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 30 June 2022. Vodacom Group's CEO, Shameel Joosub, will host the conference call. Before I hand over the call 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 a copy of the trading update sent to you, please email Investor Relations website at [email protected]. Shameel, over to you.

Thank you. Good afternoon, everyone, and good morning to those joining the call from the U.S. I'm joined by our group CFO, Raisibe Morathi, as well as our Head of Investor Relations, JP Davids. Our first quarter performance was set against the backdrop of heightened uncertainty about the global economy as a result of COVID-19 and the Russia-Ukraine conflict. Inflation is accelerating in most of our markets where we operate, which is putting pressure on the consumer spend and our rate of growth. To help our consumers stay connected, we are leveraging the power of our big data capabilities to deliver personalized Nano pricing from Just4You platform. Further, we are actively deploying the high-demand spectrum purchase through ICASA's auction process earlier this year to improve customer experience and accelerate the rollout of high-speed Internet access in the country. During the quarter, we also made good progress in key pillars of our strategy called the system of advantage. Starting with towers in South Africa, we're making good progress in establishing a separate legal entity for the TowerCo and intend to announce an experienced TowerCo execution as their Managing Director starts shortly. This carve-out is part of the broader agenda to optimize and maximize the opportunities of our assets and lower cost to communicate. From an M&A perspective, our purchase -- our 55% stake in Vodafone Egypt is expected to receive Egyptian regulatory approval in the near term as we await final regulatory sign-ups. This is an attractive asset, and we are eager to conclude the transaction as soon as possible. In the quarter, Vodafone Egypt accelerated service revenue growth to an impressive 19.2%, well above local inflation rates and our business plans. Our acquisition of a 30% stake in South Africa fiber company, CIVH with an option to increase the stake to 40% is going through the regulatory approval processes. ICASA held public hearings in July, and we expect the transaction to close in the current financial year. This is an important acquisition for us as we -- as the deal will help narrow the digital divide in South Africa by expanding the reach of affordable high-speed connectivity. In addition to consumers benefiting, this is a win for the Internet service providers who can access more fiber through an open market infrastructure. In Ethiopia our greenfield operation, called Safaricom Ethiopia, will launch commercial operations from August. The rollout will cover 25 cities across Ethiopia in the coming months, including Addis Ababa. Financial Services remains a clear strategic priority for the group contributing ZAR 2.1 billion or 10.2% of group service revenue. The mobile money levies implemented in Tanzania continued to weigh materially on the growth in the quarter. However, the good news is that the levies have been reduced by a further 43% from July 2022. This means that the levies are now down 60% since implementation, a clear positive for the financial inclusion outlook and results in Tanzania. Despite the levies headwind, our platform continues to grow strongly and pace of transaction values processed over the last 12 months, including Safaricom were USD 340 billion, up an excellent 20.2%. . Supporting our financial service strategies, our VodaPay and M-Pesa super apps, these are critical to building out our 2-sided ecosystem, which brings together consumers and merchants. Additionally, the super app approach supports a major change in our partnership model as we expand from a few partners to thousands of service providers. Critically, the super app removes the barrier of physical limitations for both consumers and merchants which can then expand well beyond the geographical boundaries and our addressable market. At quarter end, we had accumulated 2.8 million downloads and 1.9 million registered users on our VodaPay super app in South Africa. Across our M-Pesa footprint, our merchant play is scaling rapidly. International M-PESA merchants, excluding Safaricom, were up more than 200% to 84,250. Switching then to our quarterly trading update, where the focus is on revenue and key performance indicators. As with prior quarterly results, Safaricom does not report on its performance, so we will focus only on our consolidated operations. Service revenue was up 5.2% to ZAR 20.2 billion, a good result given the challenging consumer backdrop. Our performance was supported by a resilient performance in South Africa and growth of our new services such as IoT and financial services. We also benefited from some rand weakness in the quarter with normalized