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, 2020. Before I hand the call over to Shameel, I would ask that you refer to and familiarize yourself with Vodacom's forward-looking disclaimer. This is set out on Page 15 of the trading update and can be located on www.vodacom.com. Alternatively, if you would like to -- a copy of the trading update sent to you, please e-mail investor relations at vodacomir@vodacom.co.za. [Operator Instructions] Please also note that this event is being recorded. I would now like to turn the conference over to Shameel. Please go ahead, sir.

Thank you, Chris. Good afternoon, everyone, and good morning to those joining the call from the U.S. I'm joined by Raisibe Morathi, our Group CFO; Mariam Cassim, our Group Chief of Financial and Digital Services; and JP Davids from our Investor Relations team. As this is our quarterly trading update, we will focus on revenue and key performance indicators only. As with prior quarterly results, Safaricom does not report on its performance, so we will not focus on our consolidated operations. Against an evolving economic and pandemic backdrop, our third quarter is -- has confirmed the importance of all our core services and our accelerated evolution for metallic communications 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 this ecosystem approach sets us up for long-term value creation. Also, we remain committed to assisting governments curb the spread of the pandemic, whilst at the same time, focusing on the economic recovery in each of the markets where we operate. In the quarter, we delivered revenue growth of 6,4% and service revenue growth of 3,9%. Normalized growth, which adjusts for foreign exchange and M&A was slightly higher at 6,7% for revenue and 4,2% for service revenue. This performance reflects improved growth from our international operations and sustained strong growth in South Africa. Pleasingly, the South African result was a function of multiple growth drivers, including our prepaid segment, Vodacom Business, Financial Services and IOT. It's also important to note that our international markets, including Safaricom, are again charging for peer-to-peer M-Pesa transactions. Looking at South Africa in a bit more detail. Service revenue increased 5,4%, underpinned by strong mobile customer revenue growth of 5,8%. The standout performance in mobile customer revenue was prepaid. Prepaid ARPU increased 9,3% to ZAR 59, supported by increased usage of our connectivity, financial and digital services. The performance is also supported by the accessibility of airtime by our Airtime Advance product. In the quarter, we advanced airtime amounting to 40.2% of total prepaid recharges. Our contact segment posted a resilient performance with revenue growing at 1,6% and and customers up 1.9% to 6,2 million. The growth we reported in both mobile customer revenue and service revenue reflects our strategy to introduce 1 more service to customers. New revenue streams, which comprise financial and digital services, fixed and IoT revenues were up 20.3% year-on-year. These revenue streams contributed 14,4% to service revenue from 12% a year ago. Financial services delivered another strong quarter, we recorded ZAR 619 million in revenue in the period, growing by 24,3%. This business is now delivering an annual revenue run rate of ZAR 2.5 billion. From a product perspective, we advanced ZAR 3.1 billion in airtime via the Airtime Advance platform to 10.7 million customers. Growth in the insurance space continues with revenue increasing 13,5% and policies up 11.2% to almost 2.1 million. To provide some color on our financial service business and, in particular, our partnership with Alipay, Mariam Cassim, our Chief of Financial and Digital Services, will provide an update later on this call. Switching to Vodacom Business. The segment now accounts for 27.5% of service revenue and grew 6,1%. This performance was supported by fixed line, cloud and hosting and IoT revenue, all producing double-digit growth. Also, we finalized an extended roaming agreement with Cell C related to its contract and mobile broadband customers. We expect this deal to be revenue accretive, and that will carry around -- and that we will be carrying around 40% of Cell C's total traffic. On the connectivity side, we increased our home and business fiber customers to 110,000, up 113% year-on-year. The demand for mobile data continued in the quarter, although the growth is strong, the trend normalizes, lockdown restrictions were eased for most of the quarter. Data increased by -- increased 43,2% and while usage per smart device grew 35% year-on-year to 2.1 gigabytes per user. There are now 15,100,000 4G devices connected onto our network and an increase of 24% year-on-year. Our international operations delivered a notable sequential improvement in the quarter. Normalized service revenue declined 0.3% compared with the 5.2% decline in the first half of the financial year. This trend reflects some progress in economic and commercial activity levels and improved M-Pesa growth. Data revenue growth was 6.6%, supported by network investment and targeted campaigns. Data customers net additions were 302,000 in the quarter to end on 20,7 million. This means that 52,6% of our international customers make use of data services. Data traffic in our international was up 52,2%, supported by focused data campaigns and our investment into networks and our strong CBM platform. M-Pesa revenue growth improved meaningfully in the quarter as we sustained strong platform growth and improved monetization. Mozambique reinstated person-to-person fees from October with the DRC and Safaricom following in January. Active M-Pesa customers increased by 7,7% to 16 million, representing 47% of our international customer base. M-Pesa revenue grew 10.1%. On a normalized basis, M-PESA revenue was 7.8%, comparing favorably with the decline of 1.4% and in the first half of the year as a result of the free person-to-person money transfers. M-Pesa now represents 21.1% of our international service revenue. Including Safaricom, M-Pesa now processes $24,2 billion in value per month, up 57.8% year-on-year. To give this value some context, minor in Philippines process, $20 billion over 12 months and recently raised funding at $1 billion valuation. Overall, our international operations contributed 28,2% to group service revenue. Before I conclude with comments on regulation, I will hand over to Mariam for an update on financial services and Alipay.

