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 2021. Vodacom Group's CEO, Shameel Joosub, will host the conference call. Before I hand the call over to Shameel, I would like to ask you 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 copy of the trading updates sent to you, please e-mail the Investor Relations team at [email protected]. [Operator Instructions]. This conference is also being recorded. I would now like to hand the conference over to Shameel. Over to you, sir.

hank you. Good afternoon, everyone, and good morning to those of you joining the call in the U.S. I'm joined by our group CFO, Raisibe Morathi, as well as our Head of Investor Relations, JP Davids. The third quarter was a very exciting period for Vodacom. In addition to delivering strong revenue growth, we launched our highly anticipated VodaPay super app in October, and we announced 2 strategic M&A deals in November. All the while, Vodacom Group remained committed to focusing on the economic recovery markets where we operate through the execution of a purpose-led 6 point plan. This plan includes expanding network coverage and resilience, accelerating support to governments, enhancing digital accessibility and digital adoption, supporting our customers as they adapt to new ways of working and promoting financial inclusion. Our trading update for the third quarter was supported by the ongoing execution of our strategy called the System of Advantage and was in line with our medium-term target framework. We expanded network coverage and resilience to support the various initiatives that we undertook to increase consumption of our products and services. Our seasonal summer campaigns provided increased engagement and was underpinned by our behavioral loyalty program called Vodabucks in South Africa. We delivered particularly strong results in Vodacom business while our financial service businesses continue to scale across all our markets. The integration of our digital and financial platforms is clearly [Audio Gap] at the end of December, we had recorded 1.4 million downloads with over 1 million registered customers. The platform service and merchant offerings are provided through unique mini apps. At the end of the quarter, we had 72 merchants and services coming on by a mini apps with many more onboarded to be onboarded in the near term. We believe this app is a game changer as it brings together the best in technology with our investment across the FinTech value chain supporting greater digital advantage and inclusion. The super app also gives us the ability to aggregate the digital shopping mall experience with digital services, such as entertainment and our broader fintech services road map including money transfers, lending and savings. In November, we announced 2 strategic M&A transactions, a 55% shareholding in Vodafone Egypt, an acquisition of a 30% stake in CIVH, its fiber assets, with an option to increase our stake to 40%. Our minority shareholders recently voted overwhelmingly in favor of the ZAR 41 billion Vodafone Egypt transaction. This approval represents an important milestone in our target to close the transaction in the coming months. However, the timing remains subject to regulatory approvals in Egypt. Pleasingly, Vodafone Egypt sustained its strong growth trajectory in the quarter, with revenue up 17.9% in local currency. In addition to accelerating Vodacom's purpose of connecting people for a better future, what is particularly exciting about the CIVH fiber asset agreement is that this will facilitate an ambitious fiber rollout program across South Africa. This will assist in narrowing the digital divide by enabling affordable access to connectivity in some of the most vulnerable parts of society and help to bridge South Africa's digital divide. We have submitted regulatory filings in respect of the transaction to the Competition Commission and ICASA respectively, initiating a process to obtain regulatory approval. Switching then to our quarterly trading update with the focus is on revenue and key performance indicators. As with prior quarterly results Safaricom does not report these performance, so we will focus only on our consolidated operations. Revenue increased 6.4% to ZAR 26.7 billion, and we are now annualizing well over ZAR 100 billion. Service revenue was up 5.3% and underpinned by a resilient performance in South Africa with particularly strong growth in Vodacom business. At a product level, we reported strong growth in new services, reflecting our multiproduct strategy, which we call the system of advantage. Our new services, which comprise fixed IoT, digital and financial services continued to scale, making up 17.7% of group service revenue. We target a new service revenue contribution, group service revenue of 25% to 30% by FY '24. Our IoT revenue was up an impressive 33.9%, while