Vodafone Qatar P.Q.S.C. (VFQS) Earnings Call Transcript & Summary

Good day and welcome to the Vodafone Qatar Second Quarter 2022 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Bobby Sarkar. Please go ahead, sir.

Okay. Thank you, Elaine. Hi, hello, everyone. This is Bobby Sarkar, Head of Research of QNB Financial Services. I want to welcome everyone to Vodafone Qatar's Second Quarter Fiscal Year 2022 Results Conference Call. So on this call, from Vodafone Qatar management, we have Sheikh Hamad Abdulla Jassim Al-Thani, who is Vodafone Qatar's CEO; and Masroor Anjum, who is the Chief Financial Officer, so we will conduct this conference with management, first, reviewing the company's results, followed by a Q&A. I would like to turn the call over now to Pauline Saab, who is the Head of Investor Relations at Vodafone Qatar. Pauline, please go ahead.

Thank you, Bobby. Good afternoon, everyone, and welcome to Vodafone Qatar Q2 '22 Financial Results Call. The investor presentation is available on our website, vodafone.qa; the usual disclaimer, on Slide #2. So to begin, I now hand over to Sheikh Hamad bin Abdulla Al-Thani, our Chief Executive Officer.

Thank you, Pauline. And thanks to QNB for organizing this call. [Foreign Language]. And welcome to everyone who is attending this call afternoon. Would you please turn to page that's titled key messages? It's #3 in the pack. As noted on the first point, we are very pleased with the overall performance of the business. We continued our growth momentum for the 18th consecutive quarter on a year-to-year basis, reaching a record total revenue growth of 23.5% on year-to-year basis. Another record was the net profit growth of 61.3% on year-to-year basis, reaching to QAR 216 million for the first half of the year. Other pleasing KPIs for us is that we continued to improve our net profit margin; EBITDA; return on capital employed; and return on equity, which recently reached 9.2%, which is 2 percentage point above the full year results of 2021. The second point I want to highlight today is our competitive strengths. We gained revenue market share of approximately 2.9 percentage points on year-on-year basis on a trailing 12-month basis. Also I would like to highlight that this is the fourth consecutive quarter of revenue market share gain on quarter-to-quarter -- quarter-on-quarter basis. In addition to that, for the last year or so, we started benchmarking ourselves to the region, including the GCC. According to the published results of the publicly listed telecom companies in Q1 2022, we were among the fastest growing in terms of revenue, EBITDA and net profit performance. [indiscernible] these results come after a very careful and precise implementation of our strategy since 2018. I'm very happy to see the transformation of the company over the last 4 years. To mention a few key points: the adopted data-driven approach, which resulted into more accurate decision-making; cost reduction; margin increase; and smart CapEx implementation; also the investments on our mobile and fixed network. For example, our mobile sites have increased more than 61% till H1 since 2018. This has made it possible for us to target and provide a superior service to high-value segments that we were not able to penetrate sufficiently before. We have swapped and upgrade more than 85% of our IT stack and system, which enables us, for example, to do -- or to be able to react to the market faster, improving customer experience; and the employment of artificial intelligence, machine learning and RPA. And we started focusing more on customer experience while implementing the best-in-class journeys. Also we have been focused in the diversification. We are aiming to lead in IoT and big data solutions; also many other managed services that we started getting into it, which resulted into a healthier revenue mix for us. We might be able to share more in the next call, hopefully, [Foreign Language] in the upcoming quarters. The last point I want to touch is that, in the second quarter of the year, we saw an increase of approximately 6.1% of the total population compared to the second quarter of 2021, although we have seen a seasonal decline of 6% versus previous quarter. In terms of global environment, the ongoing disruption in the supply chain; chip shortage, chipset shortages; the commodity prices hikes; and the overall inflation pressures, we see an increasing importance of strategic risk management and business continuity. We're constantly evaluating these developments and adjust our action accordingly. So all in all, again, we had very strong quarter for Vodafone Qatar. I will now hand over to Mr. Masroor, our CFO, to cover the financials in details. Thank you.