Thanks, Shameel. Hello, everyone, and thank you for the opportunity to discuss some of Vodacom's most exciting growth initiatives. My name is Mariam Cassim, and I look after the group financial and digital services. Before I jump into the Alipay partnership, I thought it would be useful to provide some context around our South African Financial Services business. First and foremost, it's important to note that our Financial Services business is a fully independent company and a wholly owned subsidiary of Vodacom South Africa. We have our own Board of Directors, own dedicated resources and own [ CapEx ]. This is very important for high-growth companies such as ours as the separate stand-alone structure allows us to be incredibly nimble in what we do and have contributed to us being quick to market with the delivery of new and often disruptive products and services contributing to our ZAR 1.2 billion bottom line. We operate across 4 product lines, which includes payments, lending, insurance and trade. The last of these is probably the least familiar to you. Our trading business consists of all of South Africa's major FMCG players with over 4,500 small merchants and processes over ZAR 200 billion of transaction value per annum. Connectivity with merchants is an important part of our payment ecosystem approach and our trading platform will form the basis for these interactions. We are also proud to share that we have officially launched our own physical point-of-sale Android devices into the market a few years ago. This represents the execution of the first part of our payment strategy, which was created just over 2 years ago and is a significant milestone for Vodacom as it starts to create a whole new revenue stream outside of just voice and data. We have signed just over 1,200 active merchants in the last few months since launch and currently processed approximately ZAR 100 million of transaction value per month. Our Android point-of-sale device is amongst the first of its kind in the South African market and allow small merchants to do so much more than just processing card payments. Merchants can apply for a loan through the device, connect directly with FMCG suppliers, and soon will be able to win prepaid, airtime, electricity and other products through the point-of-sale device. Our Airtime Advance product continues to grow as we continually enhance the credit scoring algorithm and ensure that it is available to customers at every single pain point of not having a ton of data. We now advance just over ZAR 1 billion of prepaid airtime per month, which equates to 40% of total prepaid airtime to approximately 11 million active customers. Our insurance business has also continued to grow despite the challenging COVID year as we've seen a rise in our funeral insurance and [ Medi Assist ] product. We still continue to enhance the product set by creating new and innovative products in this space. And then, of course, we have the Landmark Alipay partnership. Our partnership with Alipay will add new dimensions to our financial services proposition, and in particular, VodaPay, which will become a single lifestyle super app. We are actively working on 3 streams to get this done, namely the customer journey, merchant sign-ups and our financial services infrastructure. To deliver on each of these elements, we've hired more than 100 software engineers into Vodacom Financial Services. And critically, our Alipay partnership provides us with the wealth of insight and precedent on how to get this development done successfully. We look forward to taking you through more of the detail closer to our launch date. I will be on the call to handle any further questions which you may have in this regard. Thanks. Back to you, Shameel.

Thank you, Mariam. To conclude our quarterly update, I would like to give a brief update on the spectrum process in South Africa. In December, subsequent to ICASA's invitations to apply for spectrum, the regulator received a court application filed by Telkom. The Telkom filing complied 3 parts with 5B seeking to stop ICASA from assessing or adjudicating applications received for both the high demand spectrum and the 1 ITA. Telkom has requested a hearing, which is expected for the 9th of February 2021. So in a couple of weeks time. In addition to Telkom's filing, MTN and free-to-air broadcast to Etv have also launched court filings in respect of the auction. We see the assignment of spectrum as instrumental in extending coverage, improving quality of service and lowering the cost to communicate in South Africa. To this end, in December, Vodacom submitted an application, in response to the exclusive use ITA. 5 other local telcos, including Telkom and MTN also submitted applications. We believe that any further delays to the auction process will likely have a negative impact on consumers. As such, we remain supportive of the auction proceeding by the 31st of March 2021. In addition to participating in ICASA's high demand spectrum auction, our ongoing COVID-19 response, and ensuring that we continue to invest significantly in our network to accommodate rapid shifts in the customer behavior is a key strategic priority for the group in the next quarter. To further enhance customer experience, we invested ZAR 3,4 billion in our network across the group in the quarter, including expansion of 4G coverage, speed and capacity. In South Africa alone, we invested ZAR 2,6 billion to support data demand and shifts in customer patterns. This concludes my comments, and Raisibe, Mariam and I are now ready for any questions.