revenue growth of 3.3% compared to the reported revenue growth of 5.2%. CapEx intensity this quarter was impacted by phasing in the fourth quarter of the previous financial year, with accelerated spend as we captured the benefits of a stronger rand and in anticipation of global supply challenges. We will step up spend in -- we will step up spend in the remainder of the year and target capital intensity in the range of between 13% and 14.5%, consistent with our medium-term guidance. At a product level, we reported strong growth in our new service categories, reflecting our multiproduct strategy. These new services, which comprise fixed IoT, digital and financial services reached 18.8% of group service revenue, moving closer to our target range of 25% to 30% in the medium term. IoT revenue was up 16%, supported by strong base growth. Our IoT customers reached 7.3 million, up 22.3%. Financial service revenue was up 9.3% adjusted for the mobile money levy in Tanzania, financial services was up an estimated [ 19.7% ]. This growth rate highlights an excellent growth outlook for the segment as we reaccelerate financial inclusion in Tanzania. Shifting focus to South Africa. Service revenue grew 3% to ZAR 14.5 billion and was supported by an improved performance in contract and a growing contribution from our new services. Our prepaid segment delivered a resilient performance despite the challenging macro backdrop of higher food and transportation costs as well as delays in social grants. It was in this segment that we leverage our CVM capabilities extensively to support our share of customer wallet. The contact segment performed well with revenues up 5.8%, supported by a 3% to 5% price up during the quarter. New services contributed 14.7% or ZAR 8.4 billion of South Africa's service revenue. IoT revenue delivered excellent growth of 16.4%. Financial Services revenue growth of 4.5% was supported by insurance products with policies up 8% to ZAR 2.4 million. We advanced ZAR 3.1 billion in airtime during the period amounting to 44.7% of total prepaid recharges. The growth rate of airtime advance was subdued by bundle pricing changes in the quarter, airtime advance volumes did however improve towards the end of the quarter. Vodacom Business growth moderated from high levels impacted by wholesale revenue. We are now lapping the postpaid roaming deal with Cell C, while Telkom has also optimized some spend. Data metrics remain strong. Data traffic accelerated 30.2% in the quarter. Smart devices on the network were up 11.5% to 26.4 million and the average usage per smart device increased 25.2% to 2.7 gigs per customer per month. Staying in South Africa, the proposed acquisition of Telkom by MTN is clearly noteworthy. We are of the view that the announcement aligns with the broader global trend of in-market consolidation, which we as a group remain supportive of. However, in the interest of safeguarding competition, regulators will approve transactions of this nature, subject to various conditions. Given the market dynamics in South Africa, we anticipate regulators will focus on ensuring spectrum equality and with significant remedies regarding open access to support lower cost to communicate in a competitive telco landscape. Moving to our international operations. We reported service revenue growth of ZAR 5.9 billion, up 10.4% on a normalized basis, where we removed the impact of exchange rate growth was 2.4%. The performance was supported by strong growth in data. Across International, we added 946,000 customers in the quarter to reach a base of 42.7 million. Data revenue was up 23.4% on a reported basis and 14.9% on a normalized basis. We are seeing the results of our network investment in the prior year coming through when data traffic growth up 39.7% in the quarter. M-Pesa revenue was up 11.8% or 3.4% on a normalized basis, the mobile money levies at a 15 percentage points impact on M-Pesa revenue growth. So understandably, we are looking forward to lapping this impact in the coming quarter. Our new product areas with M-Pesa such as landing are growing strongly. We granted loans equivalent to ZAR 1.8 billion in the quarter, up 71.2%. The growth was supported by -- in Mozambique in particular, in which we're leveraging the M-Pesa Africa strategic and operational direction. At the country level, the DRC delivered double-digit service revenue growth in U.S. dollars while Mozambique was impacted by proactive price transformation. We expect our pricing moves in Mozambique to support improved elasticity through the remainder of the financial year. In Tanzania, which reported yesterday service revenue declined 4.3% in local currency. As already highlighted, the outlook for this market is more encouraging as we reaccelerate financial inclusion. Raisibe and I are now ready to answer any questions that you may have.

[Operator Instructions] Our first question is from Jonathan Kennedy-Good of JPMorgan.

