Vodacom Group Limited (VOD) Earnings Call Transcript & Summary

Welcome to the Vodacom Group Limited Results Conference Call for the 6 Months Ended 30 September 30. Vodacom Group CEO, Shameel Joosub, will host the conference call. Before I hand over to Shameel, I would ask that you refer to -- refer to and familiarize yourself with the Vodacom's forward-looking disclaimer. This is set out on Slide 36 of the interim results presentation and can be allocated on www.vodacom.com. Alternatively, if you would like a copy of the results announcement or presentation, then do please e-mail Investor Relations' website at vodacomir@vodacom.co.za. Shameel, over to you.

Thank you. Good afternoon, everyone, and good morning to those joining the call in the U.S.. I'm joined by 2 new members of our team, our group CFO, Raisibe Morathi, who joins us from Nedbank, where she spent the last 11 years as group CFO; as well as our Head of Investor Relations, JP Davids, who joins us from JPMorgan. We are very pleased to have both Raisibe and JP join our team and wish them long and rewarding careers at Vodacom. I'm also joined by Sitho Mdlalose, who is our Financial Director of Vodacom South Africa. Welcome, Sitho. Our organization is purpose led. This means that we strive to balance economic growth with social inclusion, environmental protection and our vision of connecting for a better future. This purpose underpinned our response efforts to COVID-19 and our 6-point plan to support the resilient recovery for our markets. For those of you who are not able to join our webcast this morning, I would encourage you to download our slides and announcement to get a better sense of our interventions. Also this morning, I provided an update on our strategic progress, notably our accelerated evolution from a telecommunications to a technology company. We continue to expand our ecosystem of products across connectivity, digital and financial services to deliver a 360-degree customer experience. We believe our product suite gives us a sustainable system of advantage. Moving to the group highlights. I'm pleased with our group results for the 6 months and particularly in the strong performance in South Africa. Revenue growth bolted down the P&L, and I'm happy to report that our interim dividend grew 9,2%. Safaricom contributed ZAR 2,5 billion in after-tax profits. Safaricom's COVID-19 interventions, including free person-to-person transfer weighed heavily on the underlying financial performance in the first half. Encouragingly, free peer-to-peer transfers accelerated platform growth. Safaricom's M-Pesa customer base increased 13,2%, while transactions per customers increased 47.7% to 90 transactions per customer in the 6 months. And then on the merchant front, [ Lipa-Kwa ] M-Pesa, merchants increased 77.2% to 245,000. The extent of this platform growth supported improved service revenue momentum in the second quarter despite the free person-to-person fees and sets up exciting medium-term growth prospects for M-Pesa. At a group level, financial services continues to scale rapidly, and we now service over 55 million financial service customers. In the second quarter, and including Safaricom, we processed $20.5 billion of M-Pesa transactions per month. Our lending and savings products also continue to scale rapidly as we tap the narrow market opportunity. In the 6-month period, our Songesha and Fuliza lending products disbursed $1,5 billion in loans, while in South Africa, Airtime Advance accounted for 38% of prepaid recharges. For those not able to join our webcast this morning, I will summarize the key operating metrics at a group, South Africa and international level. Where relevant, I will call out the normalized growth, which excludes the translation effects of foreign exchange. From a group perspective, we have reported strong service revenue growth of 7%, with revenue up 7.8%. We added 4.1 million customers in the group, including Safaricom to reach 120 million. We added 1.8 million data customers across the group to reach 63.1 million, which is over half of our customers using data. We still see an exciting growth opportunity for connectivity. EBITDA increased 7% and, on a normalized basis, was up 5.1%, supported by positive draws in South Africa but offset by revenue pressures in our international operations. Headline earnings per share was up 6.1% after taking into account the impact of the tax rate changes in Kenya. We have spent ZAR 6,6 billion on expanding and improving all our networks. This enabled us to meet the surge in demand as customers changed usage behaviors. At a segment level, starting in South Africa, service revenue grew 7.1% or 6.5% after adjusting for a loyalty program provision of ZAR 142 million in the current period. This is an excellent result, especially given the backdrop of economic disruption and the substantial data price cuts we implemented on the 1st of April. In the contract segment, we gained 66,000 customers since March, supported by innovative work-from-home solutions in the enterprise space. In the prepaid segment, net additions increased $3,4 million in the quarter and $1.5 million in the half as we managed to attract share of wallet through accelerated investment, reasons to consume and active days management initiatives. Our underlying data matrix is strong, with data customers increasing 1,1 million in the second quarter and 409,000 in the half to 22,3 million. Data traffic increased 86% in the 6 months. We sold 580 million data bundles so far this year, up 23% year-on-year. I'm encouraged by this behavior as it means that we are making data more affordable, but also that customers are truly growing into a higher data usage. Financial services continued to perform well with revenue increasing 15% to ZAR 1,1 billion for the 6 months. 