Q1 2015 Vodacom Group Ltd Earnings Call
Jul 23, 2015 AM CEST
VOD.J - Vodacom Group Ltd
Q1 2015 Vodacom Group Ltd Earnings Call
Jul 23, 2015 / 02:00PM GMT
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Corporate Participants
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* Shameel Joosub
Vodacom Group Ltd. - CEO
* Till Streichert
Vodacom Group Ltd. - Financial Director, Vodacom South Africa
* Ivan Dittrich
Vodacom Group Ltd. - CFO
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Conference Call Participants
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* Cesar Tiron
BofA Merrill Lynch - Analyst
* Jonathan Kennedy-Good
Standard Bank Group Securities - Analyst
* Craig Hackney
NOAH Capital Markets - Analyst
* Rodeli Spanma
Citibank - Analyst
* Mike Gresty
Deutsche Bank - Analyst
* David Lerche
Avior Research - Analyst
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Presentation
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Operator [1]
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Good day, ladies and gentlemen. Welcome to the Vodacom Group Limited quarterly results conference call for the period ended 30 June 2015. Vodacom Group's CEO, Shameel Joosub, will host the conference call. I will read the forward-looking disclaimer before handing over to Shameel Joosub.
This conference call, which sets out the quarterly results for Vodacom Group Limited for the period ended 30 June 2015, contains forward-looking statements which have not been reviewed or reported on by the Group's auditors with respect to the Group's financial condition, results of operations and business, and certain of the Group's plans and objectives.
In particular, such forward-looking statements include statements relating to the Group's future performance, future capital expenditures, acquisitions, divestitures, expenses, revenues, financial conditions, dividend policy and future prospects, business and management strategies relating to the expansion and growth of the Group, the effect of regulation of the Group's businesses by governments in the countries in which it operates, the Group's expectations as to the launch and rollout dates for products, services, or technologies, expectations regarding the operational environment and market conditions, growth in customers and usage, and the rate of dividend growth by the Group.
If you do not have a copy of the results announcement, it is available on the Investor Relations website on www.vodacom.com. Thank you.
Shameel Joosub, over to you.
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Shameel Joosub, Vodacom Group Ltd. - CEO [2]
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Thank you. Good afternoon and good morning to those in the US. Thank you for joining us to discuss our quarterly results.
I am here with our Group CFO, Ivan Dittrich, the Financial Director of Vodacom South Africa, Till Streichert, and the Financial Director for our international operations, [Tito Umdaleto], who has joined us for the first time. I also have with me our Group Executive of Investor Relations, Monique Nienaber, and our Executive head of Media Relations, Richard Boorman.
Firstly, I am pleased with our performance for the quarter. The marked improvement we saw in the fourth quarter last year, particularly in South Africa, continued into the first quarter of our new financial year.
In international operations, the pricing environment in Tanzania has stabilized, supporting improved performance. We achieved solid performance in the DRC due to the adherence by all operators to the minimum price floor. And Mozambique and Lesotho continued to deliver strong growth.
We've also made substantial progress with our Group strategy. We invested ZAR2.4 billion in capital expenditure during the quarter as part of our accelerated CapEx program. As a result, we have delivered wider coverage and faster connection speed in all our markets.
We attracted 1.9 million new customers in the quarter across our operations to increase our Group active customers to 63.5 million customers. The number of Group data customers grew 10.8% year-on-year to 28 million, representing 44% of our Group active customers. Machine-to-machine customers increased 16.9% year-on-year to 1.9 million SIMs now in machines.
In South Africa, contract pricing transformation is nearing completion. We have migrated 81% of our contract customers to integrated bundles, and 71% of our contract revenue is now in bundle.
Our international operations delivered strong underlying performance through a solid commercial execution. They now contribute 25% to Group service revenue from 23% a year ago. We have maintained our number one market share position based on customers and revenue in all our markets.
If we now take a look at our financial performance, we achieved strong growth in the quarter with limited impact from mobile termination rate cuts in South Africa. Our Group revenue increased 7% to ZAR19.6 billion, and service revenue grew 5.1% to ZAR15.7 billion. At constant currency, Group revenue expanded 6.5%, and service revenue increased 4.7%.
