Since becoming a subsidiary of the Vodafone group in May this year, Vodacom has undertaken a number of initiatives to boost profitability. Through leveraging Vodafone's international presence and experience, the group secured solid revenue growth despite tougher operating conditions.
Vodacom released results for the six months to 30 September today, revealing a 9.9% growth in revenue over the comparable period in 2008. Group EBITDA increased by 8%, but earnings per share fell by 94,4% to 4 cents. This was mainly due to impairment charges of R3,2-billion, most of which related to Gateway in Nigeria. The group's operating profit decreased by 45.0% to R3,535-billion due to a combination of the impairment charges and a 16.8% increase in depreciation and amortisation.
"As the largest operator in South Africa, Vodacom's existing subscriber base has ensured continued revenues," says Frost & Sullivan ICT industry analyst Spiwe Chireka. "However, it has struggled in its second most important market – the Democratic Republic of Congo (DRC) – and has taken a lot of pain from the Gateway acquisition."
The group notes that, while the Gateway operation presents significant challenges, it remains central to Vodacom's expansion strategy in Africa. It expects Gateway's profitability to remain under pressure, but steps are being taken to restructure the business to ensure it is able to deliver quality business services and broadband infrastructure.
"The overall spend by telecoms providers in Africa has reduced during the economic crisis, and companies such as Gateway that play in the wholesale segment have felt the brunt of this," explains Chireka. "Those that are smiling all the way to the bank now are companies that are offering services and applications to mobile operators, as there is a scramble to find ways to manage operating costs and to provide applications that may drive up consumer spend. This is an area in which Gateway currently does not operate."
During the period, Vodacom did, however, solidify its position as the market leader in South Africa's broadband market, increasing its customer base by 53,5% to just over 964 000. The group's mobile data revenue grew by 30,1%.
Vodacom also noted that while South African mobile operators are under considerable pressure to reduce tariffs, the group is working with the authorities to ensure that the reduction in the termination rate is dealt with "responsibly" and will not impact too severely on profitability.
"Frost & Sullivan expects that we are likely to see a slow down in growth in the next reporting period due to the interconnection rate cuts," Chireka says. "This means the operator will need to find other ways of driving ARPU besides promoting calls."
In its international operations, Vodacom has introduced price reductions in both Tanzania and the DRC due to falling revenues in those regions. This has been due to fierce competition, weak economic conditions and higher excise duties.
"The economic crisis has hit resource-intensive markets like DRC hard, and unfortunately the telecoms sector is not immune," Chireka says. "Consumer spending on services such as telecoms has decreased. This has been coupled with the fact that doing business in DRC is expensive."
She adds that Vodacom DRC has been losing market share to Tigo, which has increased its market share by 13% over the last two years at the expense of Vodacom and Zain DRC. Frost & Sullivan expects this trend to continue in the short term, although Vodacom's interventions should stem this tide.
"In Tanzania, competition has intensified significantly," Chireka notes. "Eleven mobile licenses were issued by the end of 2008. Vodacom will be under continued pressure there, as a few of those operators are CDMA providers that will be able to undercut Vodacom's pricing."
Vodacom declared an interim dividend of 110 cents per share."
Commenting on the results, Vodacom Group CEO Pieter Uys says: “This has been a period of substantial development for Vodacom during which we achieved continued growth, with a robust performance from our South African operations in particular. We faced a number of headwinds, primarily in our international operations that were hard-hit by weak economic conditions and a resulting scramble for market share by the major operators.
"Gateway, which is a core part of our African expansion strategy, was also heavily impacted by the weaker economic conditions. We impaired this asset in response to reduced mobile traffic on the continent and strong pricing pressure and have subsequently taken steps to improve its profitability.
"Our focus on managing operating and capital expenditure resulted in strong growth in operating free cash flow, supporting an interim dividend of 110 cents per share. We were also successful in extracting benefits from the closer relationship with Vodafone in areas such as purchasing and product innovation.
"Our strategic drive towards total communications is progressing well, with particular success in broadband with a substantial increase in customers and mobile data revenue. Vodacom Business is gaining momentum and we are becoming a meaningful provider of enterprise services across Africa."