Vodacom Group Limited (VOD) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Vodacom Group Limited Results Conference Call for the 3 Months ended 31 December 2019. Vodacom Group's CEO, Shameel Joosub, will host the conference call. I will read the forward-looking disclaimer before handing over to Shameel. This announcement which sets out the results for Vodacom Group Limited for the 3 months ended 31 December 2019, contains forward-looking statements. These statements have not been reviewed or reported on by the group's auditors with respect to the group's financial condition, results of operations and businesses and certain of the group's plans and objectives. In particular, such forward-looking statements include statements relating to the group's future performance, future capital expenditures, acquisitions, divestitures, revenues, expenses, financial conditions, dividend policy and future prospects; business and management strategies relating to the expansion and growth of the group; the effect of regulation of the group's businesses by governments in the countries in which it operates; the group's expectations as to the launch and rollout data for products, services or technologies; expectations regarding the operating environment and market conditions; growth in customers and usage; and the dividend -- rate of dividend growth by the group. If you do not have a copy of the results announcement, it is available on the Investor Relations website at www.vodacom.com. [Operator Instructions] Please also note that this call is being recorded. I would now like to turn the conference over to the Vodacom Group CEO, Shameel Joosub. Please go ahead, sir.

Thank you. Good afternoon, everyone, and good morning to those joining the call in the U.S. I'm joined by Till Streichert, our CFO; and Shaun van Biljon, our Head of Investor Relations. The quarterly results will only focus on revenue and key performance indicators today. As with prior quarterly results, Safaricom does not report on its performance, so we will, therefore, not be disclosing an update on their results during this call. None of the numbers that we mention have Safaricom included, unless otherwise stated. Our results this quarter showed improved trends in South Africa -- in the South African business and consistent growth in our International operations. South Africa has performed well despite the challenging macroeconomic environment. We had a very successful summer campaign with a more engaged customer base, and we saw improved uptake of data services. Our International operations continue to deliver strong growth driven by our strategic growth pillars of M-Pesa and data services. From a group perspective, we now serve over 117 million customers across the group. This includes Safaricom's customers. More than half of these customers are now using data services. Group revenue was up 6,6%, and service revenue was up 5,7%. Normalized growth was largely similar due to a stable currency environment. Let's look a little bit more in South Africa. Service revenue increased 4,6%. This is similar to the underlying growth of 4.2% we delivered in the second quarter. Growth was supported by the good uptake in data services offsetting the impact from our proactive efforts to transform data pricing. These initiatives included a significant reduction in out-of-bundle rates by 50% from the beginning of the year and a number of reductions in bundled prices throughout the year. These efforts have contributed to significant elasticity in usage with data traffic up 63%. Our summer campaign was a huge success with 17 million customers engaged and 334 million free rewards redeemed by our customers. This has resulted in a higher degree of engagement and activity from these customers. We'll continue with the summer campaign. The trends in the contract segment improved as well, with revenue growing at 4,7% and customers up 7,8% to 6,1 million. Performance in the prepaid segment also improved with a revenue decline of 1.8%. The segment is mostly impacted by the out-of-bundle regulations in the beginning of the year as well as the subdued consumer environment in South Africa. We now sell more than 2,4 billion bundles a year. Customers continue to utilize our highly discounted bundle offers with shorter validity periods such as daily or weekly bundles and personalized value offers through Just 4 You. Underlying data metrics remained strong with 12.5% increase in data customers. There are now 21,1 million smart devices on the network with the usage for smart device at 1.7 gigs, up almost 60%. Customers using our digital platforms are growing strongly. This remains a key strategy to drive data usage. Over the December quarter, we sold 2 million customers on our Video Play platform. Our Enterprise segment, which now accounts for 27,3% of service revenue, grew 9,7%. This was driven mainly by national roaming revenues. Financial Services recorded close to ZAR 0.5 billion in revenue in the quarter, growing by 11%. The VodaPay app takeup is improved exponentially from last quarter, providing a new channel to make direct airtime purchases and bill payments. We advanced ZAR 2,5 billion in airtime via the Airtime Advance platform to 8,9 million customers. On the network side, we now have 94.4% of the population covered with 4G. We concluded a deal with an aim to extend our roaming and facilities leasing arrangements to almost all our sites but agreed by us based on demand. This is on a much improved terms when compared to our previous agreements. I'm very pleased to announce that we have signed a multiyear 5G roaming and managed service agreement with Liquid Telecom, which paves the way for us to launch 5G services very soon in South Africa. Any launch of 5G will be within the CapEx envelope, and I think that's important to stress. Our International operations sustained strong growth. Data is performing well, supported by network investment and expansion of 4G. The monetization of M-Pesa continues as we expand the ecosystem. This culminated in service revenue growth of 9% or 7.1% on a constant currency basis. Our International operations