International

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	We have been effective in defending our market positions in all our markets despite intensifying competition and difficult trading conditions, and remain confident of doing so in the current year.
Willem Swart Chief Officer International Business

Vodacom operates in four countries outside of South Africa: Tanzania, the DRC, Mozambique and Lesotho. The international operations cover a total population of approximately 134 million in these countries, which have a blended mobile penetration rate of less than 25%.

The international operations had 12.0 million customers and generated R7 003 million in revenue in the year ended 31 March 2009, contributing 30.3% and 12.7% to group customers and revenue, respectively. The international operations contributed 10.1% to group EBITDA for the year ended
31 March 2009.

Highlights

• Strong customer growth of 30.7% to 12.0 million customers
• Growth in revenue of 29.9% to R7.0 billion
• Data revenue growth of 41.0% to R468 million
• EBITDA growth of 18.7% to R1.8 billion
• Capital expenditure up 58.4% to R2.4 billion
• Vodazone and M-PESA launched in Tanzania
• 3G products and services launched in Lesotho
• Market leadership retained in four of five markets, and strong market share gains made in Mozambique
• Significant progress made in expanding network coverage and quality

Summary performance indicators

Overview

The international operations continued to record strong customer growth, up 30.7% to 12.0 million in the year. The launch of new products and services, including BlackBerry^TM in Tanzania and 3G in Lesotho, focused sales and marketing campaigns, and enhanced network coverage were the main drivers of this pleasing growth.

Gross connections were 32.9% higher and churn remained high but relatively constant, contained by various loyalty programmes such as Tuzo Points and Tuzo Draw which were launched in Tanzania. ARPU in local currency declined in most of the international operations due to the growth in lower-usage customers, shrinking disposable income due to economic conditions, and aggressive competitive pressure on tariffs in the form of discounted airtime and free on-net call promotions by competitors. Besides the pricing pressure, which is being exacerbated by worsening economic conditions, new licences are being awarded raising the competitive stakes in all our markets considerably.

EBITDA margins increased in all the international operations except for the DRC, reflecting the severe impact of the global economic slowdown in that country. The DRC’s economy is heavily reliant on commodities and has been severely affected by the slump in commodity prices which has crippled the mining sector. The effects of the economic slowdown have begun to show increasingly in all our other markets except for Mozambique, which is relatively shielded as an economy reliant on donor funding.

We continued to invest significantly in expanding network coverage and quality, with more than 400 new base stations added during the year in the four countries. Tanzania and Mozambique were the main beneficiaries of this investment, followed by Lesotho where we commenced 3G services.

In Tanzania we successfully launched the money transfer service, Vodafone M-PESA, in partnership with Vodafone Group, with accelerating uptake. Vodafone M-PESA is also under consideration for Mozambique and the DRC. We continued to enhance customer care and specifically our call centre operations, in which we set the benchmark in all our international operations. We made progress in the important objective to expand our distribution network, concentrating on under-serviced areas and on managing margins to provide value to the dealers and vendors who form the backbone of our distribution model.

We have continued to elevate our focus on specific initiatives to leverage Group efficiencies, through centralised procurement across the Vodacom Group, and increasingly also across the Vodafone Group, specifically in low-cost handsets. Our plan to identify and implement synergies with Gateway is ongoing. We are also engaging with other operators on site sharing, as part of the major thrust to extract operational cost savings from infrastructure sharing.

The regulatory environments in our international countries of operation are liberalising rapidly, and are in certain respects ahead of South Africa. The main regulatory trend in all countries is subscriber registration, which is proving challenging to implement given the lack of comprehensive personal identification systems. Vodacom continues to engage constructively with the governments and regulatory authorities in all our markets towards sound and effective regulatory frameworks that support sustainable growth in the telecommunications sector.

We have been effective in defending our market positions in all our markets despite intensifying competition and difficult trading conditions, and remain confident of doing so in the current year. We continue to invest in broadening coverage and will stay competitive by leading in new technology and launching new products, as well as executing aggressive campaigns to offer greater value to customers across a basket of benefits including coverage, service quality, customer care and affordability. The strength of the brand in all our countries of operation will continue to underpin our efforts to grow our international presence.

Financial performance

Revenue from the international operations for the year ended 31 March 2009 rose 29.9% to R7 003 million, largely driven by the 30.7% growth in the customer base to 12.0 million. Revenue was positively impacted by the appreciation of the functional currencies of the international operations against the rand.

