VEON Ltd. (VEON) Earnings Call Transcript & Summary

Hello, and welcome to VEON's 2Q '26 Results Presentation. [Operator Instructions]. Today's presentation will be followed by a Q&A session where we will take questions from the room as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. Anand Ramachandran, you may begin.

Thank you, Lucy. Good morning and good afternoon to everyone joining us for VEON's second quarter results. We are the largest NASDAQ-listed company in Dubai, and we are taking this opportunity to host this call out of New York and are very pleased to be able to doing that. So we thank the people in the room who've joined us. Thank you for the people who've joined us on the webcast. My name is Anand Ramachandran, Chief Corporate Development Officer. Let me introduce management in the room. Next to me is Kaan Terzioglu, our Group CEO; next to him, Burak Ozer, our Group CFO. As usual, Kaan will begin with the strategic and operational highlights, followed by Burak with a review of our financial performance, and we'll then open up the call for Q&A. Before we begin, do note that today's presentation contains some forward-looking statements involving risks and uncertainties. Further details are available in our SEC filings, including our Form 20-F. Our earnings release and presentation are also available on our Investor Relations website. With that, let me hand the call over to Kaan.

Thank you, Anand. Good morning, everyone. So exciting to have you in the room here in New York and do this earnings release here. Beyond excellent financial results, this quarter marks another important milestone in VEON's transformation. We are becoming much more than a telecommunications company. Today, VEON is building one of the world's largest digital ecosystems across emerging markets, combining connectivity, financial services, digital consumer platforms and enterprise solutions. Our telecom networks connect more than 150 million customers. Our digital platforms deepen those relationships every day. The result is stronger growth, stronger cash generation and increasing shareholder returns. Most importantly, today's results give us the confidence to raise the outlook for the year. Let me explain how we think about VEON today. Everything begins with connectivity. Connectivity is not the destination. It is our foundation. It is our competitive advantage. It gives us scale, it gives us distribution edge. It gives us trust, and it gives us daily engagement with millions of customers. On top of that foundation, we have built three digital growth engines: financial services, digital life, digital enterprise. They reinforce one another. Every new service strengthens the customer relationship. Customers stay longer. They spend more. They generate more data. Better data improves AI. Better AI creates better products. Better products create more cash. That cash allows us to invest again. That is the VEON Flywheel. Once you understand the Flywheel, results are much easier to understand. Growth is broad-based. Telecommunications continues to grow twice fast compared to traditional players. Digital is growing substantially faster, multiple times faster. Digital now contributes almost 27% of our total revenues. Cash generation continues to improve. Since August '24, we have already bought back $183 million worth of shares. Today, we are taking the next step. Starting with this year, we commit to canceling at least $100 million of shares every year, not as a onetime action, but as a sustainable capital allocation framework. I am particularly pleased with the consistency of our execution. That consistency is why we are raising our full year guidance. A little color. Reported EBITDA growth was affected by three exceptional accounting items. Bangladesh benefited from a provision release last year. Profit comparisons include the Pakistan Tower transaction last year. And this year, it includes the non-cash fair value adjustment on Kyivstar Group warrants. If you adjust for these items, our underlying business is even stronger. Revenue grew 18%, EBITDA grew more than 15%. Like-for-like earnings per share actually grew 88% year-on-year. This is the clearest measure of our true momentum. On the subject of consistency, Pakistan continues to deliver outstanding performance. Ukraine continues growing with extraordinary circumstances. Kazakhstan, Uzbekistan and Bangladesh all delivered. This matters. It tells us that VEON operating model is becoming repeatable across markets. Only a few years ago, digital represented a relatively small part of VEON. Today, digital has become one of our main growth engines. Our digital platforms now reach more than 227 million customers. Importantly, all three digital businesses are profitable: Financial Services, Digital Life, Digital Enterprise. They scale efficiently, they require less capital and they generate attractive returns. Digital revenues grew more than 53%. Digital EBITDA increased more than 66%. Digital is now generating profits and cash more than telecom business. Financial Services best demonstrates how the Flywheel works. We do not begin with lending. We begin with engagement. Customers use payments every day. Daily engagement builds trust. Trust creates data, data improves underwriting. Underwriting enables lending, insurance and wealth management. Pakistan demonstrates this model at scale. JazzCash has evolved from a payments application into a complete financial ecosystem. Our acquisition of TPL Insurance represents another important milestone in that journey. And our Mastercard partnership will accelerate AI-enabled financial products across every market. If there is one slide, I hope you will remember, it is this one. Connectivity brings customers. and digital deepens engagement. Engagement increases loyalty. Higher cash generation funds better products. Every turn of the wheel strengthens the next. That is why multiplay customers already generate significantly higher value and why we believe we are still in the early chapters of the story. With that, I will hand over to Burak to take you through the financials in more detail. Burak?

