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Vodacom Group Limited Annual Report - for the year ended 31 March 2009 |
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Group overview
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Performance review
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Vodacom Group owns 93.75% of Vodacom SA, with the remaining 6.25% held by Vodacom’s BBBEE shareholders. Vodacom SA commenced commercial service in June 1994 and is the market leader in South Africa with an estimated 53% market share. Vodacom SA was originally granted a mobile cellular telecommunications licence in September 1993 and commenced commercial service in June 1994. In addition, Vodacom SA was awarded a 1 800 MHz licence, and a 3G spectrum licence during the 2005 financial year. In terms of the Electronic Communications Act, on 16 January 2009, ICASA issued Vodacom SA with an individual Electronic Communications Services licence (“ECS”) and an individual Electronic Communications Network Service licence (“ECNS”), for a period of 15 years and 20 years, respectively. Vodacom SA had 27.6 million mobile customers as at 31 March 2009, comprising 69.7% of the Group’s customer base. Vodacom SA contributed 86.0% to group revenue and 89.2% to group EBITDA for the year ended 31 March 2009. Highlights
Summary performance indicators
Overview Vodacom SA produced a good set of results for the year ended 31 March 2009. We continued to enjoy strong customer growth, adding 2.8 million customers to grow the base 11.3% to 27.6 million. Record gross connections of more than 13 million were achieved and the focused retention campaigns and loyalty programmes proved effective and reduced overall churn. Segments of the business were affected by the sharp downturn in the economy. The impact of higher interest rates, higher than budgeted inflation and the 24.2% decline in the average rand/US dollar exchange rate over the past year, as well as the hike in electricity costs in South Africa, made for difficult trading conditions. Contract customer revenue grew by only 4.2% compared to robust revenue growth of 16.5% in the prepaid customer base. We responded decisively to the worsening conditions, introducing more affordable products and bundles allowing customers to better control their spending. We also increased our focus on containing costs. Despite higher foreign currency-denominated costs and our investment in Vodacom Business, these proactive measures enabled us to maintain healthy margins. Vodacom remained the mobile market leader in South Africa with an estimated 53% market share as at 31 March 2009, down from 55% in the prior year. The decline can be attributed to the ongoing impact of the deletion rule change and aggressive pricing by the competition, which we countered with focused campaigns to provide greater value to customers. We extended our lead in data and broadband services and by year end we had nearly 5 million unique mobile data (GPRS and 3G) users and 720 000 broadband customers, up 80.0% on the prior year. We also have 2.8 million 3G-enabled handsets on our network, presenting a significant opportunity for further broadband penetration. Vodacom SA’s 6.25% BBBEE transaction, together with the progress we have made in skills development and preferential procurement have resulted in an improved BBBEE rating to Level 4 according to the DTI Codes. Vodacom was recognised as the top telecommunications brand in South Africa for the fifth successive year and the fourth most popular brand overall in South Africa in the Sunday Times Ipsos/Markinor Brand Survey. The Electronic Communications Act was finalised in the year, with ICASA issuing licences in January 2009 to approximately 250 individual ECS and ECNS licensees. The final licence fee regulations were published in March 2009, setting the fee at 1.5% of gross profit effective 1 April 2009. The new licence fee regulation, once implemented, is expected to have a positive impact as the previous licence fee was set at 5% of net operating income. The Regulation of Interception of Communications and Provision of Communication Related Information Act (“RICA”) was signed into law by the President in January 2009, with implementation expected in August 2009. RICA will require every customer to be registered within an 18-month period. We expect this to contribute to further lowering churn but it is also likely to moderate the growth in gross connections. Financial performance Vodacom SA lifted revenue 10.8% to R47 483 million in the year ended 31 March 2009, up from R42 852 million in the prior year. This was primarily due to the 11.3% increase in customers to 27.6 million and strong growth in data revenue of 27.9% to R5 973 million. Data revenue from connectivity and usage (excluding messaging revenue) increased by 69.3% as a result of the 80.0% increase in broadband customers. Data revenue accounted for 14.1% of South African revenue (excluding equipment sales). EBITDA was up 9.7% to R16 222 million with a slight decline in the EBITDA margin from 34.5% to 34.2%. Excluding the BBBEE transaction expenses of R95 million, EBITDA growth was 10.3%. Operating profit of R11 372 million included a non-tax deductible share-based BBBEE charge of R1 382 million. Excluding this charge, operating profit was up 8.4% to R12 754 million. The lower growth in adjusted operating profit as compared to EBITDA is largely due to the 34.9% increase in the amortisation