Financial Services was up 12.5% to ZAR 2 billion across the group. Adjusting for the impact of mobile levies in Tanzania, group financial service revenue growth was 24.3%, reflecting the strong underlying fundamentals of this business. For example, transaction value from [ Montegrosso ] M-Pesa platform, including Safaricom, increased 16.1% to $28.2 billion a month, a truly impressive number. In Tanzania, our lending product, Songesha, grew 21.3% with the equivalent of ZAR 900 million in loans being disbursed during the period. In Mozambique, we are raising excellent initial adoption of the Airtime Advance program from South Africa. This was launched in July. Shifting focus to South Africa. Service revenue grew 4.5% to ZAR 15 billion and was supported by continued demand for connectivity, especially within Vodacom business, strong growth in financial services and increased engagement from a successful summer campaign. New services such as financial service and digital services, fixed and IoT, contributed ZAR 2.1 billion or 14.1% of South African service revenue. IoT revenue delivered strong growth of 30% and Financial Services increased 11.8%. The financial service performance was supported by Airtime Advance in our insurance products. We advanced ZAR 3.4 billion in Airtime during the period amounting to 45.4% of total prepaid recharges. Our insurance revenue increased 11.3% with policies up 14.8% to ZAR 2.4 million as we continue to expand our portfolio of products. Vodacom business had another excellent quarter with revenue growth up 14%, this growth was even by mobile contract, which is up 17.3% and supported by our innovative work-from-home solutions. Growth was also supported by wholesale revenue. The broader contract segment, including both Business and Consumer, delivered a strong performance with the revenues up 7.6%, and we added over 81,000 customers in the period. Our prepaid segment delivered a resilient performance against a very strong prior year comparator. We added over 263,000 prepaid customers and increased ARPU 1.8% quarter-on-quarter to ZAR 57. In the prior year, ARPU reached ZAR 59 as we captured the wallet share opportunity associated with more stringent lockdown restrictions. Sector metrics remain strong. Sector traffic accelerated 25.9% supported by work from home and engaged summer campaigning. We added over 500,000 customers in the quarter to this 23.4 million data customers. The number of smart devices on our network increased 11.1% to ZAR 25.9 million while the average usage per smart device increased 24.4% to 2.5 gigs per customer. Our international operations reported service revenue growth of $6.7 million, supported by strong growth in data and investor. Our customer base increased 6.9% to ZAR 42.1 million. Data services remained a key driver of growth and was up 21.2%. Growth was supported by data customer additions of 126,000, an incremental usage per customer, as the traffic growth was strong at 34.9%. Base revenue was up 12.9% to ZAR 1.3 billion, the performance was supported by strong growth in the DRC and Mozambique. Mozambique [ lapped ] with the introduction of peer-to-peer charges in the quarter, but we still delivered local currency growth of 22.4%. M-Pesa momentum in Tanzania continues to be hampered by the mobile money levies introduced during July 2021. The impact of the levies and service revenue was ZAR 250 million or 4.4 percentage points of international service revenue growth. By engaging with the Tanzanian authorities to assess the impact of the levies on the industry on -- and the impact of the financial inclusion in the wider economy. On the regulated front, the key focus here remains spectrum in South Africa with the auction scheduled for March, we are working with government, ICASA and the other telcos to unlock the economic tailwind of high demand pactum. Telkom's concession on this January interdict marks important milestone in the consultation process and for the auction to proceed in March. In Tanzania, we will continue to engage with the authorities regarding the introduction of mobile money transaction levies in the country. So it's to not interrupt the service, the significant strides made in the last decade in reducing barriers to financial inclusion. Before we open up for Q&A, I wanted to highlight an upcoming investor event, we will host on the 23rd of February. The briefing will encompass a series of presentations and demonstrations covering the group's digital ecosystem strategy, including financial services. Please reach out to our Investor Relations team if you would like to join the session whether in person or online and have not yet -- or have not yet received an invite. So if you haven't received an invite and would like one, please just reach out to us. Raisibe and I are now ready to answer any questions you may have.