Thank you. In second quarter, revenue grew 17% to $1.27 billion, with growth across all of our five markets. First half revenue also grew 17% to $2.47 billion [Break] 7.6% to $929 million, driven by disciplined pricing and rising customer engagement. Digital revenue grew 53.6%, reaching $342 million, reflecting broader adaptation across platforms and products plus our recent acquisitions. EBITDA reached $552 million, up 6.2% at a 43.4% margin. First half EBITDA grew 11.5% to USD 1.07 billion. Telecom and Infrastructure EBITDA were $428 million, down 3.8% at a 46.1% margin. As Kaan noted earlier, the year-on-year comparison reflects last year's Bangladesh provision release. Digital EBITDA grew 66.2% to $123 million. Digital is less capital intensive than telecom, and that's driving strong cash conversation as it scales. Profit and EPS for the period reflects $489 million of gain on the Pakistan tower sale in second quarter of last year and a $22 million fair value loss on KGL warrants in this quarter. Cash generation was strong in the period. Operating cash flow rose 238% in the quarter to $463 million and 51% for the first half to $860 million. Equity free cash flow after leases and licenses grew 47.5% for the first half to $320 million. EFCF for the second quarter was impacted by prepayment of taxes in Pakistan that will not reoccur. Now turning to the balance sheet and capital allocation. We ended the quarter with $2.2 billion in cash, including $468 million at headquarters. Net debt, excluding leases, was $1.8 billion with lease adjusted leverage at 1.1x. We completed a $1.4 billion bond offering this quarter, substantially addressing our 2027 maturities ahead of schedule and extending average headquarters debt maturity beyond four years. With that, I'll hand the call back to Kaan.

Thank you, Burak. Let me return to capital allocation. Since August '24, we have bought back $183 million of shares. We delivered exactly what we said we would. Now we are institutionalizing that discipline. Beginning this year, we will cancel at least $100 million of shares annually. Returning capital to shareholders is now part of our long-term financial framework. We are seeing strong execution. Digital is scaling faster than expected. Cash generation continues to strengthen. And as a result, we are increasing our guidance. Revenue growth is now expected to be 15% to 18%. EBITDA growth is now expected to be 9% to 12%. Our capital expenditure outlook remains unchanged. These revisions reflect confidence in the underlying strength of our business. Looking ahead, please join us at our Capital Markets Day in New York on November 16. There we will present the next chapter of VEON's long-term strategy and value creation. Let me leave you with one thought. Connectivity provides the foundation. Digital creates the growth and the Flywheel generates the returns. Our second quarter results demonstrate that this strategy is working. And I believe we are only at the beginning. Thank you very much. Operator, now we can take the questions.

Operator, may I suggest we start with questions in the room, and then I'll probably queue you in to get questions from online attendees. May I start in the room, it would be great if you could put your hand up. There's a mic which will come around to you. If you could state your name and your institution and then your questions, that would be great. Tim?

Jesse with BTIG. Of the guidance increase, how much was currency and how much was organic? And where are you specifically seeing outperformance versus original expectations?

So, as I mentioned, consistency was one of the key drivers. You may notice a little bit out-of-cycle results from Kazakhstan, but this is normal, and it is fundamentally due to the VAT regulations change in the country, which was a six percentage points increase. Now in the concept of how much of this devaluation, how much is performance, our business model is very simple. The way to do business in frontier markets in emerging markets relies on your ability to continuously in a disciplined way to adjust your prices with nominal GDP growth. And we rely on the fact that GDP and GDP growth is the best indicator of our wallet share success. Now devaluation and inflation will converge in 3-, 5-, 7-year cycles. We are keeping our discipline on that front. And currently, we are expecting actually about 9.5% inflation in weighted average in our markets. This is up from 8%. And the overall devaluation is 3% less than what we have expected to happen.