Data revenue accounted for 6.7% of the international operations’ revenue in the year and increased 40.7% to R468 million, which was largely driven by an increase in SMS volumes.

EBITDA for the year increased 18.7% to R1 835 million with EBITDA margins of 26.2%, compared to 28.7% in the prior year. Although EBITDA margins expanded in all the international operations except for the DRC, they were negatively affected by a significant increase in employee expenses and to a lesser extent higher direct network operating and marketing expenses. Operating profit from the international operations was 15.6% lower at R606 million with an operating profit margin of 8.7% as compared to 13.3% in the prior year. This was largely as a result of the substantial increase in depreciation and the impairment of assets, which increased to R106 million as compared to R30 million a year earlier largely as a result the impairment of Mozambique network assets.

Capital expenditure for the international operations was 58.4% higher at R2 406 million (or 34.4% of revenue) and largely relates to the expansion of coverage in Tanzania and Mozambique to support customer growth.

Products and services

Mobile voice

Mobile voice services are offered through contract and prepaid packages as well as public payphone services. Additionally, a number of hybrid packages which provide customers with greater ability to control their spending are available. These can be topped-up with additional value through the purchase of prepaid vouchers. Voice services include outgoing and incoming calls, international roaming, incoming visitor roaming and national roaming.

In August 2008, Vodacom Tanzania launched Vodazone giving customers up to 50% call discounts depending on their location and the time of day.

Mobile messaging

Vodacom offers its customers mobile messaging services such as SMS, MMS, premium rate SMS (including USSD) and MMS, SVS, bulk SMS and MMS, and WAP services.

Broadband data and connectivity

Vodacom offers broadband connectivity and internet access services using various technologies such as GPRS, EDGE, 3G, HSDPA, HSUPA, WiMAX and VSAT.

In March 2007, Vodacom Tanzania launched a 3G offering in Dar es Salaam. In July 2008, data bundles for prepaid customers were introduced in Tanzania and BlackBerry^TM was launched in October 2008.

Vodacom Lesotho launched extensive data product offerings during the financial year, including GPRS, 3G, WiMAX, coupled with various SMS usage promotions such as Summa Feva and Vodacom Challenge.

Converged services

In Mozambique, Vodamail (free email) and Vodakool, the news and information portal exclusive to Vodacom, are offered.

Vodacom Lesotho launched Vodacom Small Office Home Office (SoHo) packages, a fixed wireless home solution.

In April 2008, Vodacom Tanzania launched Vodafone M-PESA, a financial payment service in partnership with Vodafone Group.

Equipment sales

We are part of Vodafone Group’s ultra low price handset initiative, supplying handsets into Africa at less than $20.

Country reviews

Tanzania

Vodacom Tanzania’s revenue for the year ended 31 March 2009 rose 26.3% to R2 975 million, primarily due to the increase in customers, the growth in data revenue and a stronger Tanzanian shilling to the rand in the year. In Tanzanian shillings, revenue was up 12.2% for the year, before excise duty. The average appreciation of the Tanzanian shilling against the rand was 17.0%
over the period.

Tariff increases were implemented in Tanzania in July 2008, to absorb the increase in excise duty. However, as the year progressed revenues came under increasing pressure due to competitor activity as well as the global economic downturn. Competitors launched new tariff packages, mostly targeting increased on-net traffic. We implemented aggressive campaigns of our own, including a zone-based billing product called Vodazone and a promotional offer to customers of 30% additional airtime on any recharge. We also continued to investigate cost-saving initiatives to mitigate the pressure on revenues.

Our focus on network quality and expanding coverage has paid dividends, giving Vodacom Tanzania a competitive advantage. Vodacom Tanzania maintained its market leadership position.

Churn decreased to 43.1%, as compared to 45.5% for the prior year, a result of the introduction of new loyalty programmes and increased availability of SIM swap points. Total ARPU decreased 4.3% to R49 per month, as compared to R51 per month in the prior year. In local currency, ARPU declined by 20.7% due to the impact of macroeconomic pressures on disposable income as well as the competitive pressure on tariffs.