Okay, thank you, Hamad. And good afternoon, everyone. Let's move to key highlights on Slide #5. The momentum that we saw in Q1 is continuing with strong financial performance in the first half of 2022. Total revenue is 23.5% higher year-on-year, led by 14% service revenue growth and revenue from projects which we discussed in Q1. Pleasingly, we have outperformed the last year numbers in all revenue segments, including prepaid, postpaid, enterprise and also fixed, IoT and managed services. Despite higher revenue, subscribers; and significant expansion in mobile and fixed network, OpEx growth remained lower than service revenue growth. And with higher revenue and optimized costs, it enabled us continuing growth in profitability. EBITDA is QAR 590 million, and that's a growth of more than 25% year-on-year with a reported margin of 41.1%. And this led us to report the net profit of QAR 216 million for H1 this year, and that's a growth of 61.3% year-on-year. These are our highest profitability levels of a half yearly period. We have also seen strong subscriber growth. Our mobility subscribers grew 4.2% since December and 17.6% compared to June last year. Now moving to Slide #6, our financial performance for the first 6 months period compared to the similar period of last year: total revenue growing by QAR 273 million or 23.5%, led by a very pleasing service revenue growth of QAR 152 million in addition to the projects revenue. Expenses increased by 22.3% year-on-year mainly due to growth in direct costs corresponding to growth in revenues, especially for the projects. Other than equipment costs, direct costs remained largely flat year-on-year. This is despite growth in our service revenue. Increase in OpEx is mainly driven by network expansion to cater for the upcoming demands of the World Cup and beyond. It is notable that our OpEx intensity, which is OpEx as a percentage of revenue, has further declined by 2.1 percentage points to 24.7% in H1 2022. Now with increased service revenue and controlled costs, our EBITDA grew by 25.2% with a margin of -- expansion of 0.5 percentage points year-on-year to 41.1%. And lastly, higher depreciation; and the impact of industry fee, which is a function of net profit, partially diluted the EBITDA gains flowing through to net profit, but nonetheless we still recorded a very healthy 61.3% growth in our net profit year-on-year. Moving on to next slide, presenting second quarter financial performance compared to similar period of last year, on Slide #7. We continued with top line growth momentum in Q2 with total revenue growing by 22%, strongly supported by growth in service revenue of 13.7% or QAR 75 million. Again growth is recorded across all core revenue segments. Expenses increased by 22% mainly due to growth in direct costs corresponding to growth in revenues and increase in OpEx reflecting expansion in network footprint. Again it is notable that OpEx intensity remained 1.4 percentage points lower this quarter versus the last quarter despite the impact of higher 5G and fixed related operational costs. With the increased service revenue, our EBITDA grew by 22% to reach QAR 289 million. And net profit grew by 60% or QAR 41 million, reflecting higher EBITDA, partially offset by higher industry fee. Now moving to Slide #8 and taking a closer look at our service revenue. Postpaid is continuing its growth momentum, up 13.4% versus last year. This is mainly driven by higher subscribers. We continue to have good traction for our mid-value U plans. At the same time, our unlimited plans are selling well, helping us to increase our penetration into high-value segment. Prepaid has also increased by 7.8% year-on-year on the back of higher subscriber growth. There is a slight decline in prepaid revenue quarter-on-quarter. And this is due to seasonality impact, the lower recharges in Ramadan and the school holidays. Overall, total service revenue increased by 14.1% year-on-year, led by mobility; and increasing contributions from fixed, managed services and IoT. Now looking at the efficiency and profitability margin trends on Slide #9. We continue to improve our operational efficiencies, resulting in reduction in our OpEx intensity to 24.7% in H1 2022. That's a reduction of another 2.1 percentage points year-on-year, and this is despite significant expansion of mobility and fixed network. The next chart shows the growth of our EBITDA margin over the last few years on a comparison basis, with the red trend line being the reported EBITDA margin and the gray trend line being the EBITDA margin excluding equipment business and the one-offs. As explained in previous slides, higher service revenue and rationalized costs enabled us to sustain 40%-plus reported EBITDA margin despite increasing mix of low-margin equipment and project revenue. Reported EBITDA margin reached 41.1% with a growth of 0.5 percentage points year-on-year. EBITDA margin excluding equipment business, which is a true reflection of our core business, has increased by 3.4 percentage points to reach 46.4%. And the final graph shows the growth trend of our net profit margin, which has increased by 3.5 percentage points, compared to last year, to 15.1%. And that's a more than 3x margin expansion since 2018. Now looking at the CapEx on Slide #10. CapEx for the period is QAR 216 million with an intensity of 15%. This was primarily focused on coverage and capacity expansion. As mentioned by Hamad earlier, we have significantly expanded our fixed and mobility network, giving better coverage, and also enhanced our digital capabilities for a superior customer experience. As you are aware, the CapEx intensity is high in the light of FIFA Qatar 2022 preparations. And we expect the full year CapEx intensity to be between 20% to 23%. The increase in profitability, as explained in previous slides, has resulted in significant improvement in our return on capital employed. We have been successful in cautiously allocating CapEx into growth areas at right times, bringing the best in technology from both consumer and enterprise segments, while continuously controlling our expenses. This has helped us increase return on capital employed by another 1.7 percentage points this year to 8.5%. Now moving to the next slide and looking at cash flows and net debt. Together with the growth in top line and profitability, our operating cash flow has also shown strong growth with QAR 125 million or 47.5% increase year-on-year. Coming to the second graph, on the right: The net debt has increased by QAR 91 million compared to December 2021 mainly due to disbursement of dividend. However, if you look at the trend over the last 4 years, the net debt is largely stable despite significantly higher CapEx intensity of around 21% for these 4 years and also the consistent payment of dividends that we increased to 6% for the financial year 2021. Third graph, in the bottom left, shows that our strong cash flow generation during the last 4 years enabled us to sustain higher CapEx intensity and the consistent and increasing dividend payout, keeping the net debt level stable. As a result, our net debt-to-EBITDA ratio has improved from 0.89 to 0.48 in FY '22. We currently have a borrowing capacity agreed with the banks to avail financing up to 2.5x of annualized EBITDA. However, with the current signed-up facilities, we have additional drawdown headroom of QAR 850 million, a very healthy liquidity position. Turning to the full income statement. We have already covered the major year-on-year movements. Both consumer and enterprise and other revenue increased year-on-year. The earnings per share has also increased, in line with the net profit. And with these results, as mentioned by Hamad earlier, we believe we continue to be ranked as one of the best in the region in terms of top line and profitability growth. As usual, the balance sheet, detailed statement of income, ARPU and subscribers are included in the appendix. That concludes my review. Thank you, everyone. And now back to Pauline.