contributed to -- or contributes to almost 30% -- now contributes 30% of group service revenue. Data customers increased 11,2% to 20,6 million, representing 54% of our customers with data services. This was enabled by the expansion of our networks and increasing the accessibility of affordable devices to our customers. As an example, we launched a $20 smart feature -- 4G smart feature phone. In Tanzania, we are now rolling this out to all our operations. Demand for our mobile financial services to M-Pesa remains strong in all our international markets. Active M-Pesa customers increased by 10,7% to 14,8 million. That's just at the back of international markets excluding Safaricom. M-Pesa revenue grew 24,7%, representing 18,9% of service revenue. We processed ZAR 3,4 billion in value of M-Pesa transactions per month during this quarter in the International operations. I remind you that M-Pesa numbers exclude Safaricom, so this illustrates the scale we have outside Kenya. We invested ZAR 845 million in capital expenditure in the quarter as we expanded our 3G and 4G rollout. We now have just under 2,500 sites across our International operations. There's been quite a bit of coverage and regulatory items recently, so I'll give you some color on each of these. One of the most pertinent issues over the past couple of weeks has been biometric customer registration in Tanzania. After the initial extension to 20th of January, we had to start barring services to customers from the state as instructed by the Tanzanian Regulatory Authority. The biggest hindrance to registration is the lack of valid identification documents for customers. Tanzanians must need to obtain the identity documents from the government before being able to register SIMs biometrically. In the first phase, we blocked customers that have identity documents but they're not biometrically registered with us. We barred services to 1,7 million customers between the 20th and 31st of January. As at the 2nd of February, the unregistered base is 5 million customers, and we now await instruction from the TCRA on how to proceed with these. We have a base of 15,6 million customers, which means that close to 7 million customers will eventually be disconnected, which is significant and will have an impact on growth in Tanzania. The total market will disconnect closer to 20 million customers. We aim to reconnect the majority of these customers over the next couple of quarters if customers complete their ID and registration requirements. Coming back to South Africa, ICASA issued its information memorandum on the licensing process with spectrum in November last year. We are encouraged by the prospect of having access to spectrum soon, which includes 2.6 gigahertz 4G spectrum and 3.5 gigahertz 5G spectrum. They also included 2.3 and 700 and 800. The 3.5, 2.6 and 2.3 will be immediately available on the conclusion of the process. There are still a number of factors that concern us, such as the lack of definitive plans and time lines for the digital migration, which needs to be completed before we can get access to the low-band 700 and 800 spectrum. How the One will ultimately work, for instance, the proposal is that operators allow 3 MVNOs in the network, this is essentially significantly reduced the business case for the One. We also believe that the One should not be allowed to get more spectrum than the biggest operator. So these are some of the comments that we've basically entered because if we had to take on MVNOs, the One wouldn't have customers and that would significantly reduce the prospect of success for the One. And certain of the obligations will be placed on successful spectrum but is -- are unrealistic. For instance, a 100% coverage obligation is not practical and is unachievable anywhere in the world. So that's one of the comments that we have given back. We have considered the Information Memorandum and provided our comments to ICASA on the 31st of January. ICASA will now consider all submissions before issuing the invitation to apply for the spectrum auction. The Competition Commission issued its final findings and recommendations in December last year on the data service market inquiry. Although these findings are not legally binding, we are engaging with the Competition Commission. I want to emphasize that we are committed to reducing data prices even further but in a responsible way for the benefit of both our customers and the business. We are sharing with the commission what we have achieved in overall price reductions over the past 3 years, our 3 data offers which allow customers to access basic services such as looking and applying for jobs, educational content and even free Facebook Flex while aiming to resolve the commission's concerns to avoid a lengthy multiyear process at the competition tribunal. Issues. ICASA issued their discussion document in the end of November last year on the inquiry into mobile broadband services. We have until late February to make a submission to ICASA. Importantly, there are some findings that contradict the findings of the Competition Commission. For example, ICASA is not proposing any retail price intervention at this point. In areas where they have identified operators to have significant market power on the infrastructure, they are proposing to change the legislation to improve transparency and access to sites in terms of facilities leasing agreement. The commission also does not intend to intervene in roaming prices that -- the ICASA also does not intend to intervene in roaming prices at this point in order to first see how the -- all the changes in roaming deals has affected the industry. Finally, we're encouraged by the -- and then I think one of the big things is that ICASA have also stressed that the retail prices are neither high nor low and that they find that the prices are competitive. I think that's quite a big finding by ICASA. Finally, we are encouraged by the improved growth that we have been seeing in South Africa and the sustained good performance in our international operations. This concludes my comments. And Till and I are now ready for any questions.