We again achieved strong growth in Group data revenue of 35.2% to ZAR4.8 billion. This was driven by 65.7% growth in data traffic across our markets. Data revenue now constitutes 30.9% of our Group service revenue.
Let's now unpack our two reporting segments in a little bit more detail. I will start with South Africa. Our strategy in South Africa has not changed, and we are consistently delivering on it.
To reiterate, our strategy is to increase investments for end capacity for voice and data, but also to create clear network and customer experience differentiation, whilst at the same time investing in new areas of growth.
Secondly, it is to bring down prices by creating products that maximize elasticity, and then to offset the inevitable price decline in voice with a massive increase in data.
Revenue grew 5.5% in South Africa, boosted by strong growth in data and increased equipment sales. Our equipment revenue grew 13.8%, representing 23.1% of revenue compared to 21.4% a year ago, as a result of an increase in smart device sales. That's smartphones, tablets, and modems.
Our smart devices accounted for 58% of our equipment sold. This is in line with our strategy of putting smart data capable devices into the hands of more customers.
Our service revenue returned to growth, increasing 2.8%, following four consecutive quarters of negative year-on-year reported growth that had been heavily impacted by mobile termination rate cuts in the prior year.
Our prime transformation strategy, which is aimed at offering the best value to customers, was executed through adopting a clear segmented approach, offering bundles at affordable and competitive prices, together with delivering worry-free integrated plans to customers.
This led to a 14.7% reduction in the blended average effective price per minute, and a 9.1% reduction in the average effective price per meg. This was offset by growth in outgoing voice traffic of 4.9% and in data traffic of 45.7%.
We are seeing benefits of our contract price transformation, which is nearing completion, in the form of reducing contract churn by over 3 percentage points to 7.2%, our lowest ever, and a 3.8% increase in ARPU to ZAR386.00, as we continue to see early benefits to ARPU of 4G migration and increased data usage.
63% of our hybrid customers switched to uChoose packages, which give customers access to integrated plans with an option to access prepaid promotions on an ad hoc basis.
Overall active customers, contract customers excluding machine-to-machine, grew 3.1% to 4.9 million, supported by higher gross connections and greater customer loyalty.
Our prepaid price transformation also continued, with prepaid active customers increasing 2.3% to 28.4 million. Our customer value management initiative, through which customer needs are analyzed and product offerings tailored for each individual, is playing an important role in driving increased customer activity and value generated.
Voice bundles, supported by the continuous adoption of our More Power promotions, are proving increasingly popular, with the average number of voice bundles sold increasing 29.3% to 54.5 million bundles a month now. This helped drive our continued price transformation, reducing the average effective price per minute by 13%.
Improved data monetization and efficiency continued in the quarter, with the gap between data revenue and data traffic growth narrowing, which you will remember from previous calls was one of the important initiatives for us. We continue to see data as a key pillar of our growth strategy. In unlocking the data opportunity, we are focused on the following four key strategies.
Firstly, improving data utilization within our customer base through access to better smart devices; secondly, increasing network coverage and speed to improve the customer experience; thirdly, stimulating data bundle adoption, we announced our 23.5 million data bundles a month; and then lastly, in driving increased usage through content initiatives such as [Visa].
Execution of these four strategies has resulted in data revenue growth of 34.8% to ZAR4 billion, in data traffic of 45.7%, more than offsetting the 9.1% decline in average price per meg. Data pricing remained stable during the quarter, but the -- so the decline in pricing merely came from migration to bundles.
Data now contributes 33.8% of service revenue in South Africa, compared to 25.8% a year ago. So, to put it into perspective, 34.8% of our revenue is now growing at 35%.
We increased data utilization within our customer base to 17.7 million data customers, representing about 53% of our customers who are using data services. However, we're still seeing a big data opportunity in accessing the remaining 47% of our customers who don't use data. We see a further opportunity in converting the about 5.7 million that are not on smartphones but are using data to proper smartphones.
Machine-to-machine customers grew 16.9% to 1.8 million, and our 4G customers increased by 117% to 1.8 million 4G customers.