10.1 million customers have made use of our Airtime Advance platform in the first half, which in times of the lockdown, has proven to be very effective. We advanced ZAR 5,7 billion of airtime, up 16.6%. Our insurance revenue increased 13.5%, with policies up 23% to ZAR 2 million as we continue to expand our portfolio of products. EBITDA grew 9.9%, with margins improving 0.6 percentage points to 41.7%, excluding the impacts of the loyalty provision of ZAR 142 million in the current period and the IFRS 15 adjustment of ZAR 177 million in the prior period. Growth was 7.4%, still ahead of adjusted service revenue growth. The performance of our international operations was impacted by disruption to our control activities as a result of the informal structure of the economies in which we operate as well as the free person-to-person money transfer interventions for COVID-19 [ beneath ], and the budding of 2.9 million customers as a result of biometric registration as expected. Service revenue declined by 5.2% on a normalized basis, reflecting the increased pressures on consumer spend. Reported growth, excluding the sale of [ DDA ] assets, was 8.9%, benefiting from rand weakness. EBITDA declined by 8.1% on a normalized basis despite the cost containment initiatives. Data revenue increased 4.8% on a normalized basis, and we added 459,000 data customers in the 6 months to end at 20.4 million. M-Pesa revenue growth was impacted by the discounted of free P2P transactions in all our operations, except in Zania. We're encouraged by the increase in the value of multi-transactions in the second quarter by 23% quarter-on-quarter to ZAR 4,3 billion -- on $4,3 billion on average per month. Active M-Pesa customers increased 8.8% to 15.6 million and now represents 40.3% of our active customer base in the internationals. On the regulatory front, I wanted to provide some context and an update on the license in Lesotho. Late last year, the Lesotho Communications Authority or LCA issued a notice of enforcement proceedings against Vodacom Lesotho on the basis of its opinion or non-independence of the company's external auditors. Despite several engagements with the LCA in September 2020, the LCA notified Vodacom Lesotho that it was to be fined ZAR 134 million, of which 70% would be deferred. And in October, the LCA issued a notice of revocation regarding our operating license in Lesotho. The very next day on the 9th of October, Vodacom Lesotho launched an application in the Lesotho High Court to have both the determinations of the LCA, namely the ZAR 134 million fine and the license revocation reviewed and set aside. As a result of the application, the Lesotho High Court issued an interim order interdicting the LCA from enforcing the payment of the fine and revoking operating license. The matter will be held in the High Court on the 27th of November this year. Finally, with respect to the alleged non-independence of the external auditors of Vodacom Lesotho, the group is firmly of the view that appropriate safeguards were put in place to mitigate potential conflicts of interest. More positively and moving to South Africa, we are pleased with the -- on the progress in spectrum assignment, ICASA issued 2 separate ITAs with the auction for high-demand spectrum to take place on the 31st of March next year. The validity of the allocated temporary spectrum has been extended until the auction date. We look forward to participating in the auction process and see spectrum is critical to the pricing outlook for the market. Before we take questions, I'd like to revisit our COVID-19 response and the impact on our operations. We are in a privileged position as a telco to both maintain our business during this time, but also play a key and vital role in enabling governments to respond to the pandemic businesses to continue working and customers to remain connected. As the COVID-19 pandemic escalate across operations, Vodacom was at the forefront of lending support. This intervention showcase the importance of being a purpose-led business. We will continue to support our staff, our governments and our customers to face the spread of the coronavirus and look forward to a just economic recovery across all our markets. Before I conclude my comments, I would like to thank Sitho Mdlalose during his 4-year for being the interim CFO. His sterling stewardship and dedication over the past 4 months has been exemplary. Sitho will revert back to his role as the Financial Director of Vodacom South Africa and facilitate the smooth hand over to Raisibe. We will be joined -- Sitho is joining us for the Q&A now. Thank you.

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

I've just got 3 quick ones, if I can. I heard in the presentation earlier today, you mentioned that you're only looking for a 5% stake in Ethiopia. And I think that gives you some headroom to do some other M&A. So the question is, what are you guys thinking about CIBH? I mean your fiber connection rate is quite high at 74%. So how are you looking at CIBH of any other partners to grow your fiber business? That's the first question. As the enterprise is strong, I just want to know what exactly is driving that. I know the service revenue was up quite strong double digits as well. Is it more your mobile WiFi devices, handset-related contracts or just like SIM-only contracts that you guys pushed there? And lastly, your roaming cost seems -- I mean, it was a decent jump in roaming costs on your expense side for SA and this is despite you having additional spectrum in the period. So I just want to know, like what is the headroom that your network has or how capacity constrained are you guys despite having temporary spectrum being allocated? That's it for me.