of intangible assets to R607 million. South African capital expenditure at R4 627 million representing 9.7% of revenue, was largely as a result of continued investment in the data network and transmission self provisioning, to support substantial growth in data volumes coupled with improving coverage and quality. Operational performance Mobile voice In South Africa, SIM card penetration is now estimated to be at 108% of the population. Prepaid customers continue to dominate the market, comprising an estimated 85.3% of all mobile customers. The 11.3% increase in our customer base to 27.6 million comprised prepaid customer growth of 11.3% to 23.6 million and contract customer growth of 11.4% to 3.9 million. This was a direct result of the 8.5% increase in gross connections to 13.1 million driven by the success of our dynamically priced prepaid product, Yebo4Less, which had attracted 4.8 million customers (or 20.4% of the prepaid customer base) as at 31 March 2009, as well as the March Madness campaign. Net additions increased to 2.8 million from 1.8 million in the prior year. Overall churn reduced by 2.2 percentage points to 40.1%, largely as a result of targeted programmes to reduce churn in the prepaid customer base, which eased to 45.4% from 47.9% in the prior year. Focused campaigns to offer greater value to customers, marketing SIM swaps and our various loyalty programmes are proving to be highly effective and Vodacom has the lowest prepaid churn in the local market. We also contained contract churn to 9.9%, slightly up from 8.3% as a result of an increase in involuntary churn driven by the economic conditions. In tandem with our focus on reducing churn, our strong credit management capability assisted us to manage increasing levels of bad debt due to the economic pressure being felt by our customers. Total traffic increased 7.1% to 24.4 billion minutes, mainly due to the growth in the customer base. Contract minutes of use, which excludes bundled minutes, showed a 9.3% decline to 156 minutes per customer per month, as a result of fewer contract customers spending outside of their bundles. Prepaid minutes increased 4.3% to 48 minutes per customer per month. During the period, total ARPU increased 3.9% to R133 per month. Prepaid customer ARPU rose 9.7% to R68 per month primarily due to the introduction of Yebo4Less and lower denominated vouchers. Contract customer ARPU declined 2.5% to R474 per month, with the main contributors to the decrease being the rapid growth in low-end hybrid contract customers and customers not exceeding their bundles. Community services ARPU fell 22.5% to R534 per month due to intensified competition.
Messaging and data We continued to see strong growth in our messaging and data products. During the year under review, usage of GPRS, 3G and HSPDA increased, with data volumes climbing 97.8% to 3.2 terabytes in the year, and the number of packet switched data users reaching 4.9 million at 31 March 2009. We transmitted 5.4 billion messages (MMS/SMS) over our network in the year, up 8.2%. Broadband customers grew 80.0% to 720 000 customers (including customers on 24-month contracts and those electing recurring data bundles) from 400 000 in the prior period. Our introduction of Mobile Internet in June 2008 substantially increased the number of customers accessing the internet via their mobile phones by enhancing the customer experience and reducing the cost of accessing the internet. Vodacom had five million unique data users, 962 000 active email accounts and 2.6 million unique Vodafone live! users by year end, all significant contributors to data traffic. During the year, we secured our position as the leading provider of broadband connectivity in the country, with the most extensive 3G network comprising more than 2 880 sites. We continued to launch targeted campaigns and more affordable options to drive broadband connectivity and mobile internet throughout the year. The number of active 3G/HSDPA handsets on the network as at 31 March 2009 was 2.8 million, compared to 1.3 million a year before. In February 2009, we launched Vodafone Connect Via the Phone which enables customers to use a 3G phone as a modem to access the internet from their PCs or laptops. Converged ICT Services We continued to make strong progress in our converged service offerings to consumers including online services, media and advertising, financial services and social networking. Vodacom Mobile Media, responsible for mobile advertising, generated strong advertising revenue from display advertising on the Vodafone live! portal and Please Call Me messaging service. During the year we also launched a made-for-mobile advertising funded mobi-soap video series with all content free to Vodacom customers. In its first year of operation, Vodacom Business reached some significant milestones in product development and sales. The business has developed a comprehensive portfolio of 28 products and acquired several contracts to provide access and managed hosting services as well as total converged communication services. Vodacom Business is currently working on a number of large tenders to supply converged solutions. Vodacom Business has invested significantly in infrastructure with a Tier 1 internet network capability, as well as a corporate-grade national MPLS VPN. Its offerings are supported by our new data centre in Midrand, the development of soft switch capability and a client services operations centre.
