Vodacom Group Limited (VOD) Earnings Call Transcript & Summary

Welcome to the Vodacom Group Limited results conference call for the quarter-ended June 30, 2020. Vodacom Group 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 of Vodacom Group Limited for the quarter-ended 30 June 2020 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 effects of regulation of the group's businesses by the governments in the countries in which it operates; the group's expectations as to the launch and rollout date of products, services or its technologies; expectations regarding the operating environment and market conditions; growth in customers and usage and the 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 on www.vodacom.com. 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 Sitholizwe Mdlalose, our Interim CFO; and Shaun Biljon, our Head of Investor Relations. In quarterly results, we 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. Our results for this quarter were impacted by the COVID-19 pandemic, both positively and negatively. The South African business was resilient and delivered strong growth in service revenue despite the price reductions introduced on first of April. Our International operations were however, impacted by the lower economic activity, free or discounted peer-to-peer transfers in M-Pesa and customer registration requirements in Tanzania. Having a diversified portfolio resulted in the group benefiting from currency changes, pushing revenue up by 5.6% and service revenue up by 7.6%. Normalized growth was 1.3% for revenue and 2.6% for service revenue. Let's take a look at the South African segment. Service revenue increased 6.4%, driven by strong customer revenue growth of 4.3%. This was supported by the good uptick in data demand, with this increased usage offsetting the impact from a price reduction on our 30-day bundles from first of April. The demand for data increased in the quarter as people worked, entertained and studied from home during the various phases of the lockdown period. Data traffic doubled in the quarter and usage per smart device grew 75% year-on-year and 22% from the March 2020 quarter to 2.2 gigabytes per user. There are now 13.2 million 4G devices connected on to our network, an increase of almost 30% year-on-year. The overall trends in the contract customer segment improved with revenue growing at 3.4% and customers up 2.9% to 6.1 million customers. We offered a number of data products to support businesses to work from home and to assist schools and universities to continue education initiatives. Performance in the prepaid segment also improved with the customer -- with customer revenue growth of 5%. A significant growth in ARPU of 20.8% was added by the lower customer base in the quarter due to store closures and movement restrictions, which led to decrease in gross connections during the period, while you would still have had the churn from prior periods taking effect. The higher spend was partly due to telcos benefiting from a larger share of wallet during the lockdown period and our deliberate approach to increase active days and pick up opportunities, specifically around working and educating from home. Our growth in data bundle sales were driven by both lower data prices during the quarter and lockdown-related increase in demand. Following our price changes since the beginning of the year, we note that most customers continue to spend at a similar or better levels than previously, benefiting from higher allocation of data at these price points. On enterprise and wholesale segment, which now accounts for 27.2% of service revenue, this grew by 13.1%. This was driven by an increase in the take-up of MBB contracts and APN access as well as national roaming revenue. Please be reminded that from next quarter, the transition between roaming partners will be in the base of growth, will be moderated during the year. We were able to increase our homes and businesses connected to just over 79,000, up 121%. Financial services recorded ZAR 540 million in revenue in the quarter, growing by 10.9%. The air time value by the app almost doubled from the last quarter as customers are using this more convenient means to recharge and make bill payments. We advanced ZAR 2.8 billion in airtime via the Airtime Advance platform to 9.3 million customers, 38% of all the charges happened through Airtime Advance. Insurance growth continues with revenue increasing 8.2%. We also entered an exciting new partnership with Alipay to further the financial services strategy, which I will talk about towards the end of the call. Our International operations