Okay. So maybe to start off with -- on Ethiopia, I think, firstly, what we've decided to do is that the consortium be led by Safaricom and that we play more of a supporting role in that our investment is via Safaricom. So 51% will be Safaricom, 5% Vodacom, and the rest will be strategic financial investors that will be part of our consortium. The -- we've kept -- the reason why we've kept our powder dry is not because there's a pending investment, just to be clear. That said, it does give us opportunities to pursue opportunities that may present itself. The reason we've done it through Safaricom is because we felt that, that was the best vehicle, given the proximity, given the Safaricom's strong balance sheet. And also, I think, given that it'll be good exposure, being enabling country to Kenya. So we felt that, that is the most appropriate way to make the investment. In terms of fiber, honestly speaking, I think, yes, very good performance during the half. I think what's important is that from an ISP perspective. We're earning more credibility, given the investment we've made into our service levels and so on. I think fiber-based nature is not easy from an ISP perspective. But I think more and more people choosing to use us as they're chosen ISP, which I think is encouraging. So very good momentum there, given the investment we've made in that regard. That said, we don't have home spots. Let's be honest. And I think the telcos, if I play, are under-indexed in the space. And I think we need to step up the amount of home spots and coverage in that area. And in that regard, we would consider organic as well as inorganic opportunities going forward because I think the home spots in South Africa is still low. So there's still a latent opportunity in that space. We don't comment on market speculation of any particular investment, so I won't be able to answer that question. On the enterprise side?

Yes. I think on enterprise, we've had a really strong half, and you quoted an 11% growth on service revenue, the core driver in that half, 7.7% in the half. And the core elements of that was really all of the solutions that we're able to provide to our customers for working from home, for all the big corporates equally from education and all the universities where we're able to provide innovative solutions for them to be able to connect and continue with their education during the lockdown period and, actually, up till today as we speak. But that's on customer revenue. But I think all the lines saw good growth. We had good growth on, for example, in IoT. IoT revenues were up 45% as we saw an increase in the IoT connection now sitting at 5.5 million, which is great. And equally, we've had growth in cloud services looking -- driven by growth in our Infrastructure as a Service. Our cloud business is up 40% in the half, so all around a good performance, primarily driven by customer revenue, but supported by the other line as well.

On the roaming cost, I think the important part is that, of course, we've seen a massive increase in traffic. And I think what we've done is looked at which is the most optimal way to manage those -- that traffic. Given the temporary spectrum, given the roaming arrangements that we have with Rain, given the need to build more sites to cope with an 86% traffic increase. And in each case, we look for the most optimal way to utilize those sites. I think what's important, when you look at the roaming cost of Rain, you must also consider the roaming revenues for Rain as well. And you'll see, on a net-net basis, of course, it doesn't get a big impact on the numbers.

Very clear, and congrats again.

Our next question is from Myuran Rajaratnam of Metal.

I've got 2. The first one is on VodaPay. Are you in a position to disclose how many active subscribers you might have on it currently? And second part to that question is, so if I load, let's say, ZAR 1,000 into my VodaPay account using my card, who's paying? Because it leaves us ZAR 1,000 from my account and arrives ZAR 1,000 on your side of VodaPay account, I presume. And who's paying for the switching fees or the flight fees on my card here?

Okay. So I think the important thing to remember is the -- what's -- strategy the market is not the VodaPay that's going to be launched in early next year, which is the partnership with Alipay. What we have at the moment is a -- is basically a white-labeled Mastercard offering that's out in the market, and that was more kind of to gain more understanding of it. So numbers are still small. It's a couple of hundred thousand, I think, to roam about, but that's also intentional because the real play is the big platform that we're launching next year. What we -- so that's the one part. So don't look at the current VodaPay and see it as a proxy for anything. Secondly, remember, currently, basically, it's card economics, right? Because all you're doing is linking your card to the platform. So the transaction fees that you're paying would be the normal transaction fees that you're paying on card. What happens next year is with the Alipay launch is a full new platform, which is a complete lifestyle platform, which essentially is a marketplace, which incorporates on the platform itself. So you'll be able to shop for clothing, any type of service, travel, white goods, be able to pay your bills, your electricity, your water, pay for airtime, take loans and advances on it over docked facilities and so on. And that will be the initial launch. And then in a few months after that we will launch the Vodafone -- the VodaPay store value. That's when the economics changes because that's when, when you transact on VodaPay, it's at a heavily discounted rate because it's not going to the card rails. It's going to the VodaPay rail. So effectively, that's where we can discount both to merchant as well as to the customer on those fees.

