Mobile operator Vodacom's strategy to offset losses from decreasing interconnect revenue has led to more minutes and data being used.
However, income is not growing at the same pace and the company could battle to keep growing in a saturated market.
In the third quarter of the financial year, Vodacom turned over R16.03 billion as revenue grew 5.6%, excluding the impact of currency fluctuations. The company added 2.2 million new subscribers and maintained its market share.
However, the cellular operator - the largest in SA - is running out of room to expand and could struggle for growth in the next few years. In addition, its strategy to get subscribers to use more minutes and data in a bid to offset lower interconnect revenue losses has led to volumes growing at a faster rate than revenue.
Vodacom lost R418 million in services revenue in the three months to December, as a result of lower call termination rates. This figure is just more than half the cost to its income in the first half of the year.
Mobile operators voluntarily cut interconnect rates from March last year, dropping the price from R1.25 per minute to 89c. Vodacom has seen nine months of its current financial year affected by the drop in interconnect, which has so far cost the company R1.2 billion in total.
CFO Rob Shuter has previously said the revenue drop is expected to be between R800 million and R900 million a year, until the final rate of 40c a minute is in place in 2013. He expects the effect of lower interconnect rates in the second half to be similar to the first half. Vodacom did not provide its net interconnect figures.
CEO Pieter Uys says Vodacom will offset this loss by offering innovative new products and improving services and boosting its brand image. Vodacom also aims to stimulate more use of voice and data through incentives, which will help offset interconnect losses.
More for less
However, while Vodacom is spurring demand of its voice and data offerings, the company is not growing revenue at the same rate. Voice revenue grew 4% during the quarter, but the company carried 26% more minutes on its network.
Data revenue growth has also not kept pace with the growth in use, as data use jumped 54.6%, but revenue from data grew at 33.8%. Uys says data was the star performer during the quarter and strong growth in the segment balanced out the losses from interconnect revenue.
Irnest Kaplan, MD of Kaplan Equity Analysts, explains that, as the voice market is saturated, Vodacom will have to focus on data to drive growth. However, data prices will come under pressure due to more competition in the market.
Kaplan says data revenue growth is not sustainable over the next few years, although the increase in the use of data will continue to outpace growth of voice minutes.
In addition, says Kaplan, “Vodacom is virtually giving away a lot of minutes for free” as the price per minute has come down aggressively. He points out that the amount of minutes carried on the network leapt, but voice revenue only grew 4%, or R300 million.
Looking forward, Kaplan says it is possible the network will carry double the number of minutes in the next two years, but revenue growth will not follow suit. He says, depending on when these minutes are being used, the company could run into capacity constraints on the network and have to invest more.
Kaplan says if the minutes are being used when the network is idle, such as in the middle of the night, then Vodacom's future outlook is not that bad, but the growth in minutes is still concerning.
Although Vodacom is a good operator, managing to grow revenue during a difficult economic climate, this growth may not be sustainable over the next two to three years, he says. As a result, notes Kaplan, Vodacom seems to be running out of room to grow as its operations are mostly constrained in SA.
Last May, Vodacom said it would invest R7.4 billion in the current financial year to bolster its network as voice revenues start slowing down. Uys says the company will continue to invest in its network and increase data speeds.
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