A couple of questions from me, please. On the -- firstly, the impact of load shedding in South Africa on network downtime, obviously, been through a fairly rough patch of late and must be fairly difficult to understand or forecast how the future might look with respect to further downtime. So just wondering if there's plans to invest in diesel generation or solar? And what kind of CapEx and OpEx implications there are for the group? And then secondly, with the new spectrum deployment in the 2600 band. How is this benefiting the business? And do you observe immediate kind of revenue and cost benefits? Any color would be appreciated.

Okay. So Jonathan, a few things. Firstly, from a load shedding perspective, I mean, of course, it's usually disruptive. Nobody planned for 8 hours. So I think that has been there. Funny enough, when the -- when power goes off, we actually get a positive impact on usage. And I think you can see the acceleration in data growth. A bit of that has also got to do with load shedding that'll give you a boost. That said, it only lasts as long as the batteries last. And when you run out of batteries, you run out of the batteries. So we have what -- of course, we've spent quite a bit of money in the last 2 years, about ZAR 1.6 billion to ZAR 1.7 billion on batteries, then non-generators and so on. So what we've had to do is, of course, stay and we're increasing the hours of standby all the time on the different sites. And during this period, we would have used more generator power and then fuel prices have gone up. So there's definitely been an impact on us in terms of costs. Now fuel, and fuel is not such a big cost for us, but it is increasing. So at least for the year, there will be at least ZAR 100 million plus impact from additional fuel costs, I would say, fuel and diesel and generators. What we are doing is basically a couple of fold. One is continuing to add batteries where we need to. That's one, and basically taking more sites to 6 hours and 8 hours, which we could have used that CapEx somewhere else. So it's frustrating to be frank with you. And batteries also have a faster depreciation. So they do put this impact on some of the numbers. So that's one issue. The second part is we continue to optimize our utilization at site using IoT.nxt technology and using all types of methods to kind of make sure that we can reduce the amount of consumption per site. We then doing pilots on solar now, we're doing pilots in wind power and so on. Solar by the way, is projected to get more expensive in the short term because of the shortage of panels now because of what's happening in Europe. So we're doing trials both in Europe and here in terms of getting the solar model to work, but it's not yet, let's say, at a point, it still is like a 5-year plus payback in terms of deploying solar on the site. So what we are doing is we're doing wind power tests. We're doing solar test, and we will continue to do that until we can get the optimal model where it makes sense. What we have agreed and we're busy with a pilot with Eskom where we will move to green power and still in negotiation. But [indiscernible] that I shared and I did share it in the presidential forum the other day. What we're doing with Eskom is basically looking to add. So we signed -- we will sign power purchase agreements. And basically, that would then be added to the grid. And then Eskom will wheel it and then, of course, charge a fee for wheeling, but we'll end up with a better rate. And they will do the credits for us, and they'll pass us a credited source so that we don't have to deal with all the municipalities, they will do that piece. This is still in negotiation phase, but they see this as a clear opportunity to, one, to do it with us as a pilot, but also to do it with broader let's say, corporate South Africa, where essentially that will mean adding a lot more power to the grid. As a business, we've also had meetings with the presidency and all the ministers and so on, and they assure us that there is a plan to correct the power, and they shared with us their plan of how they're going to do it. I think this is an added measure that can bring success there. Yes, so we're not solar as a part where we are deploying solar, like on campus, we're busy with a big project to make the campus on solar. So where you can do self-generation on a big site, so that makes sense. Solar at a base station level is not yet unfortunately at the point where it makes sense. We're also trying to see if we mix different technologies like wind power, solar, to come up with a solution. So both, at Vodafone level and at a Vodacom level, given the impacts in Europe as well, these tests are ongoing. In terms of 2.6 spectrum...

Let me just add that to contain the cost, we also have negotiated some discounts with some of the oil [indiscernible] just in the volume of diesel consumption, given the crisis situation. So that is not only giving us a good pricing, but also just the security of supply. So -- and that is something that we've done in South Africa, and we'll continue to explore in other markets as well for these opportunities.

And then just on the deployment of 2,600, yes, any perspective?