In line with our strategy of driving access to better smart devices, the number of active smart devices on the network increased 32% to 11.9 million, boosted by sales of low cost smart devices such as Vodacom Kicka and Vodacom SmartTab.
The average amount of data used per month increased almost 25% to 408 megs per smartphone, with tablets using an average of 774 megs. While I am encouraged by this increase, it still leaves room for further growth, as only 36% of our customers are using active smart devices.
As we improve the penetration to smart devices in our customer base, we see a positive impact on ARPU, with about a 13% uplift as we move customers from a 2G to a 3G device, and about a 15% ARPU uplift as we move customers from a 3G to a 4G device. These uplifts are in total ARPU, not just for data, signaling further room for data growth.
The average amount of data bundles sold per month more than doubled year-on-year to over 23 million. I?m excited by the usage patterns we see in data, with upward migration to larger data bundles within our customer base, as reflected in the increase in the average monthly consumption of data per smartphone.
We invested ZAR1.7 billion to increase data speed, capacity, and coverage in order to provide customers with the best network experience. During the quarter, we added 229 3G sites, to total 9,031 3G sites covering 96.4% of the population with 3G. We also added 572 4G sites to total 3,172 sites covering 41% of the population with 4G.
If we now move on to our international operations, we delivered service revenue growth of 12.9% in our international operations, 11.3% at constant currency. The Group performance was underpinned by solid execution of our commercial strategy, together with strong growth in data and customers across the Group.
Active customers grew 11.5% to 30.2 million, as we continue to invest in our networks to increase our coverage and differentiation. Mobile data in our international segment increased by 36.9%, with data traffic growing 140.4%. Data revenue contributes just over 22% of service revenue.
I think the next big focus area for us in international is to try and narrow the gap between the revenue increase and the traffic increase, similar to the exercise that we embarked on in South Africa.
Our active data customers are up 23.8% to 10.3 million, representing 34% of our active customers. We continue to focus on our commercial and network offering to drive data growth, ensuring our customers have access to better low cost smart devices such as Vodacom Kicka and SmartTab, expanding our 3G network coverage, and driving the adoption of data bundles.
The demand for mobile financial services remains strong in all our international markets. Active m-pesa customers increased 18.1% to 7.8 million. Following the launch of m-pawa last year in Tanzania, 9.8% of m-pesa customers are actively using the savings and loans product.
We continue to invest in our network to differentiate our offering in terms of network coverage and performance. Our capital investment in the quarter represented 16.5% of revenue in the international segment, and is starting to accelerate during the remainder of the financial year.
To support wider coverage and significant data growth, we expanded our 2G sites by 31.9% year-on-year, and 3G sites were increased 50% year-on-year.
In conclusion, let me just give you some market updates. On Neotel, the regulator, ICASA, has approved the transaction subject to conditions that it has submitted out for comment. The Competition Commission has made a recommendation to the Competition Tribunal that they approve the acquisition of Neotel subject to certain conditions.
The matter will now be heard in the Competition Tribunal, with the hearings set to take place from the 23rd of November to the 11th of December, 2015. We are hoping for a ruling soon thereafter. As a proper work plan, that has been agreed with the authorities and with all interested parties.
The transaction will ultimately result in increased investment in communication infrastructure and accelerated rollout of broadband connectivity in South Africa.
Thank you. That concludes my comments. We are now ready to take your questions.
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Questions and Answers
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Operator [1]
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Thank you. (Operator instructions.) Merrill Lynch, Cesar Tiron.
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Cesar Tiron, BofA Merrill Lynch - Analyst [2]
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Just two questions on my side. The first one, I would like to understand why there is such a divergence between the revenue trajectory on the prepaid and the postpaid this quarter. Is it mainly because most of your initiatives to better monetize data are focused on postpaid?
And then finally, a question on margins. Is it fair to assume that this reacceleration of revenue growth did not have any negative impact on the margins because indeed it's mainly driven by service revenues and not handset sales?
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Till Streichert, Vodacom Group Ltd. - Financial Director, Vodacom South Africa [3]
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Yes, let me do a start. This is Till speaking. On your first question in terms of a difference between the segments in terms of revenue, so we've put a lot of focus on the contract revenue side.
