Q: What’s your investment strategy on datacentres?

A: In terms of datacentres we are currently using Kazakhtelecom’s datacentres, therefore, I don't see any reason why we should duplicate that kind of investment.

Q: Kcell also has a diversified portfolio covering digital payments, OTT, etc. You have become the country’s largest digital ecosystem. Would you like to talk about your digital strategy? And how has Kazakhstan developed in digital transformation?

A: We have been talking about digital transformation for years, and what makes me really uncomfortable about all these innovative services is that it's so easy for us to reach a substantial scale in importance. It’s really easy to spend the money to generate some kind of excitement, speeches, publications, all those things. But what has been seen mainly among the well-established telecom operators in the world is an amount of shareholders' value had been basically just dumped into all sorts of these super sexy tech products. I definitely don't want to be another story like that.

So that's why I don't feel myself so excited just about having it. I'm keeping the team and myself very focused on scaling it in a reasonable manner. Even if you’re not making money, at least scale it to the extent that has certain impact on the market. Do all these nice things in the proper scale and profitability, and integrate it in your existing and future business model.

Q: Kazakhtelecom also acquired and now owns Tele2-Altel, another mobile operator in the market. What do you think of the acquisition? Would it be possible that a market consolidation between Kcell and Tele2-Altel would take place, with the support of Kazakhtelecom?

A: There are certain limitations that had been imposed by the regulator in order to approve. The right party to talk about it will be Kazakhtelecom. As per my understanding in the coming three years, the merger is not possible. So the brands should remain there; at least the commercial part of the companies should have Chinese wall. As I understand on the technical part, on the technical backbone, there could be sort of some optimisation.