were impacted by the subdued economic activities as a result of slowed trading activities during the pandemic. We also discounted peer-to-peer services in M-Pesa to enable social distancing as a method of contactless payment which had an impact on M-Pesa revenue growth. In Tanzania, the barring of services to customers due to the biometric customer registration requirements in Q4 last year impacted its service revenue growth as expected. Data continues to perform well, supported by network investment and the expansion of 4G. This culminated in service revenue growth of 10.7% for the portfolio, emphasizing the rand benefits from these operations despite a decline of 5.3% on a constant currency basis. Our International operations contributed 30.2% to group service revenue. Data customers increased 5.2% to 20 million, representing 53% of our customers with data services. Data traffic was up 44.3% in the International segment, driven by the need to work from home. Mobile financial services revenue from M-Pesa reduced in the quarter due to low economic activity and movement restrictions in several of our markets. Active M-Pesa customers increased by 3.5% to 14.7 million. M-Pesa revenue grew 17% and declined 3.1% on a normalized basis, representing 18.7% of service revenue. We expect this to recover as free services are reduced during the next couple of months and economy start recovering. We processed $3.5 billion in value of M-Pesa transactions per month during this quarter. As a reminder, these M-Pesa numbers exclude Safaricom. So this illustrates the scale of what we have on M-Pesa outside of Kenya. We invested ZAR 803 million in capital expenditure in the quarter as we expanded our 4G rollout. We now have just over 2,900 4G sites across our international operations. Before I conclude for questions, I'll just give a quick update on some of the regulatory matters. One of the most pertinent issues in Tanzania has been biometric customer registration. After barring 2.9 million customers last quarter, we reconnected 745,000. Since April, the Tanzania Regulatory Authority suspended further services barring due to the COVID-19 pandemic. Currently, we have 1.9 million SIM cards, generating more than TZS 4 billion or almost ZAR 30 million per month that remained non biometrically registered. We await further instructions from the TCRA with regards to the barring of services to the remaining non biometrically registered SIM cards. There were further regulations in SIM card ownership on the first of July 2020. The TCRA issued a public release of required customers who biometrically registered more than 1 SIM card per service provider to verify the SIM ownership by 31st of July 2020 through their mobile phones. A customer may request an approval for additional SIM cards to service providers retail outlets, and we've just gone live with an automated USSD solution where customers can initiate the approval from their phones. This is a better process than the manual process originally envisaged and a better outcome than what was originally anticipated. In South Africa, to support the increase in network demand, ICASA allocated temporary access to spectrum which is available until the end of November or can be extended until just before the auction takes place. We have used the temporary spectrum to alleviate capacity issues where possible at the 3.5 gigahertz allocated spectrum to fast track our 5G launch and support the initial rollout. This is assisting us in getting real-world learnings of this new technology before spectrum allocation later in the year. ICASA is also making progress in allocating high-demand spectrum. By all accounts, from public statements made by them, they are still aiming to complete this process by the end of the year, while the one licensing will only happen in the following year. We expect the ITA in the next few weeks, which will provide more clarity on the spectrum lots and pricing. And finally, I'm happy to announce our partnership with Alipay to launch a super app in South Africa, which will allow customers to pay via the app, make peer-to-peer money transfers, borrow via the app, invest, do online shopping, stream music, watch movies, play games, book, travel and movies, hail taxis and Ubers without leaving there, all enhanced with in-app advertising, promotions, gifting and more. This is the first time Alipay, with 1.2 billion users worldwide, has partnered with a company they don't have equity in. Overall, this will help us to accelerate our financial services strategy in South Africa. This concludes my comments and Sitholizwe and I are now ready for any questions.