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

Congratulations on the quarterly update. I've just got 2 questions. Firstly, on your IoT revenue, if I look at it over the last 3 quarters, it seems to be flat at around ZAR 300 million per quarter yet your connections have been increasing each quarter. So can you shed some light on why the revenue is staying fairly flat despite the increase in connections? And then secondly, on Airtime Advance, have we reached the, call it, steady state level of 45%. I know it was growing nicely above that, and now it seems to have staggered around that level. Just your thoughts on that. Sorry, that's Airtime Advance. Sorry.

Just to confirm your question on IoT, you're asking is the connections staying broadly flat, but revenue going up. Is that correct, Presh jee?

Sorry, JP, the other way around, the revenue -- I'm calculating the revenue at ZAR 300 million per quarter over the last 3 quarters, but as your connections have increased every quarter from the beginning of the year.

Okay. Perhaps we'll -- I'll reach out of lines to help you with the numbers on the IoT. But the number itself is growing about 30%. One of the issues impacting reported growth was in the last quarter of the financial year last year. We did a reallocation between IoT and the mobile service revenue line. And we don't have to go read through that now, but that has impacted the reported trends for the year. So adjusted for that reclassification, IoT business is growing around 30%, happy to run with that off-line with you. It's a reclassification last year that is impacting the reported trends. And then do you want to have a crack at a second question again, apologies?

Yes, no problem. Airtime Advance as a percentage of prepaid recharges seems to have reached a steady state of around 45%. Is that a fair statement? Or are you targeting something higher?

Yes. I think, it's fair between 45% and 47%. I think we hit a high of 47%. I think the best part is, of course, we don't want to get completely carried away with it. I think it is -- it will go up because we kind of keep reinventing different new options and those type of things. But I wouldn't pencil in a big growth. I think it's more modest prepaid growth or slightly higher than the normal prepaid growth going forward. What we're not doing instead is expanding the number of services using the same backdrop. So remember, if we push it to ours, the bad debt goes up. So now what we're doing is we're using the same intelligence to effectively look at extending more credit to the same customers but for other products, which will come to play, which is things like [ buggers ] and the ability to land and so on.

The next question is from Cesar Tiron of Bank of America Securities.

I have 3 questions, if that's okay. The first one would be on the super app. So you've provided some very encouraging metrics on downloads and registered users. Can you please share also any data points that you have on what users spend most of the time on when they are in the app, how they use it, et cetera? Second question which I had was on the taxation of mobile money in Tanzania. I just wanted to understand to clarify if this will all be in the base in July this year. And also what is driving, in your view, the volatility, the back and forth on these changes in taxation. And the third question would be on the -- the disclosure on what you call, I think, new type of revenues, which you think will contribute to 25% to 30% of -- I think, of total revenue. Are you willing to disclose what would be the share of mobile money, as a guidance, of your revenues by 2024.

The second question is on -- we didn't understand the second question. If you can maybe just repeat that. The line wasn't so clear.

Yes. Sorry about that. So I just wanted to understand what is driving, in your view, the volatility around taxation of mobile money in Tanzania? And when will that be completely in the base? Is that in July this year?

Okay. So let me start off with the super app part. I mean we will answer at the -- we'll be giving a lot more color at the session on the 24th -- 23rd sorry. We'll be giving a lot more color about some of the activities that we're seeing. But of course, what -- just high level, what people are coming to do is very varied. You're having people buying airtime products, of course, from the package itself, but also there's 75 different services. So there's, of course, things that are more popular, like for instance, Makro and Builders' Warehouse and some of the big brands and so on. But -- so that's 1. Our highest spend was about -- what was it, EUR 4,000, EUR 5,000 on the platform in 1 transaction. So -- but we'll give more color around that. And then, of course, 1 of the big, of course, in the food side, Kentucky is doing really, really well. So there's a number of different products and services that are actually taking off quite nicely. But -- what we'll do is give a lot more color on the 23rd and go into a lot more detail there. On the second question on the volatility of the taxes. Essentially, what happened is at the time, I think government was a bit short of taxes and went for a very aggressive approach. They admitted as much, adopt -- then came back and dropped it, after we ed discussions with them, by 35%. I think there's an acceptance that they would drop it again. The question is when and they're not being firm on the date of when any further ones will come. So -- and we've been presenting to parliament and the impacts of these types of things, but it will be in the base by July. That's correct. What is done in fairness is it probably taken us back 2 years in terms of where we were in absolute numbers. So we -- it took us back, and that was the impact of it -- impact in this quarter has been ZAR 250 million. So -- but we are seeing month-to-month growth. We are seeing the recovery coming through. So that's positive, but fully in the base by July. And from the new services side, yes?