On the deployment of the 2,600, why you saw a little bit of a dip in the CapEx spend is, one, we took advantage of forward ordering and that sort of CapEx was on a higher level of our guidance last year. So we brought some stock in and the good interest -- at the good rates, prior to March. And then on some -- in some instances, we also swapped out values where we basically send stuff and [ want ] the water back so that we could get more 2.6 radius, where 2.6 plays a big role is we -- remember, we've only just got it. So we only got it from 1st of July. So it's a bit early is and famous. But essentially, what it does, it provides us with a lot more capacity. The second thing is it gives us the ability to deploy both 4G and 5G at the same time. And we can then -- if you've got 10 resources just to simplify, we can allocate 1 to 5G, 9 to 4G. And then as the traffic on 5G picks up, that's beneficial to us. That does give us a benefit over some of our competitors. We've got split spectrum.

Our next question is from Cesar Tiron of BofA Securities.

I have two. The first one would be on your earning agreement with Telkom. What happens to it if Telkom gets acquired, is there any provision to it? And also, is there any minimum commitment from the Telkom side in terms of capacity, what they need to pay you on a yearly or monthly basis? And I'll ask my second question after.

Yes. So the agreement lasts another 2 years or so to run. We, of course, in discussions to see if we can extend the agreement and Telkom is still willing to consider that. So we're still in negotiations to look at further extensions to the agreement. So I think that -- those discussions are ongoing. In terms of -- yes, so look, the regulatory process will take anyway, 2 years plus. So I think the -- we'll probably run into the [ Eskom ] agreement by the time the regulatory part comes up. What it does mean though is that -- so either we'll renew with Telkom, but it will be one of the remedies that we would want to see if MTN or Telkom deal came to pass here. We would -- I think this is one of the markets that will be impacted would be the wholesale market. The spectrum is one, wholesale is another one, and there's quite a few markets. Mobile is another one, spectrum is another one and so on and so on, they will all become part of this discussion.

I just wanted to follow up on these remedies. Obviously, it's early days, but -- and given a couple of examples. But are there any specific points that Vodacom would be uncomfortable with when looking at this type of in-market consolidation? I mean are there a couple of things that you would be demanding to regulators so that you are comfortable as a market participant with this type of in-market consolidation?

So I guess, I have the slice on my back of Neotel, right? The Neotel deal was very, very complicated, not because of the buying into fiber and so on and so on. Everyone was happy with that, but because of spectrum. And we spent 2 years on Neotel, eventually walked away, and we weren't even near the end of the process, right? It could have gone on for another 2 years. So it's going to be a very, very complicated process, multiple stakeholders as being, of course, the primary one or one of the primary ones. . The first thing is that spectrum in quality is key. So if MTN is buying this, they have to give back the spectrum, right? And so that's the first part. Otherwise, there's no way we would have accepted it. We would then fight like how to protect because spectrum equality is a given, not in this -- only in this market but globally. So from a global perspective that is extremely important. The second piece that I think will be complicated for them is the unions and so on, and you see articles coming up this morning already. The third part I would say is open access. Remember, Telkom's assets have never been subject to open access. Are we going into a deal where we're going in with the principle that we're going to open access. At a minimum, I think that would be required in this deal. So that could be hugely beneficial for everybody, especially if they're going to open access. Remember, they never open access there. The reason DFA exists today was CIVH or because Telkom didn't want to open -- didn't want to provide dark fiber, let alone open access. So those types of things now become subject to a regulatory environment. And I can -- they would have to open access fiber. They would have to open access the national long distance and so on and so on and so on. So that's -- for me, there will be pages of regulatory parts, not just for us but for the broader industry to be able to do it. Big picture-wise, of course, in-market consolidation, good, less players, more stability, more price stability, all of those type of things. So in the big picture, it will be positive for the industry. It will be positive. It will be positive for us as long as the remedies are there. I think the other positive is, remember, you have to also -- let's just say if the CIVH deal is not approved, there's no way in how the other one is going to happen.

Our next question is from Georgios Ierodiaconou of Citigroup.