[Operator Instructions] Our first question is from Preshendran Odayar of Nedbank CIB.

Just 3 quick questions from me. Nonservice revenue, can you give us a bit of color of what's in there and what's driving -- sorry, not nonservice revenue -- sorry, what's other nonservice revenue, what was driving that 76% increase? And what is in those numbers? The other 2 questions I have. One is, can you give us some color on what happened to voice usage in the quarter, considering this was the first quarter reported in South Africa lockdown. So what has happened there? And then the last question is, can you tell us how much enterprise is contributing to South Africa's service revenue in these quarterly numbers?

Thanks for the question. So non-service revenue is really driven by 2 elements. So the first is we had a 22.5% decline in our equipment revenue, which was as a result of lower sales during the lockdown period on our handsets that did pick up towards the end of the quarter. So we're happy with our exit rates. The second element of that, which partly offset, if you're looking at that from a quarter-on-quarter basis, is an increase in our sites rental, which is coming through from higher sites on -- that Rain have with us. We've moved up from about 3,100 sites in prior quarter to 5,300 sites. On voice, what we saw is, firstly, as we went into lockdown in April, we saw voice dipped slightly. However, post that, what we've seen for the quarter as a whole, is that voice did pick up. And on a year-on-year basis for Q1, our voice revenue was up 5%.

I think the important point is that we, in the month of May and June, we saw our highest voice revenue that we had for a period of over 17 months. So for some reason, people decided to talk a lot in May and June, and that seems to -- so in April, they were talking as much, but then they suddenly started talking a lot more in May and June. In terms of enterprise, the enterprise and wholesale segment constitutes 27.2% of service revenue in the quarter, and that grew by 13.1%. Remember in those numbers is also the impact of the roaming revenue, which came in from July last year or the uptick of having Telkom fully on board came in for July last year. So the numbers in the quarter, both for enterprise and overall, is boosted by that. So the growth rates will taper down slightly by about 1.3% as we go into the following quarter because of the lapping of roaming revenue.

Our next question is from Jonathan Kennedy-Good of Standard Bank.

Just to follow up on your -- on this non-service revenue growth, which I think was 76%. And you mentioned Rain and the increased cycle rollouts. Should we expect a similar kind of increase in the cost of roaming going forward as you experienced in the revenue line? That's question one. And then just want to get a sense from you on the CapEx side with the data traffic growth, what's capacity looking like? And does it affect your absolute rand CapEx envelope for the year? And then just one other thing was the prepaid subscriber numbers declining and the daily active users are stable or slightly up, should we expect lower subscriber acquisition costs as a result of declining gross connections? And is this kind of a change in how connections are churned in the market? Or is it just a lockdown impact?

Thanks. I'll take those. I think with Rain, what you will see, while we have the other revenue and the other income, we'll equally have a cost coming through a cost line flowing through on direct cost, which largely, from an EBITDA perspective, will be neutral. However, it does provide a slight drag on margin, potentially something around 0.3 percentage points on a full year basis in terms of the incremental Rain sites that we've taken on. With regards the prepaid, what we did see was ultimately, as Shameel said, towards the start of the lockdown period, due to some of the mobility issues, store closures, et cetera, you did have low gross additions. And as a result, that does give us some of the acquisition cost savings. However, what we have seen is all of that starting to come back sort of May into June and July looks fairly strong as well. So the exit run rates are back to sort of normalized levels of what we'd expect on our gross connections.

On prepaid. On contract, it's still slightly lower, but we're also seeing lower churn than what we would normally experience across the base. Also important to note, when you look at the customer base and why it's down, because remember, you've got this high-growth effect on what I call the washing machine part, what COVID has done is help to solve some of those issues. Although you have the churn coming through from previous quarters, the lower growth will also result in lower churn in the later quarters. So you had less, shall we say, fictitious SIMs. And therefore, you've also seen a nice jump in the -- so firstly -- sorry, firstly, important to note that the 30-day active customer base has continued to increase, that's one, as you would have seen in our announcements. And so that's the one part. But also it's given that a rise to a jump in ARPU of 20%.

So as you say, these gross connections coming down, I mean, should we -- could there be lower subscriber acquisition costs going forward? Or was that not a permanent feature of the market now? No.

No. So what's happened is you'll have a bit of lower gross connections in contract. But what we're also doing is make sure that we're increasing our in-contract customer base, which then also has an impact on churn reduction. And so what we're saving on the one side, we're investing into retention to make sure that, in the end, we have positive customer base growth.

And then just a follow-up on the data traffic impact on CapEx.