So on the new services of the 18% about financial services with the balance being fixed and IoT and so on. But this is a question of when each 1 of those components started and accelerated. So you will note that in the financial services and M-Pesa and obviously, [ CSF ] in South Africa. So all these businesses are growing. Financial services growing in the teens and whether the IoT, for example, is growing faster than the [indiscernible] business. And so 1 fact that, that shape will continue to correct. But certainly, finally, chances is, it's the next big offering after mobile. So migration into the 30% bucket will probably still take that change, but we do expect it to correct over time. And you'll assess the mix we can check over time.

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

If I may ask on your new service revenues, how should we think about the impact on margin going forward? Would those revenues as a group deliver margin accretion over the next 2 to 3 years? Or how should we think about that? And then secondly, I've noted, I think, in the U.K. and parts of Europe, there are some operators who are starting to raise pricing given inflationary pressures in those markets. Just wondering if Vodacom on the postpaid side has contractual terms, which allow it to increase pricing and whether that would be something the group would consider, given you've had deflationary pricing for better part of more than a decade, I would think.

I'll start with the second one. So yes, we have the ability to increase pricing, and it is -- and that's always one of the things that we do consider. I think the way we do it would be different. What we would -- what our modus operandi would be is to start with our competitiveness in the market, then look at if we increase prices, how would that be? And effectively, there will be an allocation of value that goes with it as opposed to just -- but of course, that does result in higher ARPU. So potentially, if you -- so for argument sake, so you were increasing by ZAR 10 or 3% or whatever it might be or 5%. What you would do is then allocate more data, typically, or more voice to the customer on that basis. So it would be not just a price cut with no benefit. We would also enhance the allocation of voice and data within our packages.

So on the second one, you're asking about the margin for the financial services. So just noting that the margin is variable depending on the product that we're offering. And in some product we're just really just taking a fee like the lending products, we're just taking a fee. And obviously, on the [indiscernible] where -- it is a platform that is all about scale. So some of them would be low margin. But overall, the financial businesses contribute to higher margins than the mobile business. And we sense that there is still low depreciation because they are low in terms of the CapEx requirement. So net-net for the operating profit, it is strong contribution.

The next question is from Slava Degtyarev of Goldman Sachs.

A couple of questions. Firstly, with regard to the spectrum auction, if you can elaborate on your expectations from here. What is the next steps if all goes as planned, and where you see currently the balance of risks with regard to the auction process? And secondly, any particular areas across the business with regard to the cost inflation pressures that you are most concerned with.

Okay. So on the spectrum auction, I would say, look, I think we're closer now than we've ever been before because Telkom has now removed the interdict, the likelihood that the auction will proceed for a couple of caveats, I'll come back to that, now is very, very good in terms of -- and so in all likelihood, where we sit at the moment, it looks like the auction will proceed. However, there's still a [ doubtful ] case that's hanging, I don't see that case being heard. They, of course, removed the interdict, which allows the auction to proceed. Now what would then happen is the case would probably only be finalized post auction, which means that Telkom would have to decide post auction based on what they got out of the auction, where it's worth the fight or not. So for all accounts, for now, it looks like the auction will be proceed. There is still informal negotiations happening to try and see if the -- between Telkom and the regulators and so on and government trying to facilitate discussions to try and see if that court case can be removed totally, which will be better. I think the other key development we've seen a lot more positive is that the ETV part seems to be in a much better state as well in terms of, firstly, the digital migration, but also I mean of course, ETV will have to speak for themselves, but it does -- by all accounts, it looks like things are getting better. So for all intents and purposes, it looks like we're going to have an auction. The -- yesterday, they announced the bidders, no surprise, only the 6 bidders, so no new entrants. And yes, so we go -- we're preparing to go to auction. And with you with all the auction methodologies and so on, they've appointed a very good auctioneer. That's basically got a good reputation internationally. So I think -- they're now looking at creating what they call auction training and so on. So just over a month to go for the auction. And yes, so looking like all systems go. Ideally, of course, if the court case can be removed, then there's no overhang. The question of cost and inflation, where are we, and if we're seeing any pressure points around cost inflation?