We've got good customer growth in terms of net base growth. We've got record low churn, which obviously helped basically maintaining the strong customer base on contract. And we've got an effect of about two months of price ups that we've put through on the contract side. So, that is in essence the source of the comparably strong growth on the contract side.
Looking on the prepaid side, if you look at the trend in essence, we've equally seen kind of a good trend recovery in terms of the growth. So, actually this growth is equally sourced by customer base and basically ARPU stabilization.
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Shameel Joosub, Vodacom Group Ltd. - CEO [4]
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I think maybe just to add there's obviously -- there's more pricing transformation happening in the prepaid side than there is on the contract side where you're nearing the end of the pricing transformation.
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Ivan Dittrich, Vodacom Group Ltd. - CFO [5]
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Sorry. What was the second question again?
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Cesar Tiron, BofA Merrill Lynch - Analyst [6]
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The second question was to understand if this reacceleration of revenue growth has an impact on the margins.
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Ivan Dittrich, Vodacom Group Ltd. - CFO [7]
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If your question was if there is an adverse effect in terms of margins or -- just give me more clarity on the question.
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Cesar Tiron, BofA Merrill Lynch - Analyst [8]
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Well, the question is to understand if the fact that the service revenue growth has accelerated, we should expect margin enhancement.
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Ivan Dittrich, Vodacom Group Ltd. - CFO [9]
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I think in terms of guidance that we've given on margins previously is that we -- if we look at the 2015 financial year as a restage year, in 2015 our margins were impacted by a number of one-off events like the MTR method that we had, as well as certain foreign exchange losses, etc.
We've also guided that we expect our cost base to grow at a lower rate than our revenue, so you would expect to see some operating leverage. And as a result, you would expect, over the medium term, to see some degree of margin expansion.
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Cesar Tiron, BofA Merrill Lynch - Analyst [10]
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But just -- sorry. When you made that statement, did you expect to deliver such strong revenues this quarter?
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Shameel Joosub, Vodacom Group Ltd. - CEO [11]
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I think the answer is that the guidance still stands. So, we still see the positive outlook.
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Ivan Dittrich, Vodacom Group Ltd. - CFO [12]
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And I think when you model revenues for the next few quarters, you must just remember that our Q2 last year was impacted by ones off between ZAR5 million relating to revenue that was recognized on deferrals in prepaid. So, you would need to just take that into account in your models.
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Cesar Tiron, BofA Merrill Lynch - Analyst [13]
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Thank you.
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Operator [14]
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SBG Securities, Jonathan Kennedy-Good.
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Jonathan Kennedy-Good, Standard Bank Group Securities - Analyst [15]
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Just to follow up on your comment around the ZAR325 million, was that all recorded in voice revenue in Q2 last year?
And then secondly, given we've had the start of our prepaid voice pricing transformation, can we expect in the second half of the year the decay in voice revenue to slow somewhat from levels that are sticking at around 10% down at the moment?
And then finally, just a question on Neotel. Given the substantial delays on the completion of the deal approval, does Neotel have any recourse to renegotiate the purchase price of that deal?
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Shameel Joosub, Vodacom Group Ltd. - CEO [16]
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Let me take the first two questions. So, to answer your question on the ZAR325 million prepay voucher, a balance sheet release that we have disclosed at half one respectively of the full year, yes, that was voice. And you need to factor that in when you interpret the reported results for Q2.
And roundabout, if you simply look at last year's reported results and you exclude the ZAR325 million from that, you would effectively see an uplift of roundabout 2.8 percentage points for service revenue. So, that's on the first question.
On the second question in terms of voice erosion, in essence if you look at the year-over-year trend by quarter, you do see already that Q1 represents basically a stabilization, in that Q4 was, on a minor standpoint, 7% year-over-year and Q1 was, on a minor standpoint, 6%. So, as we progress with the pricing transformation, we would effectively expect that there is some more stabilization happening on voice.
And then, there was a question --.
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Ivan Dittrich, Vodacom Group Ltd. - CFO [17]
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And then there was a question on Neotel.