Thank you, Masroor. We can start now with the Q&A session. Operator, can you explain to the participants how to ask questions?

[Operator Instructions] We will take our first question today from [ Mabe Singh ] of HSBC.

My question is on the service revenue performance. 14% growth is very strong, so I want to understand the driver behind it. It is -- like is it more driven by economic activities in the country? Or do you think you're taking market share? Or is it new people coming to the country, especially given that we have the World Cup later in the year? So is this revenue also reflecting part of that in any way? So if you could talk about that, that will be very helpful. And then secondly, EBITDA growth that's kind of aligned entirely with revenue growth. So has there been some kind of cost pressure in the second quarter as well that you -- or you're not really getting much operating leverage, it seems. So I just want to understand the cost dynamics as well because in other markets there is a bit of inflation pressure, especially from fuel costs, but I presume that should not be the case in Qatar. Or I'm -- am I wrong there?

Okay. See, I'll just give you some flavor, first of all, around service revenue. See, we have been following a commercial strategy whereby we have been focusing on high-value customers and investment in our network and digitization. Most of the growth that you're seeing is driven by expanding and improving our network into areas and segments where either we were not present before or our network quality was not up to the standards. And when we go there, we get more customers and gain market share. Secondly, at the same time, we have been focusing on diversifying our revenue stream. We have built our internal capabilities to tap into managed services and IoT markets, and we continue to grow revenue there. So definitely the market is stable and we are gaining customers and revenue market share, as we've already explained during the call. The second question, about stable EBITDA margin: Yes, with the top line growth, we have been able to sustain above 40% EBITDA. And that has to do with the continuous emphasis on the cost optimization program that we are running whereby we keep on looking for all the opportunities to rationalize our cost structure. The inflation question that you asked. Yes, like [ other ] opcos, we also get impacted by inflation because the source of a lot of our goods and service is from outside the country. However, as part of our cost optimization program, we have been able to manage the impact of inflation very well and maintain our EBITDA above 40%.