Data revenue accounted for 9.0% of Vodacom Tanzania’s revenue for the year ended 31 March 2009 and experienced strong growth of 30.0% (7.8% in local currency) to R269 million. Data revenue growth was driven by an increase in 3G/HSDPA, GPRS, and WiMAX revenues and supported by continued growth in SMS, the launch of prepaid data bundles and Vodaflava (a premium rate SMS-based information, ring tone and logo download service). As at 31 March 2009, Vodacom Tanzania had 1.6 million data capable handsets, of which 331 000 were 3G/HSDPA enabled, and had 337 000 active data users at the same date. During the year Vodacom Tanzania launched prepaid and postpaid Blackberry^TM service.

M-PESA, a financial payment service in partnership with Vodafone, was successfully launched during the year.

Vodacom Tanzania’s operating profit was R615 million and EBITDA was R1 049 million for the year, up 33.6% and 37.0% respectively on the prior year with an EBITDA margin of 35.3% compared to 32.5% a year before. In Tanzanian shillings, profit from operations and EBITDA increased by 10.9% and 13.7% respectively. The margin increase was supported by cost containment measures, and lower management fees and fuel consumption.

Capital expenditure increased to R1 355 million, compared to R713 million in the prior comparative period, or 45.5% of revenue, largely due to increased rollout of base stations. Vodacom Tanzania rolled out an additional 214 base stations bringing the total to 979 at 31 March 2009. Vodacom Tanzania now has EDGE functionality across the network, as well as 3G in all the major centres countrywide.

Following representations by the industry to delay the draft legislation proposing subscriber registration, mobile operators will be required to commence subscriber registration on1 July 2009 for all new subscribers and existing prepaid subscribers.

The DRC

Vodacom DRC’s revenue for the year ended 31 March 2009 rose 27.5% to R2 928 million, primarily due to a 26.8% increase in customers to 4.2 million, increase in data revenue and the strengthening of the US dollar to the rand over the period, offset by a decrease in net interconnect revenue and lower ARPUs in local currency. In US dollars, revenue increased by 2.6% in the year. Data revenue accounted for 4.1% of Vodacom DRC’s revenue for the year and increased 53.2% to R121 million.

The impact of the slump in mineral resource prices and the closing or downsizing of many mines has had a devastating impact on the DRC economy. Furthermore, the decrease in mining exports caused severe shortages of US dollars, which resulted in significant depreciation of the local CDF currency. A weaker local currency impacts negatively on the affordability of mobile offers which are charged for in US dollars. The severe economic conditions have spurred increased price competition, which is expected to get worse as the full effect of the economic downturn filters through the economy and with the entry of new mobile operators into the market.

While customer growth in the DRC was hampered by the harsh economic conditions, gross connections were supported by aggressive customer acquisition campaigns and connection incentives, the launch of per second billing and lower denomination vouchers and increased network coverage. Vodacom DRC maintained its leadership position.

Churn remained high at 50.5%, compared to 48.0% in the prior year, as a result of the increasingly competitive environment. During the year total ARPU increased 5.5% to R63 per month, as compared to R60 per month for the prior year. This was primarily due to currency fluctuations offset by the connection of lower ARPU customers, an increase in inactive customers and lower usage. In US dollars, ARPU was 14.3% lower, mainly due to increasing competition and the weakening economic climate together with local currency weakness against the US dollar. Local currency depreciation severely affects the purchasing power of customers who pay in local currency for airtime which is charged in US dollars. The local currency weakened by 47.0% in the six months ended 31 March 2009.

Vodacom DRC’s operating profit for the year ended 31 March 2009 was R204 million and EBITDA was R743 million, decreasing by 44.0% and 0.3% respectively on the prior year. The EBITDA margin was down to 25.4% from 32.4% in the prior year. Profitability was negatively impacted by an increase in indirect taxes, changes in interconnection rates, increases in network maintenance and site costs due to fuel and security cost increases and the market conditions. In US dollars, EBITDA and operating profit decreased by 19.7% and 54.9% respectively.

Capital expenditure rose 5.3% to R693 million, or 23.7% of revenue. During the year an additional 93 sites were rolled out, bringing the total to 518 as at 31 March 2009.

After several postponements, the commencement date for implementation of excise duty tax was set at 15 April 2009, and the full 10% excise duty tax will gradually be introduced in the following 12-month period. All mobile operators agreed to pass the excise duty tax on to customers and retail tariffs were increased by 4% on 14 April 2009. The tax rate and fees specific to the telecommunications sector have also been increased, and the FEC (Chamber of Commerce) has asked for a review of the high increases. Following a request for further extension of customer registration, the period was verbally extended by six months to the end of June 2009.