There are actually a couple of follow-ups on consolidation. And -- thank you, first of all, for clarifying the time frame and also what you want to get out of the process. I just wanted to check whether there is any risk that the kind of remedies the regulator will go for could be more disruptive for a market like ensuring wholesale access for third parties and mobile that could potentially damage pricing, if you don't mind just talking us through why you wouldn't expect this or if you see that could be also a scenario that we should be aware of? And then the second question is around towers and how does this consolidation process change, if at all, your view of both for an operation and perhaps strategic perspective, your thinking of progressing with your top portfolio?

So I think, firstly, on the remedies part. I think, look, the reality is that the remedy is the first complain and on all of this will be asked. So I think spectrum and those type of things will naturally have to be sourced out because you can't create an imbalance. And because it has just gone through a process to equalize the spectrum through the last spectrum auction. They've also set the spectrum cap per operator, which will mean that immediately MTN will have doubled the spectrum cap. And remember, Telkom still have some legacy spectrum where it's above that. So you're going to end up having to give a lot of it back. So that for us is the big issue. The remedies in terms of open access, I think, will apply to the fixed network because that's where Telkom is really going to have an impact. In terms of mobile, I think the ability for there to be MVNOs already exist, there's a requirement, of course, for -- as part of the spectrum licensing to at least trade one MVNO per operator type of thing. So those things are there. And basically, I think the -- so that will depend on where the people have the appetite and so on and so on to be able to want to play in the service layer. But the infra layer will change because you'll have the networks, you'll have Vodacom, MTN, you'll still have -- sorry, remember, you have 6 players, will now reduce to 5. So you will have 5 players. But the combination of Telkom, which is the price instigator, I guess, in mobile will probably be the most topical. Personally, I would have made a play for the fiber piece, not the whole thing, but that's just me. So yes, I think we'd have to work through it. It's early days. And I think what we're doing is a couple of fold. We proactively making sure that we have a full list of all remedies and best practices from around the world. So that would be the one, including leveraging our Vodafone in that regard. And then secondly, we will do a gap analysis. So if we did come to pass what gaps could there be, and then we'll make sure that by the time the transaction comes to parts that we've done enough to try and close many of those gaps. And of course, the big thing will be mobile, that will be more or less the same size as us. If the deal comes to pass, which I think basically, that's fine because that will create a lot more stability in the market in that respect. In terms of the TowerCo, we're proceeding with the saturation of the TowerCo. Everything has been set up. No, it doesn't change our logic. We still want to run it like a business. And we still see the strategic nature for it. As you can imagine because we have the largest towers in the country, everybody has been through here wanting to partner with us. So there's many suitors, including suitors that where other operators sold their assets too. So I think there's lots of opportunity around towers, and we'll -- what we're doing is that MD start soon. We basically put the team together and so on, we'll start to run it like a business. And then, of course, look at opportunities around, can we increase tenancies and that type of thing. Interestingly enough if the deal goes through, Telkom will -- MTN will end up with towers after they've sold their towers. So that creates another interesting dynamic because they'll have duplication of towers. And so what are they going to do with that. So I think that also becomes an interesting piece in terms of value and what you do with the towers and so on.

Our next question is from Myuran Rajaratnam of MIBFA.

First one is I'm -- see if I can elicit an answer out of you, Shameel. In terms of valuation, you've run your pencil, your ruler of Egypt, you've run it over M-Pesa, Safaricom, all these things, surely you must have run it over Telkom as well, where do you stand on that? I mean you're getting fiber assets, you're getting IT assets, you're getting mobile assets, perhaps spectrum, we don't know yet, but where do you stand?