So I guess certainly we need to pick up, but we also use a [indiscernible] to digitize a lot more areas, we're using RPA mall. We still have a lot [indiscernible] of the digital services to make it efficient. And for that to be -- help contain part of this inflationary pressure. But of course, I mean looking at costs, will already be part of our gains. So we'll continue to focus on that. So every [indiscernible] we tend to have a [ portion ].

The next question is from Madhvendra Singh of HSBC.

Can you hear me? My line was quite disturbed earlier for a second.

Yes. [indiscernible]. Thank you.

Thanks. So the first question is -- I have is on the prepaid business in South Africa. That seems to be the only lagging segment within your overall business in South Africa. So wondering if you could share -- any insights there? Is that a declining trend still or you think the worst is behind us? Should we expect some growth in prepaid back anytime soon? So how should I basically think about the prepaid segment in South Africa? And also related with that is that MOUs seem to be falling overall. So is that just continuation of the word cannibalization or is there something else to it? And second question is on the CapEx plans. It seems like your third quarter was a bit slower on the CapEx side. So if you could remind about the CapEx guidance and how should I think about medium-term CapEx outlook for Vodacom.

Okay. So let me start with the prepaid one. So effectively, I think the underlying measures in prepaid pretty strong. I think One of the things that you have to consider when you're looking at this year's results, is that I think what we did really any successfully last year is we captured some of the opportunities around COVID and the lockdowns and so on. So that did boost revenue. And we were very, very well prepared for them, and we took full advantage of it. Now that did mean that we took money from other indices for example, alcohol and alcohol lockdowns and so on and so on. So we did benefit more in those lockdowns, and we benefited from some of the social grants as well. Simply put, when there were tougher lockdown provisions, people were working for home, one, but more importantly, they're to stay home and couldn't go out. So they used more data -- and so we captured that opportunity. And you will see last year, ARPU was stronger at ZAR 59. But what I think is encouraging is that once things started to normalize, of course, the ARPU then came down, which has impacted a lot of the CR compared to last year. Encouragingly for us, though, we have seen a 1.8% quarter-on-quarter growth in ARPUs. And I think that is helping, and that is showing the right change. Secondly, I think if you're looking at the net customer additions, that was quite strong. And if you're looking at the total customer base growth, you are looking at the customer base continuing to expand -- and over last year to this year, we've added 1.4 million, almost 1.5 million customers year-over-year. So -- and most of that, of course, is prepaid. So I'd say the underlying parts are quite focused within prepaid.

Then on the CapEx, the ZAR 2.3 billion that you see in the [indiscernible] where we have front-loaded CapEx, taking advantage of the exchange rates, but also the [ Kenyan ] CapEx, the better operations to generate revenue from it. So we do give you in terms of comfort in terms of what we tend to do for the rest of the year, if you look at where we have spent now the -- some of that ZAR 8 billion, the ZAR 10.5 billion that you're guiding shows that there we'll still be around ZAR 2.6 billion, which is around ZAR 80 million number that we see in the previous quarters. So definitely not slowed down, just a question of shape. And on the IV market [indiscernible], where CapEx has grown by 28%. And here, we still have some remnant of supply chain disruption coming from the COVID environment, but they're definitely building to continue to improve our network. So the growth in CapEx altogether, we expect to see the guided CapEx [ maturity ] of 18.5% and interest rate at 14.5%.

Okay. And on CapEx point, just digging a bit more, especially relative to your biggest competitor in South Africa, MTN, which has significantly up the investment game in the market. With that, I think there is a good perception about improving network quality and so on. How would you weigh your network compared to the gap you had versus MTN previously? Are you looking to regain that gap at all? Or you are happy with where the gap is currently versus MTN.