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Shameel Joosub, Vodacom Group Ltd. - CEO [18]
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Yes. I think on Neotel, the answer's no. There isn't any clause that will allow them to renegotiate the agreement.
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Jonathan Kennedy-Good, Standard Bank Group Securities - Analyst [19]
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Thank you.
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Operator [20]
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Craig Hackney, NOAH Capital Markets.
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Craig Hackney, NOAH Capital Markets - Analyst [21]
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Just on your capital expenditure in the first quarter, that as a percentage of revenue just seems to be on the light side compared to your guidance. Are you expecting quite an acceleration for the remainder of the year, or have you hit any potential snags that made that CapEx lower than you would otherwise expect? Thanks.
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Shameel Joosub, Vodacom Group Ltd. - CEO [22]
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I think that CapEx will basically accelerate during the year. Generally we do have a little bit of a slow start going into April and then it kind of ramps up during the year.
We are already accelerating a number of projects where we expect a significant catch-up in the second quarter, if you like, already. So, I think the CapEx part will be within guidance for the year.
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Craig Hackney, NOAH Capital Markets - Analyst [23]
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Okay. Thanks very much.
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Operator [24]
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Citibank, [Rodeli Spanma].
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Rodeli Spanma, Citibank - Analyst [25]
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I just wanted to understand how much of the good performance from the SA business can be attributed to the industrial action that disrupted MTN's operation in the quarter. And just in terms of the performance in the quarter, how much of it was a pure -- a stronger operating performance? And last question. And then, do you see a strong performance from the SA operation continuing into Q2?
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Shameel Joosub, Vodacom Group Ltd. - CEO [26]
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Yes, I think maybe just to start with the -- firstly, I don't think that the result that we've seen has basically come from a weakening or the industrial action at MTN. I think yes, we probably would have gained a little bit of customers and so on from that, but I don't think it had a significant impact.
I think the good performance is really a continuation of what happened in the fourth quarter, and I would say a continuation of delivery of strategy. I think it's very important that you stick to strategy and that you basically -- that we keep focusing and delivering on the strategy.
And so, I'd write the performance down to basically the increased capital investment and the clear strategy of being able to monetize data a lot faster, a lot quicker. So, the accelerated capital investment, I would say, is bearing fruit.
And we're seeing that result come through in the entry stage of revenue, which, if you think about it, was exactly what we tried to achieve when we set out with accelerating our capital investment. So, that's very, very encouraging.
Secondly, on the international side, I think the performance that you're seeing in international is basically coming through from a -- I would say firstly a recovery in terms of price stabilization which happened during the year last year, especially towards the end of the year, and those measures that were put in now starting to bear fruit, if you like, and I would say also borne out by a lot more market rationality across the board. So, I think that's come through quite clearly.
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Ivan Dittrich, Vodacom Group Ltd. - CFO [27]
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And then, on the Q2 question, I think the answer is that we're continuing to focus on our delivery and to execute on our strategy to make sure that we're continuing with good momentum. And as I said earlier, when modeling Q2, just remember the ZAR325 million that boosted revenues in Q2 last year.
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Rodeli Spanma, Citibank - Analyst [28]
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Okay. Thanks, guys.
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Operator [29]
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Deutsche Bank, Mike Gresty.
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Mike Gresty, Deutsche Bank - Analyst [30]
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I just wanted to chat a little bit further about the price transformation on the prepaid side. If I understand the numbers correctly, you've still got 46-odd percent of subscribers that are on the legacy plans. And my understand also is that you proactively are migrating those guys over time to your new plans. With the positive surprise that's come through in data revenue, to what degree is that enabling you to accelerate the migration? And what sort of timeline do you now think we are on to complete that transformation? I just wanted to get a sense how, if you accelerate that transformation, you still think that voice decline is going to slow. Would it not maybe accelerate a little bit if you're pushing the transformation?
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Shameel Joosub, Vodacom Group Ltd. - CEO [31]
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Look, I think what we're saying is that we're basically -- obviously we've put a plan in place of how we're doing it. Yes, the data revenue does give us a little bit more room to move, if you like. But, that's where we're saying we're seeing a stabilization of trend in terms of voice declines. So, we're not seeing an acceleration of that.
