Annual results: Vodacom spends billions on infrastructure while data demand grows

Vodacom has raised its profit targets following a strong year as it built capacity to cope with a surge in data usage, sparked by price cuts last year and surging demand due to Covid-19. However, it says any further adjustments to data pricing are dependent on it getting access to high-demand spectrum. 

The mobile network operator (MNO) spent R10.1-billion on its South African network in the year to 31 March as more people worked from home and studied online. Data usage was also stimulated by lower tariffs from 1 April 2020 following negotiations with the Competition Commission as a result of its data services market inquiry in 2019. 

Including that, total investment in its African network infrastructure amounted to R13.3-billion last year as it also assisted governments in providing critical services during the pandemic. 

The auction of the new spectrum has been delayed a number of times due to legal battles over communication authority Icasa’s invitation to apply (ITA). The spectrum will help operators to deliver more cost-effective services through more efficient use of the spectrum. This will increase their cost-competitiveness and ultimately lead to lower data prices, according to Dobek Pater, telecoms analyst at Africa Analysis. 

“The different spectrum frequencies enable service delivery in different scenarios,” Pater said.

“For example, the sub-1GHz spectrum will allow the MNOs to deliver better services in less densified areas with lower service demand such as rural, semi-rural, and some peri-urban areas. They can also deliver these services more cost-effectively in the low-frequency spectrum. It also allows the MNOs to provide better in-door signal penetration.”

Pater said he didn’t expect the strong growth in data usage over the past year to reverse, though the rate of growth was likely to decline.  

“Mobile (and fixed) data use is growing in general. Post the lockdown many individuals continue to work from home/remotely and this situation will continue into the future,” Pater said. 

“Data is becoming cheaper, enabling greater use of it. Increasingly, more aspects of business and personal lives are app-based. This is also driven by the government, which will continue to drive various e-Government services in the future.”  

The demand for more spectrum comes as Vodacom grows its customer base, with increased demand for financial services in particular. It has partnered with China’s Alipay and will shortly launch a new lifestyle app, VodaPay, in South Africa, offering services ranging from loans and savings, payments and personalised shopping experiences, which it says will promote greater financial inclusion.

“We see this super-app as a precursor to [payment service] M-Pesa’s evolution, supporting accelerated growth across our financial services’ businesses and assisting us in connecting the next 100 million African customers so that no one is left behind,” the company said. 

The network operator added 8.2 million customers, taking its total customer base to 123.7 million across Africa, including its stake in Kenya’s Safaricom. Total financial services customers, including Safaricom, increased by 13% or 6.6 million to 57.7-million. 

Group revenue rose by 8.3% to R98.3-billion for the year to 31 March, supported by service revenue growth of 5.8%. In SA, service revenue improved by 7% on the back of the increased data usage and demand for financial services. This offset the 40% reduction in tariffs at the beginning of its financial year on 1 April 2020, which cost it an estimated R3-billion in service revenue. 

International services revenue was held back by the impact of Covid-19 in the first half of the year. While zero-rating peer-to-peer (P2P) M-Pesa transactions for most of the financial year to help facilitate economic activity cost it an estimated R2-billion in service revenue, this paid off as it broadened Vodacom’s customer base, accelerating growth. Through M-Pesa, Vodacom now processes $24.5-billion (R366-billion) a month in transaction value across its international markets, including Safaricom, generating revenue of R19.3-billion a year. 

Earnings before interest, tax, depreciation and amortisation (Ebitda), a measure of its operating performance, increased by 4.5% to R39.3-billion and net profit came in 2.6% higher at R17.1-billion. Earnings per share increased by 4.2% and headline EPS rose by 3.7%. It declared a final dividend of 410c per share. 

Africa Analysis’ Pater said South Africa, Vodacom’s largest market, continued to perform well. 

“Whereas other countries offer market growth through continued growth of more traditional mobile services, the opportunity in SA lies in expansion into adjacent and new markets,” Pater said. 

These, he said, included fixed line (fibre, fixed wireless access), fintech services and Vodacom Business.

“These opportunities are lower in the other countries… and will take a few years to mature to a level where they become a greater opportunity, fintech possibly being the exception,” Pater said.  

In the meantime, Vodacom CEO Shameel Joosub said the assignment of high-demand spectrum was instrumental to data pricing. 

“While being cognisant that disposable income will remain under pressure, we are increasingly optimistic about improved growth prospects for our international operations,” Joosub said. 

“In South Africa, the allocation of temporary spectrum has supported network capacity and highlights the urgent need for high-demand spectrum to be allocated through Icasa’s ITA process.” 

Vodacom has raised its medium-term targets for operating profit growth to the mid- to high-single digits from mid-single digits due to improved growth prospects for its operations outside SA, including Safaricom. DM/BM