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

Firstly, congratulations on the quarterly trading update. I've got 3 quick questions, if I may. Firstly, I just want to know on South Africa. Your active data customers went down in the period. I'm just trying to -- if you can give me some details or color on why that happened. It wasn't much. It's, I think, 1.8% down? The second question is around Cell C. I remember at your interim results, you mentioned to us that the Cell C roaming was mainly for 2G, and that was coming to an end, and it was, I think, around ZAR 40 million that you were getting from Cell C on that roaming agreement. Can you give us any indication of how this new roaming agreement on its contract involves that subscribers are going to affect your -- [ access ] in your other service revenue line? I know you mentioned just earlier that you're going to plan to cover about 40% of Cell C's traffic. So I just want to know if you can give us some numbers or some color on what that impact will be? And just the last one, please, if I can, on Tanzania. Can you give us an update on the unregistered SIMs over there? And how many are still impacted?

Okay. Let me start off with the SA active data customers. So I think what is important this year, just to understand, is that we've been trying and you'll know we've had this conversation for a while now. But effectively, what we've been trying to do is step down the amount of gross adds on prepaid. And so that we could ensure that we could stop the washing machine effect. Now obviously, when you add customers, at the same time, you're also adding more data customers. So just to give you a sense of what was happening and what's happening now. So last year, this quarter, just as a comparison, we added 13,5 million new gross ads on prepaid, yes, of which 500,000 was the real number of net adds during the quarter. So what we've done is taken a deliberate move to reduce the amount of gross adds and we've reduced the gross adds, this year for the same quarter is 11.5 million customers that we've added. And that's because we've improved the quality around the -- and brought down the gross adds on purpose. But the net adds have gone up to 1,45 million net adds during the quarter. So I think what's important is the factor of these higher gross adds would have given rise to a basically a bigger number of active data customers because -- especially during the December period, and then they always fall off January, February, March. Now we have a more robust piece. So am I worried about it? No, because I think it's a factor of the reduction or 15% reduction in the number of inflow on prepaid, which is resulting in a better net add quality. On Cell C roaming, so what's interesting is that the Cell C roaming agreement came to an end in November. And so they continued to use post-November, but that was more on a month-to-month basis on the current roaming agreement. On first of February, the full new roaming arrangement kicks in. And without giving exact numbers, let's just say it's in excess of ZAR 1 billion net. So that's the benefit of the new Cell C roaming agreement. So it's quite big for us. And so we're quite pleased. It's a new long term arrangement. And effectively, will see us providing both roaming to them, but also services to them. So services in the form of where we have a separate entity that will look after things like basically some of the services on their postpaid base for them like credit vetting.

And then on the Tanzania matter, so as we indicated in our half year that 2.9 million customers were initially deactivated. And we still expected that a further roughly around 1.8 million customers could be deactivated. So that number is now roughly around 1.1 million. So we expected that we will notify that those deactivations will take place in December. But fortunately, that did not happen. However, it is still likely that somewhere during the course of quarter 4, we could see the deactivation of the 1.1 million customers.

And Raisibe, can you give a revenue impact of those 1.1 million, that still could be disconnected?

The -- it's about KES 3 billion a month.

Yes.

Tanzanian.

The next question is from John Kim of UBS.

I'd like to ask a couple of questions about the South African business. Can you give us some color on price elasticity post the CompCom price cuts? From memory, I believe Vodacom proactively cut prices 15% before the 30% mandated. I'm just trying to pin down the timing of that.

Okay. So remember, your -- the price cuts, the first price cuts were first of April 2020, okay? And to be honest, you saw the results that came through in the first half. And so the -- let's say, COVID helped to achieve the elasticity very, very quickly. So although we had something like a 34% price drop on some of the monthly data bundles, the -- basically, all of it was offset by volume growth during COVID. So we had no issues and still delivered a strong result. I always said that we should have had a negative first half. But essentially, you saw the numbers, more than 5.5% growth for the first half. So very strong results in the first half. So I think it was nicely offset by the COVID results. And then we have a further price drop of 15% on the same monthly bundles that will take effect from first of April 2021. And there, again, we are quite comfortable that we will more than like -- more -- we will be able to offset it with enough elasticity to more than cover for that price decrease.

Okay. Helpful. Is there any updates or traction on development of the WOAN? Have -- RFPs have been submitted or adjudicated?

On that WOAN?

WOAN...