From a currency perspective, the currency assumptions in Q1 versus Q2 did not change. So it was mainly organic from a growth perspective.

Vincent Fernando from Zero One Investment Research. Just want to talk a bit about your financial services business. So, I see that you've achieved about 45% year-over-year growth in the first half. What's the latest in terms of your regulatory kind of, I guess, development outlook, particularly with Bangladesh. So maybe you could talk about the latest for Pakistan, which I know is much more mature, Bangladesh and Ukraine, which is very early, but do you start to have an outlook for Ukraine, maybe even when new licenses might be available, et cetera?

So let me, first of all, give a little bit of a color on our business. Our business is really doing extremely well in Pakistan. We have 60 million bank accounts on a monthly basis, 27 million active users of our platform, JazzCash. We issue 225,000 nano loans every single day. We transact close to 16% of Pakistan's GDP. We have 1.6 million merchants on our network. We are a financial giant when it comes to the landscape. Naturally, with that comes a responsibility to work hand-in-hand with the authorities, including Finance Ministry and Central Bank to make sure that we are basically serving the people in the right levels. I'm confident that the regulatory environment will also support us to expand our capacity to even grow our lending potential. We would actually, this success we believe, is quite repeatable in other markets, especially in Bangladesh and in Uzbekistan. That's why we are working again with the new government of Bangladesh in terms of creating the right platform for us to launch which we will start with payment services and later on move into full-scale financial ecosystem in Bangladesh as well. And I expect that to happen in Q3. With regard to our operations in Uzbekistan, in order to accelerate deployment of similar services in all the countries, we are looking forward to getting necessary digital banking licenses in every single market we have. We do have already payment solutions and digital wallets in Uzbekistan and Kazakhstan. In Ukraine, we are looking for the regulatory environment to allow us also to proceed in the same direction.

Ukraine [Technical Difficulty] to kind of have a halfway solution before you can have your own full license that you work with, maybe a bank to start building a financial services type of platform.

It's early to give you a clear answer on that. But clearly, we will be looking for every possible business model in terms of how we can serve our customers the way they deserve the service.

Tim Ryan, Oppenheimer. You have a great relationship with SpaceX and Starlink. Could you just describe that relationship, how it's evolving? Also, how is the quality of the service that they're providing to you? And how do you think that changes that connectivity changes these value-added services over time based on the fact that we're going to have connectivity almost everywhere?

As I mentioned, connectivity is the foundation. It's our competitive advantage. And there is no excuse for it is not to be available. It has to be ubiquitous. It has to be affordable, accessible because all our business model relies on that connectivity in the Digital Services part. Now if you assess the situation in different countries, we operate in emerging markets and frontier markets. In Ukraine, there's an ongoing war going on. And there are cases where our infrastructure, terrestrial infrastructure may not be accessible due to land mines. It might be on the front line. There might be energy outages. And in those cases, we have observed that it is essential to integrate our terrestrial network with the satellite platforms, and that's exactly what we did. As of last quarter, more than six million people utilized the capabilities of connecting their smartphones without any other additional equipment directly to satellites and utilize messaging and live data services. This is remarkable because if you think about it, this allows us to be relevant to our customers literally every single minute in a day. And also, it gives us the advantage that being a trusted partner when it comes to connectivity. We are expanding these capabilities to other markets to Kazakhstan to Bangladesh. We do not see Starlink as a substitution. We are complementary to each other. And we are naturally in our markets in sovereign countries with soar regulations protected in a way to keep our license and our technical responsibilities in each country to serve the populations in a safe and secure manner. I look forward to extending our partnership with Starlink, but also clearly, there is going to be many other alternatives. We will do our best to make sure that our customers are always connected so that they can always do financial services on our platforms. They can always do access marketplaces, healthcare services, education services, entertainment services if they are our customers on connectivity side.

So I know you've had text for a little while, and that sounded like it was working well. How is the data connectivity going? And related to that, too, do you have an exclusivity for a period of time with them?

First, in terms of quality, we have initiated the light data services in Ukraine, and we are optimizing certain applications. And Sasha is also here, our CEO in Ukraine. And those applications are optimized in a way that they can function in this light data environment. We do not have exclusivity. I do not believe in exclusivity. Customers have the exclusivity to select their telecom operators when it is necessary.