Excellent. That makes a lot of sense. My second question is also similar to Preshendran on the Rain cost. I'm sorry, I'm being a bit picky here. So just a clarification, then I'll ask my question, all right? So you say your operating expenses went up 6.9%. And if you exclude the roaming -- Rain roaming, it would have been up 3%. And with the Rain cost, it went up 3.9% -- it's Slide 20 of your presentation. I just want to double check. The 3.9% is the incremental cost from Rain. So the Rain cost is actually a lot bigger, but that's just the delta of your total cost that the Rain cost went up by, if you know what I mean.

So Yes, that's correct. That's a correct interpretation. The 3.9% is the delta, is a bridge to the overall growth. So it's the contribution to the growth in the direct cost on a year-on-year basis. So it ends up at [ 3% ], yes.

And so -- and normally, that sort of is netted off with your facilities leasing and the rollout costs, right? Now but if Rain stops growing its sites and rolling out a network, there will be a hole in the incoming side, if I think about it, and please correct me if I'm wrong. And how much can that hole be if -- all else being equal, if Rain stops growing its network today? Because then you still get the facilities leasing past, but you won't get the delta from growing the network or rolling out the network? Or am I seeing this wrongly Sitho?

Yes, I think you're thinking about it wrongly in the sense that there's a line in other revenue, which comes through for, effectively, the facility leasing. And then there's the direct cost element. Those 2 largely net each other off. And you have a small delta and EBITDA level on a year-on-year basis that also hasn't grown. So ultimately, net-net, that's the position. But I'm not sure if I've understood your question correctly. Does that help you? Or is it...

So just to double check, so it's only for the facilities leasing you get incoming money from Rain. There is no fees or anything for actually rolling out the network for them. Because I understood that they actually don't do much in this relationship.

Well, I think they only have a network that we roam on, but that's not much. I'm just being facetious. Of course, they -- I mean, we're using their network, so yes.

So you don't get a fee from them for actually building out their network, only for leasing the -- for using your masts and towers, it's almost like a telco fee, right? Is that right or...

So we -- I mean, we do provide some services to them and whatever services we provide to them, we charge for, of course.

Our next question is from Jonathan Kennedy-Good of JPMorgan.

Just one up question from me. On your temporary spectrum that you're utilizing at the moment. Are you able to utilize sub 1 gig spectrum that's been temporarily allocated to you? And then just following up from that. Once the auction happens, presumably, let's say, on time, next year, would you be able to utilize that sub 1 gig spectrum as it stands today? Or would it need to be cleaned up further? And how does that impact your decision to pay for it immediately?

Yes. So look, I think a few things. So I think, firstly, the prices in the auction are coming in or the reserve prices are lower in auction. So that's the first part. And the second thing to remember is, are we using the sub 1 gig today? Yes, but on the temporary spectrum, but we're using it where we can. Let me put it that way. So in some areas, the broadcasters are using 800, so then we can use 700. And where they're using 700, we can use 800 provided that we have the radios in that particular area that can do it. So that's where -- so we -- are we getting the full benefit of it? No. Is it giving us some relief? Yes. So that's the first part. The second part is that, of course, in the auction once it's -- once you pay for it, you do get the full utilization of the spectrum. So the spectrum prices are lower than the numbers we were calling out before, but they're slightly different because you also have different blocks and so on, and so on. So it's a different construct, and it starts with a lower reserve price. When it reaches the numbers that we previously spoke about, maybe. I don't know, we'll see. But -- so that's the first part. The second thing is the -- I would say, do we get immediate use of the spectrum? No. So depending on which block we buy, we'll be able to use it again in certain areas, but at least the difference between now and then was that -- if you know you've got the spectrum, you can go and invest in all the radios and use it and maximize the use wherever you can, right? If there is interference in a particular area, then, of course, you won't be able to fully utilize it in those -- in that particular area or you'll be pushing for the cleanup to happen in those areas first. So it's going to be -- the 2.6% to 3.5% that, I think, will be completely usable from day 1. The 700, 800 will be a bit tricky initially. I think as part of the auction, there has to be a definitive date of when the full digital migration would have happened. And I would anticipate that it would be within a year. Also, if we've got clarity around the definitive date, it -- we'll use it where we can, build everywhere else and then simply flip a switch when it's -- when the digital migration happens.

