South African network provider Vodacom added a five-point-one million customers to a number of 61 million. More and more, people in South Africa are now Vodacom customers, but the company reported a slight decline in group revenue to just under R20bn. Senior Analyst at Ovum, Richard Hurst was in the studio with Alec Hogg to have a look at the results that were released by Vodacom for the quarter to the end of December.
There’s a lot in these numbers, Richard. I suppose the warning was given in November by Vodacom, that for the next three years, they are not going to be making a terribly good growth in their revenue or in their profit line. Well, they certainly lived up to that pessimistic statement.
I don’t want to speak for all the analysts out there, but analysts predicted that there would be this negative impact due to MTR’s and the other headwinds that they’re facing. Looking at the numbers this morning, I don’t think we’ve quite worked out that it would be that severe.
In November, they were talking about profit growth in single digits.Â
The interesting thing is that this quarter was over the festive period, which is traditionally a good period for the Telco network operators because people hang onto their subscriptions, and using more of the network etcetera. It’s begs the question as to what has happened in that operation for Vodacom, locally.
What do you think?
Of course, there’s the MTR and then there are other factors, which have hit this. The rising costs of their network provision, and the fact that they have to out and buy their equipment at Dollar-based prices.
The Rand falling hasn’t helped.
It hasn’t helped and so they are facing some of those headwinds. They’re just not getting the traction that they desire right now, in the market. The regulatory environment is partly to blame but it’s the local environment, as well.
A bit of speculation is going around it, given the temporary (they hope) reverse at Vodacom; that Vodafone, which owns 65 percent (the U.K. Company) would be looking to increase stake by buying more shares in the market. Do you give that much credence?
I think that Vodafone have always indicated that they love the South African operation. They love what Vodacom are doing, but whether they would increase their stake right now – I’m not too sure. I think Vodafone themselves have other pots on the fire to look after. There’s the Germany operation, Turkey, and India etcetera. I don’t’ know whether too much credence can be given to those speculative thoughts.
The DRC story in particular, wasn’t mentioned in these results today. What’s going on there? How significant is it, to Vodacom?
There’s always been a tussle with their local shareholder. Their issues are repatriation of those profits, so there’s a bit of a challenge. However, behind closed doors, they’ll tell you that the relationship with their local shareholder is improving, thought. They’ll tell you it’s the best that it’s ever been and the Government understands their needs – whatever that means.
To bring money from the Democratic Republic of Congo, back to South Africa. Cell C have launched a court battle against Vodacom. Again, there was nothing in these results to talk to that.
No, that is the issue over its acquisition of Neotel.
Well, Neotel’s one part of it but also, in predatory pricing etcetera, that Cell C is accusing Vodacom of doing.
Isn’t it interesting that 20 years ago, Telkom was the big incumbent, the baddie accused of predatory pricing? Fast forward to today and now we have Vodacom sitting almost as the incumbent. It’s almost natural practice for these types of markets, where you’ll see this type of thing coming to the fore.
The Neotel story?
The Neotel story is very interesting because the real bugbear there is the acquisition of the spectrum. Government has failed to allocate the spectrum so, in essence, Vodacom have, through the back door, found a way to acquire this spectrum.
So they’re buying Neotel for its assets.
Yes, and one happened to be the spectrum. Although Vodacom has denied looking for the spectrum, if you read between the lines there are several things, which Vodacom are looking for and one would be access to that spectrum.
There is resistance to it the acquisition, though.
Yes. You can see that all the other operators have lodged resistance to this acquisition. You can understand their point of view, but if Vodacom see the opportunity, I don’t see why they shouldn’t be allowed to acquire this entity.
Richard, looking at the big numbers is interesting. The big numbers tell us two things: (1) Vodacom now has 61 million customers, and (2) their data revenues are growing and data usage is growing. Looking at both of those in turn, isn’t this a massive opportunity? Wherever you go, you see people using their phones for data and that can only expand.
Of course, but the real challenge for the network operators is that while data usage is on the increase, they need to invest proportionally and the profit margins are not the same as the circuits for voice. They’re considerably lower. They would need to balance their act in terms of being able to derive the best possible scenario from that. At the same time, they’re facing headwinds with the likes of the OTT player such as WhatsApp etcetera, coming and using their platform for services, which they would traditionally provide.
It’s interesting to notice that the traffic on the data system for Vodacom is up 62 percent, but the revenues are only up 20 percent.
I rest my case. It’s in the margins, which are different. It requires a different mindset in approaching the data environment.
Scale is so hard to get in this world and these guys have scale. Sixty-one million customers – my goodness. Do you remember the old story? If you could sell one Coca-Cola to everybody in China, you’d clearly never have to work again. Isn’t there a similar issue?
There is but if you look closer at the numbers, they are the average revenue per user. There was a decline in some instance as well as a flat projection of ARPU. That’s a bit of a worrying figure as well, because you’d actually like to see some gentle uptick of that ARPU at the same time as this data revenue increases.
Challenging times, but would you be buying the shares? They’ve done well in the last three years – 30 percent in the last three years, and 14 percent in the last year – so the shares keep going up even though the profits are flat.
Of course, I’d say that it’s good to buy and hold but the challenge I see is that investors will look for growth. They would need to show some serious growth over the next 18 months, for them to restore some of that confidence.
Alternatively, to retain this kind of a rating on the stock market. However, the shares are yielding six percent on dividends and I guess that’s what gets some investors terribly excited. Richard Hurst is Senior Analyst at Ovum, with the quarterly figures for Vodacom. An interesting company: R200bn market cap and always of interest to not just those who use its services.