Thank you. I don't see any other questions in the room. So operator, shall we pass to the online attendees for their questions.

[Operator Instructions] Our first question comes from Nicholas Paton with Edison Group.

A couple of questions. So, the first one on the guidance. I'm struck by how much the guidance has changed since the full year '25 numbers. So, at the low end of the guidance, full year '25, we're at 9% and we're now at 18% for the top end of the guidance for second quarter. And on EBITDA, we've gone from 5% at the low end to now 12% at the top end. Can you just run us through briefly, the key drivers of that change. And I guess the question from investors is, what makes you so sure that you can achieve those numbers now when you were unsure you couldn't achieve those numbers at the top end of the scale at the full year '25 numbers? And the second question is regarding the new businesses. I mean the numbers are, I'm going to hate myself for saying this, but they really are an impressive set of numbers. And the digital businesses have been growing like crazy. But when you look at the digital businesses, let's say, three to five years in time, are you still able to leverage the capital returns that come from the established fixed asset base? Or do you have to invest more in the fixed asset base? And how do those returns on capital change between the core telecom business and the digital business, let's say, in three to five years' time? And I'm reminded of your answer, Kaan, I think it was on the first quarter, and maybe it was the full year numbers when you went through the difference between the digital and the core telecom returns on capital, I thought that was a very interesting and instructive answer. So, I'd be interested to hear an update on that and to hear how you think those capital returns change through time.

Nicholas, thank you very much. Actually, you're absolutely right. I wish we could have been more precise 2 quarters ago. But Flywheel is working and Flywheel is working better than we expected. And as you have rightly pointed in your second part of your question, it is growing. It is growing 50%, 60% year-on-year, and it is beyond what we have expected. But it's not only about the top line growth. The EBITDA growth of Digital Services is also above our expectations, significantly above. Actually, EBITDA grew 66%. So the margin on the Digital Services is expanding as well. So those two things combined gives us the confidence to raise our guidance. And I think what we see, it's a sustainable business model. We are systematically seeing that more customers are embracing our solutions. and we still have room to sustain this growth. When it comes to cash-generative capacity. Now our original business idea a year ago when I talked with you that the Digital Services would deliver a margin of 20% to 25%. We are at 36%. And Digital Services has a CapEx to revenue ratio of 7%, 36%, minus 7% makes 29%. On the foundation side, we do have a margin of 45% and 20% goes to CapEx, and you end up with 25%. So actually, that's why I'm saying the Digital Services cash generation capacity has exceeded our expectations as a business model a year ago, which I'm very happy to see. Having said that, please don't forget foundation. is our competitive edge. And we will not stop investing in that. And we will keep investing in where it is necessary, just like in Pakistan, we have recently bought some spectrum. We are now lighting up the spectrum for 4G, extended 4G and 5G. We will do exactly the same in our other markets. But the balance of our growth coming from digital will slowly actually put us in a better position in terms of cash generation capacity. And I'm happy that it is happening faster than we expected. I apologize that the expectation was not spot on two quarters ago, but I think we are on the right side of that equation.

Can, if I may just add on to that. At the end of first quarter, I think we pointed out that we wanted to see how the macro impact of what was happening in the Middle East and oil prices weighed on operations. So we've made a very clear point of, therefore, our holding on EBITDA just to get better clarity on how things evolved. And clearly, sitting here today, it's pleasing to see that they've turned out better than we thought, not just on the margin side, but also on the revenue side. So I think that's also the additional fact that I wanted to point out that leads to where we are today relative to year-end. And last, on your CapEx question, whether we will spend more in the future? Yes, but the CapEx ratio will not go over 7% with the growth in revenue accelerating. So definitely, we'll stay with the same CapEx ratios on our digital businesses.

Sorry, just to follow up, 7% CapEx to sales for the digital businesses in isolation.

Yes, that's today what we spend.

Yes. But you're saying that it won't go above that in the future either.

Yes, because of the growth in the revenue projections.

I would expect it to decline in a way.

And business is evolving. I think the message is we're very pleased with the momentum of the business. Business is evolving. Margins are turning out better than where we expected. The Flywheel, as Kaan pointed out, is working and working incredibly well, and we take it as we go along. But as things stand, as Burak pointed out, we expect this business to continue to generate pretty material cash. And as the business grows, hopefully, we continue and see it progressing in the same direction.