Have you seen any positive impact from the World Cup [ event side yet ]? I presume your project revenue is probably partly -- at least partly driven by that, but on the consumer side, have you seen any positive activity there?

No. I think the World Cup impact is -- still we are yet to see that impact coming, mainly during -- towards the end of Q3 and Q4 mainly.

[Operator Instructions] We take our next question from [ Ajan Abadi ] of Rayan Investments.

This is Zohaib from Al Rayan Investment. I've got one question on the prepaid segment. It seems, after the revenues have peaked in the fourth quarter and -- in the first and the second quarter, the revenues for the prepaid have come down. Is there any specific reason for it? Or was the peak in December a one-off?

So we already explained in Q1 the Q4-to-Q1 decline was mainly because of lower number of days. Q2 is a quarter where we seasonally get lower prepaid revenue. There are 2 major reasons for that. Ramadan comes during Q2. And the summer seasonality starts with June coming and people starting leaving the country. So these are the major factors causing the reduction in prepaid revenue. Our prepaid revenue continues to do very well and we remain positive about its growth going forward.

Sounds good. My one other question is on the depreciation. So the depreciation in the first quarter was about QAR 97 million. In this quarter, it's about QAR 77 million. Is -- this is because there was a one-off in the first quarter. Is that, is my understanding correct?

Yes, correct. As we explained previously as well, as we are modernizing our network, certain elements are reviewed and we provide accelerated depreciation. So higher overall depreciation in Q1 was mainly because of that.

And with this QAR 77 million as a good indicator of the level, it will be maintained going forward.

As we continue to increase our CapEx, spend our CapEx, it will slightly increase in line with the CapEx going forward. The accelerated depreciation impact that we were doing for the last couple of quarters was mainly driven by the modernization activity, as we explained previously. And majority of that is nearing completion, so you should see a stable depreciation going forward impacted by the regular CapEx that we are spending.

Next, we move to [ Faisal Alsabi of NBK Capital ].

Congratulation on the strong set of results. My question is pretty much just on the market share side. Do you believe that you can keep up with the momentum that we have seen in terms of market share gain, either on the postpaid side or the prepaid side, going into the second half? And my second question is, is it a fair assumption for us to annualize the first half profit till the second half? [ And ] that's it.

[ So see ], our growth in RMS. As I explained earlier, we primarily focus on growing our business, our customers and revenue. And when we go out there with that strategy, we definitely gain market share. We are doing that consistently for the last 2, 3 years, as you've seen. We have seen significant expansion in our RMS as a result of our strategy, which is giving us higher customers and revenue. And we have no doubt that we can continue to follow that strategy going forward as well. Yes, RMS, that is a by-product of that, and we remain very hopeful that we can continue to expand our RMS and CMS going forward as well. Regarding your question number two of annualizing the half yearly net profit, it's very early to comment on that because there are a lot of unknowns which are coming specifically in H2 of this year. The World Cup is coming up. There are a lot of unknowns about that and we cannot work out the exact impact of that in our H2 financial results as of now.

We take our next question from [ Mohammed Adel of AFII ].

Congratulations on the results. So basically Vodafone has been doing very well for the last 3, 4 years. And my question is on growth. So the population growth in Qatar has been muted over the last 3, 4 years. And most of your growth [ come in from ] gaining market share, so I want to ask on gaining market share again. And if, worst case scenario, the population stayed muted, what would be the realistic growth rates for your profits and margins or, let's say, operating profit over the next 5 years?