So honestly, look, I think my view is that Telkom's underlying assets were always undervalued in terms of what they have in the ground versus the revenue that they generate from it versus the EBITDA and the multiples. If you look at the assets, they've got some really good assets. There's no doubt about that. So for me, I mean the trading is based on profits and EBITDA and so on and so on. So effectively, or the earnings potential that they've never fully managed to gain, right? Let's be honest about it. So would you pay a premium on the current trading price? I think you would have to. Could that premium be baked? Yes. I'm not going to put an exact number to it. So I do think there's underlying value in the assets. But I think it's -- you have -- it's how you manage it and it's -- and also how you manage the legacy which I think is important so -- and the aging. There's a multitude of different things when you look at it, but it does have some good assets. I mean there's no -- the final book play is roughly the same as [indiscernible] is slightly bigger than -- that opens up. So there is value there. They have a lot of properties, and they've never really been able to commercialize it, but they have properties. They've got back all fiber, they've got national fiber, they've got undersea cables. And then they've got business. And so it's a mix of legacy and new is the way I see. I always thought that there's more value to Telkom than what the share price reflects, in terms of underlying assets.

Then you mentioned spectrum equality and the Neotel deal and you've got scars still, right? .

We'd also appreciate also in us, we also undervalued.

Okay. Well played. Well played. My next question is on Neotel and spectrum because you mentioned you've got scars from Neotel. Just on that spectrum issue, I mean that was a point in time Neotel, maybe, 5, 7 years ago. Has the industry, the regulations, the overall international markets have moved on from there, is it fair to say? Or is it still everyone hung up on spectrum being not tradable or not trending?

I think as an industry will always be hung up on spectrum. I think inequality in spectrum is a big issue. So it will -- have that hang up. In fact, to be honest with you, I think it's worse today, with 5G, with 4G and so on. When we attempted it, I thought I could slide it through, but it didn't work.

Okay. Okay. So last question, and I have to have one tongue-in-cheek, right? Spectrum you keep saying spectrum equality. So that means all your African operations where you have extra spectrum, you're going to give it back to the [indiscernible] later, right? Because you really want to play fair in those markets, too. Is that right?

No. My assessment is, actually we don't have the more spectrum in every market. So that is a problem we try to address. The issue is that spectrum this [ country ] has always been subject to some kind of auction problem. So I think spectrum was given as part of the regional licensing process and Telkom [indiscernible] the biggest bunch of spectrum, which it just held on to, right, and that was never allocated. That was allocated where in the time where Telkom was on the one side of the corridor and the postmaster general on the other side. And then they work from one office to the other and allocated themselves what they need.

Our next question is from Nadim Mohamed of SBG Securities.

Just one question from my side. I'm just very curious, when I look at the international performance, it looks like data revenue held up really well in an environment where you had a lot of pressure on consumer spending in a tough macro environment. Just was wondering what exactly other strategies that you're employing? Is it about 4G rollout or anything in that regard, it does look like data revenue has done better than voice and [indiscernible] are holding up. And I would think in a more normalized environment, it would have been much higher than this, both [indiscernible] will be appreciated.

The multitude of different issues, I would say. I think the first one being just a normal -- the normal demand for data, right? And as you're converting people to smartphones and the normal usage growth in data, that's there. So you're getting more smartphones, more users, more data users. So there's a natural path. And I think that natural path will continue for years to come. [indiscernible] is not so much the growth. The issue that you manage in all markets is not a growth of data. Data growth is there. The issue is pricing and the stability of pricing. So once out in this quarter is also some stabilization in pricing, regulatory price stability that's been created in Tanzania as an example. That's one. The DRC continuing to grow strongly on data. So price stability plays a big goal and then in Mozambique, also the drop in pricing to be more competitive in a price transformation, and we've taken a hit on -- from a pricing perspective. But to ensure, more competitiveness going forward. So we constantly do reviews and we have pricing methodologies in each market. So yes, here momentum in terms of coverage rollout, more capacity and more 4G, more smartphones and the like.

And just to confirm, is the data price so in place in Tanzania now?

There is, there is. So that has been implemented.

[Operator Instructions] It seems we have no further questions on the line. I would like to hand back to Shameel for any closing comments.

Thank you for joining us today on the investor call, and please reach out to the Investor Relations team if you have any questions and we will be meeting some of you as we do some of the investor calls and lunches and so on. Thank you very much.

Ladies and gentlemen, that concludes this conference. Thank you for joining us. You may now disconnect your lines.