Kenya's Safaricom profit falls as price war hots up

Mergers, Acquisitions and Financial Results

East Africa's biggest mobile phone company, Safaricom, said on Thursday full-year profit fell by a quarter as it faced a price war in a crowded Kenyan home market that it expects to intensify further.

The company, 40-percent owned by a consortium led by Britain's Vodafone ( VOD - news - people ), retained its leadership of the voice market at 79 percent but saw year to March earnings per share fall to 0.26 Kenyan shillings ($0.003), down from 0.35 previously and below a consensus forecast of 0.30.

After what Chief Executive Michael Joseph described as 'probably our most challenging year in terms of operating environment,' Safaricom said future earnings growth would be driven by data traffic as more broadband capacity comes on line in a country where only one in ten are Internet users.

The firm partly blamed the fall in earnings on higher costs and economic factors such as inflation that cut consumers' disposable incomes, while analysts said it reflected a year that saw a rise in competition with the entry of two new operators.

'The EPS number was on the light side. It was a fiercely competitive year, if you look at it in that context ... it was not a bad performance,' said Aly Khan Satchu, an independent Nairobi-based equities analyst.

Safaricom has faced growing competition from three other mobile operators, Kuwait-listed Zain, Telkom Kenya's Orange and Essar's Yu.

Pretax profit fell 23.2 percent to 15.3 billion shillings ($196 million), narrowly missing market estimates, while it doubled its dividend payout to 4 billion.

Revenue rose 14.8 percent to 70.48 billion shillings and user numbers were up 31 percent to 13.36 million.

But average revenue per user (ARPU) fell 22.9 percent to 475 shillings, and the firm said it expected this figure to decline further as more users in lower income rural areas come on board.

Kenya was battered by post-election violence at the start of 2008, followed by high food and fuel prices and inflation.

Safaricom's rivals have been slashing prices to attract users, and investors had been waiting to see if the firm would defend market share and maintain its ARPU.

'With the increased level of penetration into more rural areas where consumers' disposable income is lower, it is anticipated that voice ARPU will continue to decline,' the company said in a statement.

'However, with Internet penetration at less than 10 percent, there is a significant opportunity to compensate.'

Industry executives expect increased broadband capacity to be the next big attraction and are positioning their firms for a slice of the data market in Kenya and neighbouring countries.

Safaricom said users of data services leapt 158 percent over the year to 1.47 million in March 2009. It also said data traffic had jumped 89.3 percent in the six months to May 1.

In the year to end-March, data services revenue increased 83 percent and represented 12.9 percent of total revenue.

Safaricom expects to acquire a unified licence in the next month or two to enable it increase its services and products.

'This will turn us into a telecoms operator from (just) a mobile operator,' Joseph told investors.

Kenyan Finance Minister Uhuru Kenyatta said the East African Marine Systems cable (TEAMS), in which Safaricom has a 20 percent stake, was due to reach Mombasa port in July.

'(Soon) the problem of bandwidth capacity will be no more,' he said, referring to complaints by operators.

Along with two other submarine cables, TEAMS is expected to unleash a broadband revolution in a region where telecoms are often hamstrung by expensive and slow satellite connections.

Mobile operators already provide a wide range of services including money transfer and wireless Internet on 3G platforms.