The Huge Group has issued a trading statement warning that there is a reasonable degree of certainty that its earnings per share (EPS) and headline earnings per share (HEPS) for the first half of the 2010 financial year will be 110% to 130% lower than the 26,18 (EPS) and 26,18 (HEPS) cents reported for the previous half year.
According to a statement from the company, there are a number of reasons for the decrease in EPS and HEPS.
Revenue effects include a reduction in cellular airtime and other revenue of R14-million from R262-million for the first half of 2009 to R253-million for the first half of 2010. Weighted average daily cellular airtime revenue is down by R75 000.00 per average calling day from R1,918-million per average calling day to R1,843-million per average calling day. There were 131,5 weighted calling days during the first half of 2010 versus 132 weighted calling days during the first half of 2009. This has had the effect of reducing gross profit by R2,8-million based on current discounts received from the mobile network operators, with the after tax impact on earnings amounting to R2,016-million. An increased focus on sales coupled with the appointments of a MD: sales and a MD: channel & distribution at Huge Telecom, should result in an improvement duringthe second half.
Gross profit effects include the contractual seasonality or timing patterns of mobile network contracts, with a contract period of 24 months, has had the effect of reducing connection incentive bonuses earned during the first half of 2010 by R13-million from R43-million a year ago to R29-million during the period under review. This difference is expected to reverse in the first half of 2011, but has had the effect of reducing gross profit by R13-million with an after tax impact on earnings of R9,4-million.
Meanwhile, stock of airtime revenue on 6 000 unallocated SIM cards of R11,5-million has been written off during the period, with an after-tax impact of R8,2- million. All 6 000 unallocated SIM cards have now been allocated to customers.
Operating expenses during the first half of 2010 have increased by R11,6-million compared to the previous year as a result of:
* An increase in salary expenses of R6,5-million, with Huge Telecom Investing in human capital to advance its medium-term growth aspirations;
* Non-recurring restraint of trade bonuses of R2,4-million paid to staff (but not directors of the company) in the prior half year but amortised during the current half year;
* An increase in bad debts of R2,6-million when compared to the same period last year, mainly due to the weaker economic climate. The bad debt ratio of 1,7% is, however stable and within an acceptable range;
* Legal fees are R2-million higher than the prior period, but are considered non-recurring;
* Consulting and audit fees are R1-million higher, with the 2009 year-end audit being particularly complex as a result of the accounting treatment of certain transactions. The increase in fees is expected to be non-recurring;
* Depreciation and amortisation is R1-million higher due to high capital expenditure in the prior year. The company's infrastructure was upgraded and improved and this is expected to positively contribute to future success;
* The after tax impact of these items of operating expenses was R8,352-million.
Other effects on earnings include the impairment of derivative contracts currently held by the company, which negatively impacted pre-tax earnings by R6,3-million in the current period due to downward movements in the Huge share price. The total possible future exposure to these derivatives contracts amounts to R6,9-million.