So your CapEx for the year will probably be at a lower rate than the normal CapEx that we invest in South Africa, specifically. We've toned down the CapEx a little bit this year given some of the pressures on -- or rather some of the issues that we were anticipating with COVID that so far isn't materialized.

Right. And so network capacity is fine despite the traffic growth?

Yes. So capacity-wise, I mean, we basically front-ended some CapEx investment to make sure that we could cope with the capacity. And we're using a combination of, of course, additional CapEx investment or, let's say, our normal CapEx investment for capacity. We're also using the Rain spectrum or the Rain roaming, if we can put it that way. And we're using the temporary spectrum all to cope with the additional traffic.

Just to add to that on the CapEx, equally in this quarter, just a reminder, we have invested to ensure that the availability of our network remains high, so a lot in our battery rollout program to ensure that we can cope with any further SCOM loadshedding periods.

Our next question is from Slava Degtyarev of Goldman Sachs.

A couple of questions. Firstly, how do you see competitive environment during Q1? Has that become more rational? And is there any increased competition as lockdown measures are lifted? And secondly, on your opportunities with regards to the Alipay agreement. What are the couple of most exciting pillars within that agreement in your view? And would you expect any impact to be visible already in the near to medium term?

Okay. So I think on the -- so in terms of competition, I think a lot more rational. I mean firstly, us and MTN having both reduced prices. I think we both had to deal with that issue. COVID gave us the in-bolt, I call it in-bolt elasticity. So normally, remember what would happen is you would go negative and then you recover it over a period of 4 to 5 months, you try and get that usage back. COVID is that the effect of -- despite the price drops giving us enough traffic increase to offset those impacts. Yes, so that was quite positive and quite strong. And yes, so in terms of -- but generally, the market seems to be a lot more rational in terms of -- during this period. Telkom has actually pushed some prices up. And Cell C, I think, has its issues, so no more aggression or no more say aggressive offers or anything coming from that part. Also remember, us and MTN have moved the level down in terms of pricing. So any pricing gaps that would have existed has been narrowed between us and the smaller competitors. So that's one. And I think that probably played in our favor as well during the quarter, being more competitive during a crisis, I think, has turned out to be a very good thing. In terms of the Alipay agreement, I think hugely exciting for us. In terms of that, we now have access to the best tech in the world. And this super app will have the ability to aggregate a lot of the different services. From the app, you pay, you lend, you'll save, you'll invest, you get entertained. So if -- the way to think about it is multiple different merchants exposing their services through the app. It will be 0 rated within the app and you'll be able to access all kinds of things. The beauty of the service is that you never leave the app. So we haven't done a deal with Uber yet, but just using Uber as an example, you'll be able to book an Uber from the app itself without leaving the app. You'll also be able to do -- if you don't have money, we could advance you the Uber ride. So these are the type of services. Payments and lending will be into everything, but it's a full ecosystem in lifestyle app. Very interesting. If you haven't had an exposure to Alipay or WeChat Pay, interesting to download one of those or Paytm, which is an Alipay partner, to actually see how the app works. So you'll shop, you'll also shop from the app, so your online shopping everything from clothing to groceries to merchandise will be done from the app itself. So a very, very rich ecosystem, more boosted by very good data analytics, pop-up promotions, gifting. So it's got a -- it's -- we did some serious homework in terms of identifying what the best deck is and then decided to implement the full platform in South Africa. And we're looking at implementing elements of the platform on top of our M-Pesa platform as well.

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

Great update. My question is, I guess, probably a little bit harder to even know what the answer is, but let me just try. I mean you've -- we've had this benefit now over the past quarter of COVID, with people working from home and traffic almost exploding in your network. Now I mean there's this other leg that you talk about, which is the economic leg where people don't have jobs and they don't have income and you don't know when that is going to come through. But you had, call it, a few weeks of the economy sort of like opening up and all of that. So my question is have you seen like a slowdown or sort of almost like a cliff in terms of traffic or in terms of ARPU, which gives you an idea of what's going to happen over the next few months, given the fact that the wallets -- or the competing services for the consumers' wallet will also increase over -- as we have opened up? So just maybe a bit of color of how you are thinking about it in terms of the economic challenges?