Products and services Mobile voice Mobile voice services are offered through contract and prepaid packages as well as community services. Vodacom offers contract customers a range of mobile service packages including hybrid packages, which allow customers to contract for a specific level of airtime which can be topped-up with additional value by purchasing prepaid vouchers. Vodacom offers various prepaid products such as Vodago, Smartstep and 4U. In 2008, Vodacom SA introduced Yebo4Less in South Africa, a prepaid tariff plan offering discounts to the base call rate depending on available network capacity at a specific location at different times of the day. Voice services include outgoing and incoming calls, international roaming, interconnection and incoming visitor roaming. 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. In 2000, Vodacom SA launched the USSD-based Please Call Me service, which enables a customer to send a free SMS requesting a call back. Vodacom SA now transmits approximately 20 million Please Call Me messages per day. The call back from the recipient generates revenue for Vodacom. The Please Call Me messages also provide media space that can be sold to advertisers. In October 2008, Vodacom SA launched SVS (short voice service), which allows users to send and receive voice messages up to 30 seconds long. Within two months more than 1.6 million customers had used this service. SVS provides customers with the flexibility of communicating in their preferred language and does not require sophisticated handsets or complex downloads. Broadband data and connectivity Vodacom offers broadband connectivity and internet access services using various technologies such as GPRS, EDGE, 3G, HSDPA, HSUPA, WiFi, WiMAX and VSAT. In December 2004, Vodacom SA was the first operator to introduce a commercial 3G product in South Africa. The number of active 3G/HSDPA handsets on the local network as at 31 March 2009 was 2.8 million. In June 2008, Vodacom launched its Mobile Internet offering. In April 2009, Vodacom SA launched Broadband Standard and Broadband Advanced, allowing data bundle carry over for up to a maximum of 60 days for all customers irrespective of the data bundle (Standard or Advanced) chosen. Vodacom’s existing internet rates are now standard with HSDPA 3.6 as well as HSUPA (device dependent). Broadband Advanced offers the same in-bundle and out-of-bundle rates and includes HSDPA 7.2 with HSUPA for free. Converged ICT services Vodacom Business was launched in February 2008 and offers a total communications service portfolio to corporate customers. Vodacom Business services include nextgeneration IP voice, managed networks and infrastructure, internet access, hosting and storage. In the consumer market, Vodacom is extending its service offerings to other converged areas, including social networking, financial services, digital publishing, gaming, video on demand, music and telemetry services. Mobile advertising has evolved into an important mass media channel, with more mobile phones in the world than the combined number of televisions and personal computers. Vodacom Mobile Media was launched in the 2008 financial year. Equipment sales Vodacom sells handsets and other telecommunications equipment and accessories. We are part of the Vodafone Group’s ultra low price handset initiative, and supplied handsets in South Africa at less than $20.