Mozambique

Vodacom Mozambique’s revenue for the year ended 31 March 2009 rose 69.4% to R735 million, primarily due to the 27.5% increase in customers to 1.6 million, a 12% tariff increase from 1 October 2007, strong growth in data revenue and a stronger local currency against the Rand. In meticals, revenue increased 34.4%, with the metical average rate appreciating 20.7% to the rand in the year. Data revenue accounted for 4.8% of Vodacom Mozambique’s revenue for the year, up 118.7% to R35 million.

We made strong progress as the challenger to the state-owned market leader in Mozambique, recording a 4% gain in market share in the year to an estimated 44% at 31 March 2009.

The growth in customers was a result of increased network coverage, improved products and services and an increased number of distribution partners. Growth was supported by various promotional tariffs with free on-net calls and recharge bonuses. For the year ended 31 March 2009, churn increased to 69.0%, as compared to 58.7% for the year ended 31 March 2008, as a result of strong competition in the market and a large part of the base being seasonal holiday visitors from outside Mozambique. During the year total ARPU increased by 37.6% to R43 per month, primarily due to tariff increases and an appreciation of the local currency to the rand. In metical, ARPU increased 9.2% in the year due also to market share gains among higher spending contract customers.

Vodacom Mozambique’s loss from operations was R253 million and EBITDA loss was R19 million for the year ended 31 March 2009, as compared to a loss from operations of R157 million and an EBITDA loss of R32 million in the prior year. Profitability was negatively impacted by the impairment of the network assets of R106 million.

Capital expenditure increased 140.5% to R267 million, or 36.3% of revenue, largely driven by network expansion and the investment in fibre optic infrastructure in Maputo. During the year an additional 60 sites were rolled out, bringing the total to 280 as at 31 March 2009.

It is likely that a third network licence will be issued in the future and we have continued to position the business to defend its market position.

Lesotho

Vodacom Lesotho’s revenue for the year ended 31 March 2009 increased by 28.8% to R398 million, primarily due to the 31.1% increase in customers to 518 000 and growth in data revenue. Data revenue accounted for 10.8% of Vodacom Lesotho’s revenue for the year ended 31 March 2009, and increased by 38.7% to R43 million.

New data product offerings included GPRS, 3G, WiMAX, coupled with various SMS usage promotions such as Summa Feva and the Vodacom Challenge. In the year Vodacom Lesotho successfully launched its 3G network and enabled GPRS/EDGE to support data services nationwide.

Vodacom Lesotho has maintained its market leadership position.

Churn increased to 19.8% for the year ended 31 March 2009, as compared to 17.8% for the prior year, due to stronger competition. During the year, total ARPU decreased by 6.1% to R70 per month, primarily due to a decrease in the average monthly minutes in the prepaid customer base.

Vodacom Lesotho’s profit from operations for the year was R166 million and EBITDA was R189 million, up 35.0% and 36.0% respectively, with an EBITDA margin of 47.5% compared to 45.0% in the prior year. The EBITDA margin increased due to effective cost management and the lowering of international interconnection costs.

Capital expenditure increased 152.8% to R91 million, or 22.9% of revenue, largely due to the expansion in coverage and investments in the 3G and WiMAX networks.

Management priorities for the year ahead

We expect the contribution of the international operations to group revenue to continue growing with low penetration rates presenting significant opportunity for customer growth in the medium term. As economic weakness persists in the DRC and affects our other markets more acutely, a trend that is already evident, the current year will however be difficult. Although the impact is expected to be more muted in Mozambique, any contraction in donor funding and investor confidence will hamper the significant proposed investment in the country.

Underpinned by a more centralised coordinated approach to our international operations, our priorities in the year ahead will be to:

• Defend our market leadership by adding new products and services, and driving data penetration;
• Persist with aggressive value campaigns to counter competitive pressure on tariffs;
• Continue to expand network coverage and enhance quality;
• Expand our distribution network further;
• Focus on extracting further operational efficiencies and cost savings, and driving group-wide procurement benefits;
• Continue to enhance our customer care differential and the strength of our brand;
• Focus on maximising the benefits of synergies with Gateway; and
• Continue to manage the cost and resource implications of regulatory change.

International key indicators