Our next question is from John Kim of UBS.

Congrats on a [indiscernible] two questions, please. Firstly, on your ESG goals, when you think about having your carbon footprint over the next, call it, 4-plus years, should we be factoring this into a kind of CapEx/OpEx outlooks? Is this cost-neutral? And where do you see most of that savings coming from? Second question, completely unrelated. When you think about service revenue growth potential in South Africa for the next, call it, 1.5 years. You did indicate that the consumer is going to be under pressure in H2 of the fiscal year. Should we translate that in terms of lower ARPUs and service revenue growth starting to slow? What needs to be true to kind of preserve your service revenue growth rate in South Africa going forward?

Okay. Let me start off with the ESG goals. So I think we largely see it as cost neutral. Of course, what we are doing is we are utilizing some of the capabilities that we've already built in-house to help us reduce our environmental footprint, specifically power consumption. So let me give you an example. We've created a very good solution in IoT.next, which is deployable in buildings, base stations and so on, which is allowing us to reduce power consumption by as much as 20%. And we've deployed that on already more than half of the South African network and now looking to expand that across the group. We're also selling those solutions into the Board of Vodafone and having discussions with Vantage Tower and Vodafone as well so that we can resell those solutions, which is, by the way, driving some of the growth in IoT because we've now signed up the U.K., Germany, Netherlands and so on to all sell our IoT products, both for self-consumption as well as a platform. So strong part there. And so I think on the ESG part, it's largely -- the idea is that will largely be self-funding. Service revenue?

Yes. On service stone, we take encouragement from the number of clients that we are still growing this period around. Data clients and also some increase in the smart smartphones as well as the usage, where clients are, as of recent, at an average 2.2 gig. And obviously, leading off the peak of COVID effect, that some of the trends could still remain. And most importantly also, from the AI enablement that we have started building that it allows us to go to -- continue to get the bigger share of the wallet of the client. You would have also noticed some positive trends in our financial service offering. So that is also an area where we consider an opportunity to continue to sell more to our customers. And with that, the added pay enablement will enhance our ability to be to see revenue coming from customers continue to come through. So that is just in South Africa and it will just be a replication of that in, obviously, South Africa as well.

Maybe just to add. I think -- we think a stronger second half in the internationals in terms of the first half -- sorry, in the South Africa, as Raisibe said, the trends should continue. We should be -- there should be a slight step down, I would say, or a bit of a step down into the second half purely because the customer is under pressure. But more importantly, I think, because when people move -- when lockdown, it was the only modus operandi of transport. So I'd say people won't have thing by train, buses or cars, they were traveling on data. And data became the new mode of transport. And I think as we got out of lockdown, they would ease it for a little bit. But remember, the growth rates on data were still pretty strong, even outside of COVID.

Our next question is from Sunil Rajgopal of HSBC. It seems there is no response...

Sorry. Yes, sorry, can you hear me?

Okay. We can hear you now, sir. Please go ahead.

All right. Okay. Can you please comment on the trends that you are seeing in your international markets, especially, Tanzania? And how do you see the markets develop from here? Are you still seeing strength in the economy? Is there any outlook on the improvements.

So thanks for that question. So the trends in Tanzania have had basically the COVID -- intervention for COVID, nice effect observed in other markets. Obviously, the economy is slowing down a little bit. But in addition to that, and that's more importantly is the biometric issue where we had to disconnect the 2.9 million customers, we have since reconnected 800 of those customers and continue to work through the system to see whether or not we can be able to get some of those customers back. Of course, some of them may not necessarily be back. But that is a part of the kinks in terms of also working with the government or the regulators in that order. So there's still 1.6 million customers who are at risk in terms of this biometric challenge is concerned. Fortunately, in Tanzania, unlike the other markets, we did not have a free P2P. So the M-Pesa component has continued to see some growth in terms of the trend of spending. And for that, we expect that we will see better opportunities there going forward. So I guess in terms of just the COVID risk, I mean, that is something that we're still going to [indiscernible] to see across all the different markets. So Sitho, anything else to add?

Yes. I completely agree with Raisibe . I think the data traffic in Tanzania showed good growth. So we're up 0.3% -- 0.8%. So really strong demand from that 0.8% that we've seen. Our voice traffic was up 13.7% in Tanzania. So I think the vitals are there. The business will continue to pick up. Clearly, there's an element for Tanzania where, as an economy, one of the biggest drivers they have there is tourism, and that is still needing to pick up a little bit for refresh of the economic activity surrounding that to pick up as well. But nonetheless, I think, from a sort of life-hold of the business, we're confident with the trends going forward.