Network technology and infrastructure As at 31 March 2009, Vodacom SA’s GSM and 3G infrastructure covered an estimated 98% and 28% of the South African population, respectively. We have GPRS functionality across the entire network and 40% of sites have EDGE functionality. We are also engaged in renewing parts of our radio access network in certain regions. The new equipment is expected to be more cost efficient, improve network coverage, provide improved data services to customers and allow for the convenient upgrade to future technologies. We started deploying our 3G network in December 2004 and in 2007 we implemented HSDPA, which supports down-link speeds of 3.6 Mbps and is provided to all our customers. In 2008, we launched HSUPA in South Africa, improving data speeds on uplink to 1.4 Mbps. Our network is now also fully HSDPA 7.2 Mbps capable. In the year we accelerated our programme to self-provide transmission in critical areas of our network, which will assist us to better manage transmission costs, one of the single biggest input cost for data services, as well as better manage the service quality. Our construction of 11 metropolitan fibre rings, with the assistance of several suppliers, to interconnect various mobile switching centres and base station controller sites is progressing well and eight have been completed. This roll-out facilitates the provisioning of fibre access directly to Vodacom Business customers in conjunction with the construction of additional fibre acceses into corporates. We have also built a satellite earth station in Midrand to provide international connectivity and links to certain remote sites within South Africa. In line with our infrastructure sharing plan, which will provide cost savings in future, agreement has been reached to construct a national fibre network jointly with MTN and Neotel. The national network will include a northern and southern ring with a total distance of around 5 000 km. The first phase of the project will commence in 2009 and the total project is expected to take 30 months to complete. We will secure substantially augmented international broadband connectivity as a major investor in the West Africa Cable System, due to come on stream in 2011. Vodacom sets itself network quality targets for voice on both the 2G and 3G networks, as well as data performance targets on the 3G network. These targets are based on statistics measured by the network elements itself, and measurements done by a third party. The measurements performed by the third party involve drive testing, which resembles the service experience of customers. Vodacom manages network quality very stringently through several mechanisms. Firstly, outright network failures are detected via alarms in the Network Management Centre, which action the restoration of the failed element(s) immediately. Furthermore, network quality management is facilitated by the continuous monitoring of network quality statistics and drive test results, which triggers corrective action if deterioration in network quality is detected. This ensures that good network quality is maintained. Other measures taken to ensure good network quality and customer experience include monitoring the performance of types of handsets and taking corrective action where poor performing handsets are detected. Supply chain management Vodacom SA operates a world-class warehouse facility in Midrand handling on average more than 167 000 units per day, 98% of which are delivered within 48 hours to major centres. This allows Vodacom SA to provide stock to our extensive distribution network on a “just-in-time” basis. The Group’s supply chain management initiatives focus on reducing costs and minimising inventory while ensuring product availability. We negotiate handset pricing centrally and are also able to leverage Vodafone’s global procurement muscle to secure the benefit of volume-based pricing and low-cost handsets. In the year, handset sales totalled 5.5 million, up 8.3% on the prior year. In Vodacom’s continued efforts to drive penetration, sales of the Vodafone ULCHs (ultra low cost handset) increased 30%, now representing 20% of all handset sales. Customer Care We continue to invest in continually enhancing customer care, evidenced by improved call centre service levels, first call resolution and higher customer satisfaction results. The primary service level measure of 70% of calls answered in 20 seconds improved by 9.7% year-on-year to 73.3%, with the data call centre service level up 6.3% to 73.7%. Call volumes into the Customer Care Interactive Voice Response units (“IVRs”) dropped by 12% to 152 million calls for the year. Over the same period non-directory enquiries calls to agents declined by 16% to 43 million calls. These changes can be attributed to selfservice initiatives, fewer repeat calls and a maturing market. Agent efficiency improved significantly with the ratio of customers per agent increasing by 43% year on year to 14 537 customers per agent. These improvements have been achieved by focused initiatives in a number of areas including single skilling agents which has lead to fewer repeat calls, improved self service on the IVR (72% of all calls were managed via IVR), web and keyword SMS services, regular customer satisfaction reviews and ongoing process improvements. A total of 50 143 staff in the distribution channel were trained during the year, substantially up from 22 743 in the prior year. E-learning received the greatest response and 24 242 e-learning completions were achieved compared to 3 248 completions in the previous training year. Our well-established customer loyalty programmes are designed to underpin Vodacom’s reputation as a caring company and to reduce churn. These include the Onyx and Platinum programmes for contract customers, and our Talking Points programme for prepaid customers, which gives points per recharge that can be redeemed for airtime and special offers. In the year, 3.5 million redemptions were recorded. Our Yebo Millionaires game show attracts well over 2 million SMS entries per week, with more than 680 000 customers having won prizes and three instant millionaires created in the last year. At the heart of the programme is a strong community investment element, and more than 50 schools across the country have been provided with computer centres with funds generated from the initiative.