Okay, see, there are 2 elements of our growth which we need to understand. As I explained previously in answer to a previous question, see, we have been investing heavily in our network. We are trying to expand our network, improve our network, improve our digital capabilities. As a result of that, we are gaining customers and customer market share in a market where the population is muted for the last 3, 4 years, as you have mentioned. The second part of our growth is coming from diversifying our revenue into new areas. And that is also giving us a very good sort of growth and that you have seen in our results for the last 3, 4 years. As I mentioned before, we intend to continue the same strategy. And as we have demonstrated that with a muted population we were able to not only grow our revenue and profitability but gain market share as well, we don't see any risk that, in case the population remains muted, why we can't grow going forward.

We now take a question from Ziad Itani of Arqaam Capital.

Congratulations on the results. Just 2 questions from our end. The first question is on the ARPU specifically. What's the reason behind the small weakness, I would say, year-on-year? It's down around 5%. And sequentially also there is pressure even though on the mobile segment you're growing on the postpaid specifically, which typically has multiple times the ARPU of the prepaid segment. That's the first question. So basically is there any sort of...

Sorry. Can you repeat this question about the prepaid -- sorry. ARPU decline. And what was the second part of this question?

Your growth on the mobile segment. It's being driven by the postpaid specifically, and the postpaid has higher ARPUs than prepaid.

Yes, okay.

Okay, so why are we seeing pressure on the blended ARPUs?

Okay, okay. And what is your second question, please?

The second question is basically when it comes to your plans on the ICT segment, if you can give us a bit more details. What are you doing? I mean, who's the main client that you're targeting? Is it the government-related entities? Is it the enterprise generally speaking? And what specifically are the plans with ICT? Is it on data centers? Is it on system integration? Is it on developing platforms in terms of digital solutions? Any insights would be appreciated.

Okay, regarding your first question. So yes. So postpaid ARPU is higher than the prepaid ARPU. You have seen our mobility ARPU coming down, and the reason for that is the significant increase in the mix of our mobility customers of the prepaid customers. Postpaid ARPU is stable year-on-year from last year to this year. Prepaid ARPU from last year to this year has slightly declined, but the overall mobility ARPU decline is because of the increase in the mix as I just mentioned. Coming part -- coming to your second question. So I think we have been discussing this ICT revenue in the previous calls as well, so I'll just explain that again. Basically we are getting projects in both government and semi-government sector. And these are the projects whereby we are able to integrate our core telecom services with equipment, installation and managed services. See, some of these projects are long term in nature whereby the revenue will be realized in cash over a period of more than 1 year. And there are mainly -- so for some of these projects, there are 2 parts. The first phase is the build phase, followed by a second phase which is managed services. The margin that we get on the build phase is typically between 10% to 12%. And the managed services sales has higher margin almost in line with our regular business. The increase in revenue, non-service revenue, that we have seen from Q4 last year till Q2 this year is mainly driven by the build phase of these projects. I can tell you the exact amount of the non-service revenue related to these projects that we have recognized. In Q1, it was QAR 66 million. And in Q2, it is QAR 43 million. And as I said, very important to remember, it's a business with a margin in the range of 10% to 12%.

Perfect. That's very helpful. And just one follow-up question. Is it possible to share the number of sites you have [indiscernible] I mean, how many towers? And would you be open for a tower sale? Or also are there any talks with Ooredoo on optimizing the passive infrastructure specifically?

In terms of selling the towers, there is no discussion or there is no attention now to do this. However, there is an agreement or sharing agreement that -- it has been going on for the last few years between us, between Vodafone and Ooredoo, which I believe it has been accelerated going forward to synergize the investment in towers and reducing cost base for both operators. The other question for you was -- can you remind me which -- what was it?

Yes, the number of towers.

Okay. We cannot comment on this now. However, at the end -- maybe at the end of this year, we will be able to get you more details and share it, hopefully.

Thank you. We have no further questions at this time.

Yes, this is Bobby again. So if we have no further questions, we can end the call today. I want to thank Sheikh Hamad, Masroor Anjum and Pauline for taking the time to answer our questions. And we'll pick this up next quarter. Thank you so much.

Thank you, Bobby. Thank you, everyone, for joining today's call. If you have further questions, please do not hesitate to contact us. Thank you again.

Thank you. Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation. You may now disconnect.