Yes, I think firstly, I mean, we are outspending MTN for the last 2 years or so in terms of CapEx. I think they moved out to a more -- to a level lower. That's the first part. I think the second part is in terms of performance and network, I think we still got a very good customer perception around the network itself. And the reason like this, just to give you an example, we've won the -- we've basically beaten [ FGM ] in all the voice parts for the country. So I think a very, very strong performance in terms of voice and voice to a large is perception because you don't worry about whether you are 1 megabit per second, but you do remember when you dropped the quarter, there wasn't coverage. So that it is -- we put a lot of effort into and make sure that we're leading in that respect. And then, of course, we're doing the same region by region with MTN. And essentially, I would say, it depends what you're looking at. If you're looking at reliability, coverage, voice, then Vodacom is definitely leading. If you're looking at data speeds and MTNs in the lead. But to be frank with you, I call them more the eagle space of who's faster, who's slower. I think the customer doesn't really care if you are a few megabits faster, so what. They care about the service work. So I think that's the bigger focus area for us. I say tongue in cheek because, of course, I train some of these people to come -- and come back with the same methodology. So they're fighting us with the same game we taught them.

The next question is from David Lerche of Sanlam Private Wealth.

Just 1 question from me. Could you give a little bit of detail on Airtime Advance? Are you actually charging interest on that? I mean how much more expensive is it for the customer to buy airtime with advance rather than just buying it straight up.

Right. So effectively, and then they buy normal airtime to repay the loan, okay? So they still go to the process of buying airtime. Of course, the most beneficial part is when we get both sides of the transaction because then we're set for the commissions as well. So what happens is the customer doesn't pay any interest. And there's no recourse. It's no recourse funding. And effectively, what it is, is we use a data analytics to return and who to give credit to based on the calculation but also based on stuff like what time you wake up in the morning as an example. And so an example would be a customer wakes up between 4 and 6 is more credit worthy than a customer who wakes up at 7. But the way it's charged is a plain policy of ZAR 1. So you only pay it and for the transaction. But we, of course, do a lot of loans. So you're extending loans of over ZAR 1 billion a month. The exposure at any time -- every payback period is 2 days. So your exposure at any time is more than ZAR 40 million to ZAR 50 million for a month.

The next question then is from Ziyad Joosub of Nedbank.

Just 2 questions from my side, please. The first question is, could you maybe give us an update on roaming revenues, specifically from Cell C and maybe to some extent, Telkom, what trends are you seeing there? And then the second question is on your fixed service revenue growth. So your fixed revenue growth sort of channel checks indicate that Vodacom continues to take market share in the retail fiber space. I'm just trying to understand why we've seen what seems to be a slight deceleration in fixed line revenue growth?

Thanks for the questions. On the roaming side of things, yes, so again, quite a similar profile to what we've seen over the last couple of quarters in terms of the impact of wholesale and Cell C, et cetera, on the growth profile to add about 1 percentage point of growth in the quarter. Just as a reminder, we will lap that in the fourth quarter. So we started seeing the benefit of that Cell C contract coming in, in the fourth quarter of '21, anniversary is coming up there. To answer your question, yes, it's been supportive in the third quarter, adding about 1 percentage point of growth to the South African performance. Then on the fixed line side of that, you've correctly called out that there has been a bit of a deceleration, that's not within the sort of core side of business, as you said, from a retail perspective, from a wholesale perceive at the moment, so I think we're going nicely and we are taking market share on the highest side in particular. The drag is actually just within our cloud and hosting business, which forms part of fixed, but that's a little bit of an unfortunate accounting and we've actually got to deal with it. So we've had to move contracts to justify in the software as a service. And so you've got a net of revenues and costs and just take the net number through your P&L. That's having a little bit of an impact on the growth profile in fixed. If you take that out, your fixed line business is still growing double -- around double digits. So the underlying trends, the fundamental decline is just a bit of -- a bit of a headwind from some of the accounting changes on the carbon hosting site we're putting through. Hopefully, that's fair enough.

So we have no further questions in the queue. Would you like to make some closing comments?

Yes. Thank you. Thank you, everyone, for joining us. We hope you could join us on the 23rd. We've got some exciting things to show you on what we're doing. Look forward to chatting then. Thank you. Bye-bye.

Thank you very much, sir. Ladies and gentlemen, that concludes this conference call, and you may now disconnect your lines.