Rural network expansion and 5G network acceleration has been put on hold as Vodacom diverts funds to back-up electricity solutions for its base stations. It describes the past few months of intensive electricity blackouts as “disastrous”.
Since 2020 the group has spent R4bn in back-up power solutions such as batteries and generators in South Africa and a further R300m in the past financial year on diesel, security and maintenance. It has been spending R11bn a year on its network and at the recent South Africa Investment Conference Vodacom pledged R60bn over the next five years.
CEO Shameel Joosub this week said load-shedding has been “disastrous” for the group. He said the billions the company is spending to keep customers connected during electricity blackouts “could have been spent on accelerating our rural coverage, 5G network, financial and enterprise services. There is lot of things we could have done with the money but we had to reprioritise.”
Vodacom’s rival MTN SA will spend R1.5bn this year on generators, diesel and batteries, and as a result has temporarily halted building new network sites and rolling out 5G.
“It has been a tough year ... in terms of the level of complexity that it [load-shedding] has created. I think we have navigated it well, although it comes with a cost,” said Joosub.
Moreover, data demand and usage increase during blackouts, hence the need to ensure there is sufficient capacity and availability for customers, he said.
Joosub said clarity from the government and Eskom is needed on the extent of the energy problems and level of load-shedding to enable the company and the industry to plan and be better prepared.
Vodacom runs networks in seven countries outside South Africa, where its base stations run on generators. In South Africa its base stations and those of MTN were not built to operate with generators. The mobile network operators are in talks to share back-up electricity solutions and related costs.
Joosub said Vodacom's pilot project with Eskom, in which the mobile network operator is generating its own power then contributing it back to the grid, is expected to be accelerated beyond the pilot phase, with other sectors replicating the model.
Vodacom SA operating profit declined by 1.2% to R20.9bn and subscribers fell 2.7% to 44.2-million, affected by deleting 1.5-million inactive customers in the third quarter.
While Vodacom SA's service revenue growth slowed further to about 1% in the latest quarter ended March 2023, in line with peer MTN SA, Peter Takaendesa, head of equities at Mergence Asset Managers, said it appears Vodacom managed costs better to limit the effect on its profitability in South Africa.
Service revenue includes monthly access charges, airtime usage, roaming, incoming and outgoing network usage by non-Vodafone customers and interconnect charges for incoming calls.
Vodacom CFO Raisibe Morathi said at a presentation that it has renegotiated contracts with 8,000 suppliers to “refresh pricing for different products”. Where possible it will move its foreign currency spending to local currency to “protect us from exchange rate changes”.
Takaendesa said Vodacom has suggested that service revenue growth should improve due to recent contract price increases in South Africa, but “we think the business will find it harder to achieve its mid term targets given signs of deterioration in the consumer environment over at least the next 12 months and increasing competition in the market”. .
Joosub said the price hikes came with increased value, more data and voice minutes.
The higher levels of inflation and recent price increases, supported by improved data and fintech growth, could assist in achieving their revised mid to high single digit revenue growth
— Claude van Cuyck, portfolio manager at Denker Capital
Vodacom expects mid to single growth in South Africa while the target for group service revenue has been revised from mid-single digit to mid-to-high single digit growth; and group EBITDA growth is expected at high-single digit growth.
Claude van Cuyck, portfolio manager at Denker Capital, said the improved guidance is welcome and “achievable”.
“The higher levels of inflation and recent price increases, supported by improved data and fintech growth, could assist in achieving their revised mid to high single digit revenue growth,” he said.
Overall, Vodacom’s performance was largely lifted by the inclusion of recent acquisitions of Vodafone Egypt. Without strategic acquisitions ora the diversification of income streams, the group faced limited growth, said Craig Pheiffer, Sasfin Wealth's chief investment strategist.
“South Africa continues to provide the bulk of the revenue and operating profit but the diversification into Egypt and the additional product segments are helping reduce the reliance on a single operating territory and a single product offering,” he said.
South Africa’s level of contribution is coming down with the addition of Egypt, said Joosub. About 55% of group revenue comes from South Africa while the rest is from other operations.
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