[Operator Instructions] Our first question is from John Kim of UBS.

Three questions from me, please, but they're short. On ICASA, the final market review comes down in April. Do you have a sense of timing on the spectrum allocation? And what is the lead time from actually being awarded spectrum to usability, i.e., how long does it take ICASA to reform? Last question, on Comp Comm, what is the process from here? Because if I remember, the -- their report, you had 2 months to respond. And if my math is right, you would be at the other end of that.

Okay. So firstly, on the ICASA market review, they haven't put a definitive date that the market review will come out in April. It's still a bit open-ended in terms of when the final document will come out. Remember, comments are only due end of February. So I think that process will still take a while. So that's the one. That said, I think the initial findings have given a steer in which way they're thinking. And to be honest, we don't really see anything overly dramatic in what ICASA has proposed. In fact, we've gone a long way to open up our sites in -- over the years. So transparency is not something that we think would be untoward. In terms of the second question, the usability of spectrum, I think it's important to note that the 2.3, 2.6 and 3.5 spectrum will all be readily usable. The 3.5, we feel, could be bigger blocks, but essentially, that they're usable. These are some of the comments that we've put forward. The 700 and 800 is -- will take a bit longer. I would say it would take a year to clear it all up, but it could be available in pockets because how it works is, in some regions, they use 700; in other regions, they use 800. So one of the bands is normally available, but that would have to be cleaned up, so I would say, probably a year. In terms of the Comp Comm, Comp Comm issued a statement over the weekend extending their deadline date by a month. The comment that came from the Competition Commission is that they've been having fruitful discussions with all the operators and are quite encouraged by it and, therefore, have extended the deadline by a month. We have been engaging with the Comp Comm. We've had some constructive engagements. We -- important to stress that we shared with them -- so price transformation has always been part of it. We've taken into account some of their concerns and obviously still in the process of discussing our plans with them and there's ongoing engagements in that respect but I think tracking in the right direction.

The next question is from JP Davids of JPMorgan.

Two questions from my side, please, both relating to the new roaming agreements that have been signed and the extended roaming agreements. Firstly on Rain, Shameel, in your introductory remarks, you talked about the sort of favorable terms that you've done this with the better terms that have been done under. I assume the equal and opposite applies for Rain, i.e., the scale and the economics of the deal are better for Rain. So just wondering how you're going to -- how you sort of managed the potential disruption risk from Rain over the medium to longer term if their own economics are also improving. Then switching gear to the 5G deal with Liquid. Just wondering if the -- in relation to the spectrum that is being issued with 5G, the 3.5, if there is actually sufficient spectrum there, or you're going to have to have this Liquid deal as a backstop sort of regardless with what happens with the spectrum auction. Maybe asked in a simpler way, is there enough, hopefully, contiguous 5G spectrum available in the auction process that you may not need the Liquid deal in the longer term?

Okay. So firstly on Rain, I'd say it's improved terms for both of us, also less impact on the financials for us in terms of the way the deal is now constructed versus what we had previously. So that's the one part. But essentially, what it does is it gives us the flexibility to -- by mutual agreement, extending it to where we may need more coverage, okay? So -- or where we may need, let's say, Rain capacity, if one can call it that. Are we worried about the long-term effects of the deal? No. I think if we go back, it's been what now, 3 years, 4 years of Rain, and I think the hype that -- how can I put this nicely? The hype around -- or the impact that Rain would have on the market, I think, is proven to be unfounded. And so they -- I think they've built a good business selling to customers. But remember, their primary customer is someone called Vodacom. Then the same with Liquid. Essentially, Liquid has also acquired a nice customer called Vodacom. And the access to the spectrum is a multiyear deal. And basically -- or access to roaming, our services, is a multiyear deal. We see this, both deals, the spectrum security. We would still take part in any auction. But -- and because there's nothing better than having your own spectrum. But based on the size of our base and based on where the technology is going and so on, we think having access to more spectrum is more beneficial than having access to less spectrum. And remember, spectrum does have the impact of helping you to be more efficient in the way you deploy. So when you run out of capacity, always better to deploy more spectrum. Or if you can do it through a worthwhile roaming arrangement, that's always more better -- better than having to build more sites. So we're quite -- strategically, we're quite pleased with what we've managed to achieve on both, taking away probably what's our biggest risk in -- or risk of any telco spectrum security. So we've managed to achieve that.

