Vodacom is said to be losing market share in the service revenue segment, and faces pressure to improve following disappointing performance in the half year to September, dragged by pending contract renewal by one of its key wholesale customers.
The group delivered a modest topline growth with flat earnings before interest and tax margins. Service revenue, which includes roaming services, voice and data, grew 1.3% to R31.1bn. Wholesale agreements — roaming agreements with competitors — was one of the major factors as the company has yet to conclude a new deal with Telkom. That of Cell C has been signed.
“I think, firstly, we’ve had a strong first half last year, because of load-shedding. So we’re batting against a very strong quarter last year,” said Vodacom CEO Shameel Joosub.
Rival MTN SA said this week service revenue for the nine months to the end of September was up 3.3% to R32bn.
Peter Takaendesa, head of equities at Mergence Investment, said in addition to the disappointing performance from South Africa’s prepaid and wholesale divisions, the 6.6% interim dividend decline was “worse” than market expectations — and it marked the third consecutive interim dividend cut, “which makes the investment case tough in the absence of both growth and income”.
Vodacom declared an interim dividend of 285c per share.
Vodacom can continue to grow their ISP business, co-build fibre networks with existing fibrecos and pick up some small independent fibre networks that won’t attract the attention of competition authorities.
— Peter Takaendesa, portfolio manager at Mergence Investment
“Vodacom SA will have to find a way to lift service revenue growth to at least closer to the rate of consumer inflation to avoid becoming another MultiChoice, especially as Telkom and Cell C continue to put pressure on roaming rates, while MVNOs [mobile virtual network operators] continue to chip away some revenue market share.”
MultiChoice, which is technically insolvent, reported a decline in half-year earnings citing macroeconomic challenges and currency devaluations in some markets.
Takaendesa said service revenue market share over the past nine months to June 2024 shows that Vodacom has been losing market share. “We know that is largely caused by the sharp declines in wholesale revenue at Vodacom but it is what it is. The only key metric screening better at Vodacom is that they still have a better dividend yield within the telecoms sector despite the series of dividend declines over the past few years.”
However, government bonds are offering much better yields and there are other low-growth SA Inc sectors offering much better income yields than the telecoms sector, he said.
To improve margins in the SA business, Vodacom’s CFO Raisibe Morathi said the mix of business was changing, and some business contracts came at lower margins. “From an enterprise perspective, as we do some of the transactions, like in the cloud and so on, those come at lower margins, but they’re still very strong … opportunities contributing to service revenue. So a little bit of that effect is to be expected.
“But, in terms of the long-term look, we continue to identify opportunities where we renegotiate some of the terms with the suppliers. Where we issue RFPs [requests for proposal] for areas that need to be refreshed, [we] package the services differently, manage the demand side, to make sure that we buy right, and we only obviously incur costs that are necessary.”
South Africa’s service revenue result was supported by the consumer contract segment, prepaid mobile data and beyond mobile services, which include financial and digital services, fixed and IoT were up 8.1% and contributed R5.5bn, or 17.7% of service revenue.
Vodacom still makes the bulk of its money from its South African operations, where it has 49.2-million customers, an increase of 4.2%. On the fibre business, Vodacom says its fibre has passed almost 166,000 homes and businesses. It operates in seven other countries such as Mozambique, Lesotho, Tanzania and Egypt, and through its investments in Safaricom it also operates in Kenya and most recently Ethiopia.
Refilwe Moroka, head of domestic equity research at Melville Douglas, the boutique fund manager for Standard Bank, said the inclusion of Vodafone Egypt remains a key lever for growth.
Group service revenue was down 1.2% to R58.6bn. At group level, Joosub said the target was a 25% to 30% contribution from beyond mobile in the medium term.
In South Africa, Vodacom’s plans to buy 30% in fibre infrastructure group Maziv, owner of Vumatel and Dark Fibre Africa, was blocked by the Competition Tribunal. Although reasons for that decision are yet to be released, Joosub said it was a travesty for South Africa that the fibre deal wasn’t approved, because the pro-competitive benefits of the deal far outweigh any potential competitive issues.
Joosub said Vodacom — which has about 2% market share in fibre — is considering an appeal. However, the group will continue to pursue fibre partnerships throughout the continent where it operates.
Other options are to continue leasing capacity from other infrastructure providers or to develop its own fibre network across South Africa’s cities and towns, specifically targeting lower LSM fibre-to-the-home, said Moroka. “However, this would necessitate a substantial capital expenditure, potentially impacting capex allocation for its mobile infrastructure, which could lead to capacity constraints and affect mobile data growth,” Moroka said.
But Takaendesa said Vodacom had missed the top prize and there would be no quick wins in the South African fibre market for Vodacom without merging with a large existing fibre operator.
“They can continue to grow their ISP business, co-build fibre networks with existing fibrecos and pick up some small independent fibre networks that won’t attract the attention of competition authorities. However, nothing comes close to the economics and speed to market of Vodacom acquiring a large existing fibre operator such as Maziv or Openserve.”
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.