We need to obviously balance the strong data growth against the pricing. So, yes, we do take the opportunities as we see it. But, no, we won't accelerate it further than the current trend. And we still think it will take about 18 months.
I think also important for us to deliver a, let's say, revenue within the guidance. So, yes, it's possible to accelerate, but we have to balance all factors.
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Mike Gresty, Deutsche Bank - Analyst [32]
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Great. Thank you, guys.
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Operator [33]
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(Operator instructions.) We have a follow up question from Craig Hackney.
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Craig Hackney, NOAH Capital Markets - Analyst [34]
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Thank you. Just looking at over the top voice, do you have any indication of -- within your smartphone customer base what sort of percentage or how much over the top voice is taking place, firstly?
And then secondly, has there been any discussions with the regulator around regulation of over the top voice at this stage? Thanks.
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Shameel Joosub, Vodacom Group Ltd. - CEO [35]
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Okay. So, basically -- let me start it with the regulation part. Effectively, where we -- there hasn't really been much movement yet. We have made presentations to the regulator and so on, and we think that this subject needs to be discussed. And I think it's a topic that will have to be discussed worldwide.
I think the -- and I was saying earlier today that I think the OTT play, although very small today, will start to accelerate and you will start to see a little bit more of that.
And I think what will happen is that either it gets regulated in a proper fashion, otherwise your data and your -- the decline that will come from OTT in voice will have to be offset by, let's say, price stabilization in data. So, you won't see price decreases in data if OTT becomes a bigger part of it. So, those declines that you might have seen in data pricing will be offset.
I think currently the OTT is less than 1% of our traffic. So, it's still very, very small, but I think something that one has to keep a watchful eye on. And I think in the end it will be -- if OTTs become bigger, it will become a factor. One would have to ensure that data pricing is appropriate to be able to accommodate for that.
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Craig Hackney, NOAH Capital Markets - Analyst [36]
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Okay. Thanks very much.
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Shameel Joosub, Vodacom Group Ltd. - CEO [37]
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(Multiple speakers) we also get the uplift in data traffic.
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Craig Hackney, NOAH Capital Markets - Analyst [38]
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Yes, yes. No, sure. Okay. Thanks.
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Operator [39]
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David Lerche, Avior Research.
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David Lerche, Avior Research - Analyst [40]
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Just a very simple one. Messaging in both South Africa and the international business, that revenue has looked a lot better than the trend over the last little while. Can you maybe just give us some indication whether you expect that to now stabilize at the current levels, or would you expect messaging to resume its decline?
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Till Streichert, Vodacom Group Ltd. - Financial Director, Vodacom South Africa [41]
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From the South African point of view, we've had relatively strong messaging revenue related to wholesale, wholesale bulk messaging. So, that is kind of quite positive.
Of course, kind of on your separate note in terms of the trend line, of course that is true. You do see substitution from effectively over the top messaging services in general. But, obviously the whole bulk SMS type communication is still very much SMS-based. And we've had a number of big deals that effectively has resulted into that growth.
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Shameel Joosub, Vodacom Group Ltd. - CEO [42]
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Yes, and maybe just to explain the -- what's happened in the mobile messaging part in South Africa, so your decline is, as Till says, in terms of people -- all the substitution. That's still happening.
But, what we have been able to do is put proper interconnect agreements in place for messaging where there was a lot of arbitrage happening. So, we saw a massive decline due to arbitrage, and we have managed to pull that back by putting proper interconnect agreements with all the different parties in place.
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David Lerche, Avior Research - Analyst [43]
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Excellent. Thank you.
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Operator [44]
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Shameel, it appears there are no further questions in the queue. Do you perhaps have any closing comments from the analyst side?
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Shameel Joosub, Vodacom Group Ltd. - CEO [45]
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No, I think we've covered everything.
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Operator [46]
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All right. Thank you. Ladies and gentlemen, on behalf of Vodacom, that concludes today's conference. Thank you for joining us, and you may now disconnect your lines.
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