The next question is from Jonathan Kennedy-Good of Standard Bank Group Securities.

Just a follow-up on the Liquid roaming agreement. Just to verify, I presume it's a roaming agreement plus a facilities leasing arrangement, much the same as your Rain deal. If you could confirm that. And whether -- when you foresee kind of costs coming in, will it be a similar type of treatment to what we've seen under the Rain agreement with the impact on margin coming through, presumably, in the next 2 financial years. And then second of all, on the VodaPay app that you've launched, some comments on how that's impacting the distribution of airtime, whether that's cutting distribution costs and whether -- how that's impacting your sales in the channel for some distribution as well, whether that's bringing some margin back to the business would be helpful.

Jonathan, yes, so you're right. The structure is actually similar to the Rain deal in terms of the agreements. So there's a facility leasing aspect in it and there is one basically that covers the capacity aspect where we buy capacity. So on your first question, yes, similar. On your second question in terms of financial effects, look, we are not disclosing the details of the agreement in terms of the facility leasing and the capacity cost, respectively, fees associated with it. But you will see in the next financial year, the cost associated with the deal coming into our numbers, that's correct, and also in the following years, as you basically have got access to the 5G capacity. So that is going to come into our numbers.

In terms of your second question on VodaPay, I think it's part of a bigger play. But right now, where the -- it's still early days. And so I mean is it significantly moving the needle yet? No. Will it over time? Yes. But I think for us, what you're seeing on VodaPay is what we call VodaPay 1.0. The next phase is a lot more sophisticated in being able to access multiple different services. You would have noticed that we've already launched electricity and water. And so all these services will end up contributing where we make our payments app a lot more. We're looking for a lot bigger distribution, if you like, or take-up on it. A lot of it is premised around the new launch, which will happen during the next fiscal. And I think that will help us to significantly scale up our ambitions around it. So it's still early days, but yes, there is a saving that comes through.

[Operator Instructions] The next question is from Slava Degtyarev of Goldman Sachs.

A question on Competition Commission impacts. At this stage and based on how negotiations are going, would you expect any potential deceleration of the South African service revenue growth in the medium term on the back of this? And broad -- do you think that, basically, you're on track with the mid-single-digit group service revenue growth, taking into account the regulatory developments and also certain market challenges in the countries of your operations?

So -- okay, let me start with your second question in terms of medium-term guidance on service revenue. Yes, you are right. We are tracking that guidance, and that has been supported by the third quarter results, which we are pretty happy with. And remember, the step-ups that we've seen in the third quarter was also kind of what we told you and what we expected, in particular, in South Africa from the elasticity which we have seen, which is good, and equally sustained performance in the international market. Now when we called out the medium-term guidance, of course, a topic like customer registration or biometric customer registration, all the Competition Commission weren't topics -- were topics that hadn't materialized or weren't on the horizon yet. But of course, in our guidance, we did have headroom, which allow us in a portfolio of a number of markets that we have to also see a little bit of up and down in that. So we will be updating everyone on our guidance across all 3 elements, so service revenue, operating profit and CapEx at the full year results. But at the moment, we are tracking nicely on service revenue and have got equally some room to play in.

Yes. And I think just maybe on the Competition Commission part, it's -- we can't give absolute numbers right now in terms of what the impact would be. Safe to say that part of it will be around pricing, in monthly pricing specifically, and part of it would be around certain social benefits that we prepared, that we were planning to give in terms of our plans. So I think a similar kind of profile potentially, where whatever we do, we will have a similar profile where it will affect the first quarter, and you'll get more elasticity through the year. But -- and as Till says, the rest of it is within the comments that we -- that Till just gave.

And perhaps just adding to it, and Shameel already gave color on the engagement with the Competition Commission. And you've seen the numbers that obviously are in the report from the Competition Commission. There's constructive engagement happening. The one point I would like to add to it is that, of course, we had been, and you have been seeing that over the years, us doing quite successfully, which is pricing transformation, whereby we did lower prices years back for voice, then starting for data and driving this pricing transformation proactively, which had resulted into a good step-down in terms of unitary prices with the requisite elasticity coming back and supporting, in essence, the service revenue growth. So some of it, what you have been seeing here on the Competition Commission side, of course, on our planning, you would see also in the pricing transformation strategy embedded.

The next question is from Siphamandla Shozi of Coronation Fund Managers.