Okay, so remember, this is all now caught up in this debacle of Telkom, right? So effectively, remember, what's supposed to happen is there's supposed to be an auction of the spectrum that's supposed to take place or that's planned to take place on the 31st of March. Then following that, there will be a process to allocate spectrum to the WOAN. I think where we are currently is a good position, which has come out in the ITA, which is an equal amount of spectrum, being envisaged for the larger operators and the WOAN. So I think that's a good place to land. Of course, we're not happy with all the requirements of the ITA. But I think all in all, on balance, if the auction goes ahead, it will be okay. There is certain things that are confusing still in their ITA. And that's why you're seeing the MTN challenge coming through. I think ICASA hasn't managed to respond properly to some of the questions. They've been vague in their responses. We took the view that it will be sorted out in the auction, once their auction year has been appointed and the rules will be clearer. But I think MTN decided to take a more stronger view and actually challenge specifically the opt-in rounds of the auction. The WOAN will take -- once it's licensed, of course, there's a separate licensing process and then it will have its obligations and so on and so on. So I mean, we're comfortable that the balance between us and the WOAN will be fine. And if the WOAN wants to really create a use case that will be successful, it will provide the operators -- remember, the WOAN doesn't sell directly to the market, it will provide the operators with a rural coverage piece where there may be a much bigger uptake of their services than there would be in the cities.

[Operator Instructions] The next question is from Jonathan Kennedy-Good of JPMorgan.

Perhaps a question for Mariam on Airtime Advance. Just wanted to get a sense of where exactly those figures are recorded, are they recorded in the prepaid customer revenue line, boosting that growth there? And also, in terms of 40% of airtime being driven through Airtime Advance, is it still the case that you lose some of the commission through the physical distribution channels or are you seeing an increased take-up of electronic top-up to pay back the Airtime Advance? And then secondly, just a follow-up on prepaid growth. Can you give us some color as to what revenue growth is looking like now in the fourth quarter? I mean, obviously, you had a very strong third quarter. And just trying to understand exactly how COVID grants, et cetera, and the increased economic activity, transportation, alcohol share may affect this kind of growth rate going forward?

Thanks, Jonathan. Just to your first question, yes, it is reflected in line item prepaid customer revenue. So that's where the Airtime Advance revenue is reflected. To your second question in terms of the saving of the distribution cost, there isn't an exact saving as customers would still need to recharge through their normal channels. And so there is still a distribution fee payable for that. But what we do have is we have a platform admin fee that is charged to customers to take in advance, which equates to about 9% to 10% of the value of the advance. So we're actually a lot more profitable than the distribution fee that's paid. So with that, Jonathan. So regarding the outlook for fourth quarter, we see -- we're not at liberty to be able to give you full details on that. But the alcohol ban hasn't happened probably until yesterday because the [ statistics ] have changed a bit. And there's still uncertainty around whether the social grant of ZAR 350 will be extended or not. At this stage, there was [ seashell], concern for government was that it will end in January, and there are obviously some noises relating to what's transpired in the ANC conference, but that has not been validated by government in terms of extending the ZAR 350 per month. So for that, we think the outlook for fourth quarter is looking positive, but obviously, it had some boost with the alcohol ban, which has now ended.

If I may just ask Shameel 1 question on the spectrum licensing process. Is it feasible? Or is it likely that these various challenges by Telkom, MTN, et cetera, would delay the spectrum auction process? Or -- do you have any views on that or not, in particular?

So look, I think there's always that risk, right. And I think the reality is, I mean -- I think the Chairman of ICASA put it quite nicely today where he said that Telkom essentially is looking at its own self interest, right, and basically trying to scupper the auction process to its own benefit. And I think that's the truth, right? And I think Telkom's told you guys often enough that they want to delay the spectrum allocation. So one would have thought that it would have been better this time around. Because I think what they're doing by delaying it is actually creating a rod for their own back because they do need access to the lower band spectrum and so on. So it's not surprising that they're trying to delay the auction process. I think MTN has been clear that their intention is not to delay it but rather to -- for clarity on this 1 particular area, which is the opt-in loans. So yes, there's a risk that it gets delayed. It depends when it goes into core processes, but it's a little bit more unpredictable. It depends how the court sees it. Of course, from a public interest perspective, any further delays is a problem, and government of course, are not happy with any delays also on the spectrum auction because it's 1 of their priorities. And frankly speaking, they need the money as well. So I think it will be very disappointing, but yes ,say the rest gets delayed.

The next question is from Myuran Rajaratnam of MIBFA.

My first 1 is about -- is for Mariam, actually. Thank you for the additional color on the Airtime Advance product. I mean it seems like a very useful and profitable arm of the prepaid segment. My question is twofold here. I mean you've got about 10 million customers there, which bearer -- I'm trying to understand the behaviors of this particular group of customers. So which bearer do they use to access airtime advance predominantly? Is it the SMS, is it USSD or is it actually the data bearer? I'm sorry, I don't use it myself. So I don't know. So I'm asking that. And the second bit is, is the churn of this 10 million group of people different to the general churn in the prepaid segment? I've got a follow-up as well.