Vodacom saw lower mobile termination rates strip R1 billion off its revenue line in the first six months of the year, which translated into profit coming in R600 million lower than if the rates had not been amended in April.
For the full year, which ends next March, CEO Shameel Joosub anticipates the net loss to the company to come in at a total of R1 billion because the end-September rates gave the company some breathing space in terms of asymmetry.
Of this amount, about three-quarters of the loss is paid out to Telkom, which the operator is no longer obliged to pass on to consumers, says Joosub. He says lower termination rates have not aided consumers because prices have come down thanks to competition, and not regulatory intervention. "I do ask the question of what have we achieved."
Joosub explains the balance of what Vodacom - which has 32.6 million South African subscribers as it added 2.5 million repaid customers - pays out goes to Cell C, aiding it in being competitive and, more importantly, being profitable.
Despite the hit to its bottom line, Vodacom will continue to invest in its network, with R8.5 billion earmarked for the full-year, as it seeks to differentiate itself and cater for growing data demand, says Joosub. The operator is also seeking new revenue avenues, such as financial services, he notes.
Better final outcome
Vodacom's interim numbers were affected by the Independent Communications Authority of SA's (ICASA's) April rate cut, which was thrown out by the South Gauteng High Court, which ruled, at the end of March, those contested termination rates were invalid, but would be in force until the end of September.
The regulator's April rates heavily favoured smaller players Cell C and Telkom Mobile. From April, mobile termination rates for Vodacom and MTN dropped to 20c - half the previous rate - while Cell C and Telkom Mobile were able to charge the two larger players more than double that (44c) to terminate calls on their network.
Towards the end of September, the regulator decreed mobile termination rates would remain at 20c until next September, after which they would drop to 16c, and then 13c in the final year to September 2017. Cell C and Telkom Mobile will now be able to charge the duopoly 31c to terminate calls on their networks, which then drops to 24c and then 19c at the end of the glide path.
Joosub notes the final rates will give Vodacom some breathing space and will not hit its numbers as hard in the second half. In the first six months of the year, Vodacom grew overall revenue 1% to R37.5 billion -stripping out the positive effects of foreign exchange, the top line gained 2.3% - while income earned off its network grew 1.7%, or 0.2% when currency effects are removed.
Locally, the operator grew revenue 0.1% to R30.2 billion, and service revenue dropped 1.3% as termination rates dropped 50%. Stripping out this effect, which cut interconnect revenue 42.2%, service revenue would have gained 2.9%.
Joosub says the lower rates accounted for 40% of the 5.5% drop in headline earnings per share, which came down to 415c a share from 439c a share in 2013.
Ovum analyst Richard Hurst says Vodacom is in the midst of a serious balancing act as it needs to invest to remain relevant, but - at the same time - deal with regulatory pressures. He says the effect on its bottom line was anticipated when ICASA dropped rates in April, and the pressure will continue.
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