Mergers, Acquisitions and Financial Results

Expansion is on the agenda for cellular network operator Vodacom, which plans to win more customers in SA and extend its reach in three neighbouring countries to drive up its R19,7bn revenue.

Within 18 months it would enter another, as yet unidentified, country in the sub-Saharan region, its CEO Alan Knott-Craig promised yesterday when he presented its results for the year ending March 31. "We have to do that if we want to achieve respectable growth."

Relentless expansion is the only way for Vodacom to continue posting results to match those issued yesterday, with revenue up 22,5% from R16bn and operating profit of R4,3bn up 19% from R3,6bn. Its net profit of R2,2bn was 6% down, however, with financial director Leon Crouse blaming various factors. Those included fluctuating lowmargin handset sales, stronger competition, currency fluctuations, accounting-practice changes and high interconnection fees, which meant that calls from Vodacom handsets to the other cellular networks were costing more to carry.

The results were in line with expectations, said HSBC analyst Franca di Silvesta, and Vodacom was right to prepare to tackle another country as that was the only way it could sustain growth.

Knott-Craig said the solid results were due mainly to growth in its customer base, which jumped 26% to 8,6-million across its African operations. Defying fear of the SA market slowing, Vodacom grew its local customer base 20% to 7,9-million.

At the same time it sustained monthly average revenue a customer at R183. Cellphone firms typically see this average fall after initially signing up wealthy customers and being forced to add less affluent customers to their networks. However, Knott-Craig believes that SA’s market will easily grow from today’s 14-million users to 19-million, even without scraping in the more parsimonious spenders.

"In the past year we connected 3,5-million new customers in SA, almost 15% better than the previous year, which supports our bullish view on the potential of the market. SA is continuing to deliver strong growth because we have a strong management team, a simple organisational structure, strong work ethics and strict financial disciplines," he said.

Those features had let it drive down its costs and reduce customer churn, or the loss of profitable users to rival networks.

Although Cell C lured customers away from Vodacom and MTN, the arrival of a third operator stirred up the market by attracting new customers to benefit all three players, he said. A roaming agreement to carry Cell C calls where it had no network of its own also saw Vodacom benefit from Cell C’s success.

Beyond SA’s borders, Vodacom operates in Lesotho, Tanzania and the Democratic Republic of Congo. They earned combined revenue of R1,2bn and saw a 152% increase in customers, although coming off very low bases.

Monthly customer spending in Tanzania has begun to decline, but still stands at a healthy $22 and brought in a profit of R187m. The Congolese network signed up 248000 customers in 11 months, but start-up costs saw it lose R117m.

In Lesotho, Vodacom was forced to expand its network more quickly then expected to combat a new rival, which pushed its profit down from R12m last year to R4m.

The group also won a licence in Mozambique, but had done nothing with it. Regulatory issues including interconnection deals with the fixed-line operator needed to be thrashed out, and plans would be revived only if they were resolved.

So far Vodacom was seeing little profit from its data services, but it had already invested the capital to carry that traffic. Once the services caught on, profits would quickly accrue, said Knott-Craig. Revenue from data services jumped 45% to R581m in the past year, but still only accounted for 3% of its revenue.

Business Day