Distribution Vodacom’s distribution channels consist of its franchise operation, direct operation, national chains, wholesalers and a network of independent dealers. In addition, a relatively new channel of on-billers has been introduced. During the year Vodacom SA further increased our points of sale, primarily as a result of the Yebotradas initiative, with over 4 400 traders in rural communities nationwide. This initiative empowers community-based traders to sell recharge vouchers to customers in remote communities using a specific application to enable a handset to become the point of sale. Franchised outlets include Vodashops and Vodacom 4U stores and our cellular mall, Vodaworld. The national franchise stores are Vodacom’s most successful contract channel and are frequently used to pilot new initiatives and products, such as the successful launch of the Apple iPhone in 2008. We further increased our dealer and franchise network by another 168 stores to 1 148. Vodacom Direct, our online channel and direct fulfillment call centre, continues to employ its multi-brand strategy and off-the-page advertising to attract customers to its contract offerings. The National Chains division, which encompasses the majority of South Africa’s leading retailers, has grown from 14 300 to over 16 200. Vodacom continues to seek out new and exciting retail distribution channels to expand its reach throughout the country. Wholesalers continue to dominate the prepaid market. The Dealer channel consists of two main areas, Independent Dealers and Specialist Dealers. The Independent Dealer channel consists of smaller independent stores across the country. Significant growth potential exists to increase distribution through Independent Dealers in a number of provinces and we are currently identifying suitable outlets in small towns in these regions. New dealers, who specialise in computer sales, are also being appointed across the country to drive sales of our data products. Specialist Dealers (on-billers) own the billing relationship with end-users. They focus mainly on selling our data products and recharge vouchers. We have seen a steady increase in sales of our 3G products via two of our major Specialist Dealers. For our business customers in South Africa, Vodacom Business operates an extensive direct sales division which concentrates on the sale of contracts, data products, value-added services and, more recently, the full portfolio of ICT converged services. Brand Our marketing efforts in the year were focused on promotions to offer greater value to customers such as the “20% free” March Madness campaign, as well as providing extensive marketing support for data and converged offerings. In the last quarter of the financial year we launched our Player 23 campaign to coincide with the Vodacom Super 14, providing a platform for the brand to speak directly to rugby fans, effectively leveraging our sponsorship of the sport. Vodacom’s advertising has once again been recognised for excellence – in its creativity and effectiveness. At the Annual AdReview Awards, Vodacom’s “Dictator” campaign was awarded Campaign of the Year. This success is a continuation of the brand leadership accolades achieved by Vodacom in the Sunday Times Ipsos/Markinor Brand Survey, as the top-rated telecommunications brand and South Africa’s Most Loved Advertiser. Vodacom was also awarded four Loerie awards, including Gold, for “Dictator” in the year.
Management priorities for the year ahead This financial year is set to be as challenging, if not more so than the past year, but we will continue to build on our achievements by staying focused, disciplined and responsive to changing market conditions. We will concentrate on the following priorities:
South African key indicators
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Effective distribution remains key to ongoing success in the mobile telecommunication industry. It ensures a
steady supply and turnover of product, essential in retaining and growing market share. This is especially true
in Africa, where formal distribution networks are often challenged by vast distances and numerous rural areas
where communities have limited resources and dispersed distribution points.
Vodacom has developed a location-based social network, aptly
named The Grid. It won the New Telecommunications Service of the
Year award at the 3rd Annual Comms MEA Awards in Dubai, where
the judges described the service as a “perfect combination of Web
2.0 applications and mobility”. The Grid is also a finalist for two
awards, Social Networking and Mobile First Innovation, at the Mobile
Entertainment Forum Awards in London in June 2009.
The Vodacom Mobile Media business is the only fully-fledged mobile advertising offering in Africa and is
being used as a benchmark for the Vodafone Group. It has run campaigns for over 140 unique brands
and, in any given month, will run campaigns for over 35 multinational and local brands. The business has
already shown excellent year-on-year revenue growth through a string of highly innovative products.
Vodacom’s sport sponsorships offer a unique opportunity for us to invest in
our communities and connect with our customers by sharing in their passion
for sport. We are proud and long-term sponsors of rugby’s Vodacom Super 14
(previously the Super 12), Vodacom Tri-Nations, Vodacom incoming tours and
the Vodacom Cup, amongst others. We are also a major broadcast sponsor,
bringing rugby into the homes of millions of South Africans and making the
game accessible to supporters nationwide.Copyright © Vodacom 2009.
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