I think with caution. And what I'm going to say now I will caveat with caution in inverse commerce. So what we've seen so far in July is not a slowdown, okay? The trends seem to continue. That said, remember that you have to back out the -- about at least 1.3% of roaming benefit in the quarter. That's one. But I think the important thing is, so far, so good. Trends are continuing. There will be -- and I think it's also important to just note a few things. I think consumer wallet spend, what's changed is where people were spending the money on travel and driving to work and these type of things, the new modus operandi of staying connected is data. So you have to connect somehow and to connect to the world and be able to continue to work. So that's the positive part, I think. And from that perspective, I think it's been strong. What we've also done, I think, proactively from the start, is look at our -- look at the opportunities around the pandemic. And one is what I call hyper personalization. So segmenting the base a lot more, understanding if a person is 10 days active, 15 days active. And we're busy implementing this across all the markets. And then more targeted network segmentation and offers to those customers. Also products like Airtime Advance is now 38% of our revenue, also helped with people who were using advances to access their time. So it's been very positive in that respect. And we're trying to make sure that we find new initiatives to continue some of the momentum. I can [ be it ] quite heavily because you don't really know what's going to happen on the positive front. Alcohol being banned is positive. Some of the social grants benefits that have been given to people is positive. The interest rate continuous cuts, including the ones today, is positive. On the negative side, job losses, I would say, it's probably the biggest impact and what would that impact really be. So I think we are claiming a bigger share of wallet at this stage. And hopefully, that continues. Yes, so we'll have to -- we're kind of making sure we can pick up all the opportunities around it. But yes, it's a little bit uncertain, still, to be honest.

Okay. Just a follow-up on that. Maybe if you can, maybe comment just roughly what sort of the debtors or the contract booked in terms of cancellations and nonpayments, that sort of thing? And then lastly, what do you think is -- is Cell C going to come through in terms of roaming? I mean there were rumors that you might get. Just maybe an update on that?

Thanks. Maybe let me take the first one on bad debt. So I think what we're seeing is obviously quite a lot of pressure on -- particularly in the enterprise segment on small to medium enterprises. So obviously, they've suffered quite a bit under the lockdown regime. So a few of those who haven't been able to trade in various sectors, obviously, under massive pressure. But we're seeing that pressure come through in terms of ability to pay. We're obviously working with all our customers in trying to set appropriate payment plans where possible and see how we can be creative around ensuring that they're able to continue to receive the services that they require to get back on their feet while making it sustainable for them to play in the long term. On our consumer customers, we have noticed a slight increase in pressure on settling accounts. It's not incredibly higher than our expectations at this stage, but we expect it will play a little bit of a feature as we go into quarter 2 and as we close H1.

What was the second part of your question, Siphamandla?

It was Cell C roaming agreement, whether you're going to get more out of it. I remember there was a talk that you might. Just maybe an update of where that is.

Yes, Siphamandla. So the Cell C is still quite open at this point. So once we've got updates that we can go to the market on that, we'll let you know.

Our next question is from Dilya Ibragimova of Citi.

I had a question on Alipay partnership that you've announced. Is it -- maybe just structurally, have you done it between South African entity and Alipay? Or is it something that you're doing via M-Pesa global? And how are you thinking? It's interesting that you're having the investor as a tool for P2P and everything you going for a very tacky franchise. Is there -- do you see an opportunity for M-Pesa maybe to learn and adapt some of the tech side from the partnership you're announcing maybe to kind of -- could become a -- whether you see this as an opportunity for M-Pesa to step up on the technological side as well? Any color will be appreciated.