Vodacom needs to "do something now" to reverse its South African fortunes, as it continues to face declining revenue and higher levels of churn despite investing heavily in its network and adding subscribers.
SA's largest mobile operator has again been heavily hit by mobile termination rates, which caused revenue from its local operation to drop 3.1% to R16 billion in the three months to December.
CEO Shameel Joosub notes, eliminating this disadvantage, local revenue would have been flat. Overall, Vodacom's revenue dropped 2.2% when currency gains are removed, to R20 billion.
At half-year, Vodacom reported a R600 million loss on its bottom line because of lower termination rates, a figure it expects to grow to R1 billion by year-end. In April, the Independent Communications Authority of SA cut termination rates, but this was later reversed by the South Gauteng High Court, forcing the regulator to implement new rates in September.
Downside surprise
Ovum analyst Richard Hurst notes Vodacom's numbers paint a "bleak picture", and while lower income was expected, he did not anticipate the figures being "this bad", especially on service revenue. Vodacom's local service revenue dropped 5.8% to R11.9 billion, while overall revenue from its network declined 2.7% to R15.8 billion.
Joosub notes, although Vodacom added 5.1 million customers across the group - the bulk of whom joined its international operations, as the South African base declined by just more than a million - it was a "challenging quarter". He explains Vodacom faced "a significant impact from the 50% decline in mobile termination rates in South Africa, increased competition" and is "seeing increased pressure on consumer spending".
Hurst says Vodacom's lower revenue is "clearly" due to decreased voice use, which dropped 12% year-on-year, from a decline of only 3.7% in the same quarter a year ago. This decline comes despite increased minutes of use, which gained 4.8% year-on-year.
Although data, one of Vodacom's key growth drivers, gained locally - growing 18.8% to R3.5 billion - this product is at lower margins than voice, notes Hurst. He says Vodacom's push to move more people to data is a "double-edged sword" as the company also spent R3 billion overall in the quarter to boost its broadband coverage.
Slower data gains
BMI-TechKnowledge director Brian Neilson adds data gains are slowing in SA, as - a year ago - Vodacom's data revenue gained 31.2%. Neilson adds Vodacom's numbers are "surprising" and the sign of a maturing market. He says the data gains, which make up a smaller percentage of the basket, are "just not enough".
Vodacom is also experiencing increased churn, which is now at 70.9% compared with 52.3% a year ago. Hurst questions whether smaller operators are enticing customers away from Vodacom, noting its third quarter numbers - which include the festive season - should have shown an increase because of more holiday traffic.
Joosub says Vodacom continues to invest in the network, despite difficult trading conditions, because it believes "it supports our network quality and growth aspirations which will deliver positive returns for our shareholders".
Hurst says there is still an opportunity for Vodacom to change the road it is on, but it needs to turn its investments into growth now. "If growth is not forthcoming soon, there will be a change in sentiment on the part of investors."
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