Our next question comes from Adrian Cundy with Emerging & Frontier Capital.

I have two questions. One about just sort of your use of headquarter liquidity going forward, given that you've really turned the corner on the debt restructuring and that you've moved into a positive free cash flow to equity profile. Nearly $1 billion of cash at the headquarters and no major repayments until out beyond what you're upstreaming 2031, 2033. Can we sort of expect further reinvestment of that cash into any of the key countries, particularly if they need to capitalize digital bank? Or do you think you can continue to grow those opcos with their domestic cash flows? And M&A broadly, is that now new markets that are you keeping an eye on given that you have dry powder at the headquarters? That's my first question. Now my second question comes down to sort of the coming back to the capital and CapEx intensity, and thank you for the 7% number just now. 5G launching in Pakistan, Uzbekistan talking about significant investment in 5G post the sale of Mobiuz, 40% of subs by 2030, something as I saw a headline. Kazakhstan, obviously, Bangladesh will come. And then there is Starlink. What do the relative margins look like between a Starlink data ARPU versus a terrestrial ARPU on 5G, which is more profitable? And what do you sort of see the balance of? And where will you be focusing your 5G investment? And are you confident that you can continue extended 4G, early-stage 5G in high-density areas at the current CapEx sales ratios? Adrian, let me first start with the part about M&A. We are extremely disciplined when it comes to decisions about growing through inorganic means. Now naturally, there are very accretive in-market consolidation opportunities that we will always be looking after. But I truly believe that our stock price at today trading at 3.5x EBITDA is not at the level that we would be looking into acquisitions at a broad level. And I will keep that discipline very, very strong over the next couple of years. So that's number one. But of course, in-market consolidation, naturally accretive synergies, these are things that we will be in the market continuously. Now you asked about the profitability of Starlink versus our other networks, terrestrial networks. If you look to the cost of producing mobile data via terrestrial networks in terms of deployment of towers, equipment, et cetera, versus having access to satellite connectivity. And let me give you an example in Kazakhstan. Kazakhstan, the size of Kazakhstan is probably bigger than the entire United States and 20 million people live there. If I would try to deliver license requirements just in railways and roads based on terrestrial networks, it would cost me a fortune. So, I do not see actually cost differentials or additional cost when it comes to access to satellite platforms. I consider it actually quite reasonable when it comes to comparing the cost of satellite connectivity versus terrestrial connectivity. Having said that, this is not about substituting terrestrial networks, fiber networks with satellites. It's complementing it when it is needed. And I think with that regard, the utility value to the customer definitely is much higher than the cost of the technology it brings.

And just to add to that, as Kaan said during the presentation, we will definitely use cash for shareholder return. On top of that, he just mentioned the M&A opportunities that we have in order to grow our business for in-market consolidation and maybe on the fintech side in priority. Last but not least, we will be addressing some higher cost debt that is sitting on the balance sheet today to make sure that we kind of balance the cost to debt ratio there in terms of interest expenses.

Our next question will come from Matthew Harrigan with Benchmark StoneX.

Great. Firstly, when you look at the digital side, I mean, clearly, you're a market leader in some areas where there's very substantial TAM witnessed in other markets, and you can see a really nice growth curve all the way around. But you're also involved on the LLM side as a critical player working with Google Gemma and COSCO clearly. How do you see the utility of LLM models developing for your Frontier markets? And are they eventually monetizable in concert with your partners? And then secondly, clearly, in some other markets, you'd be trading at, people would be talking about targets of 5x EV to sales rather than 5x EV to EBITDA. But when you think about valuation without giving out a number, I mean clearly, Pakistan is one of the cheaper markets in the world, I mean, even relative to the Morgan Stanley MSCI for your markets basket. But how do you feel about valuation in terms of, I mean, should be people to be doing 10-year models rather than 5-year models? I mean, growth rates relative to GDP? I mean, do you think you get a fundamental re-rating of Pakistan or clearly, Ukraine, I mean, if that starts trading like Poland, you've got an immediate pop in Kyivstar. But just kind of playing in a capital markets professor, just any thoughts you had on valuation without trying to say, I know you're not going to say what you think your stock is worth. And congratulations on the results and guidance.