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When I was appointed as CFO in August 2015, I highlighted three clear priorities that I believe have been important for this financial year’s results which will have a significant impact on our future financial performance. These include ensuring the returns from accelerated capital investment, improving the monetisation of growing data usage and a continued focus on cost efficiency. While we are on track with all three of these priorities, there remains scope for us to do more.
The Group delivered excellent results in a tough operating environment. Group revenue increased 7.5%, with service revenue up 7.4%. In South Africa, we have seen a return to growth for service revenue of 4.9%, with the second half of the year pleasingly stronger than the first half. Service revenue improved in our International operations by 16.2% (9.6%*) with the second half also growing faster than the first half. Group EBITDA grew 12.8% (10.2%*) ahead of revenue and we delivered strong operating free cash flow growth of 21.8%.
An important competitive advantage lies in the superiority of our networks. Over the past two years, we accelerated investment and spent R26.2 billion on our networks, widening voice and data coverage and capacity, and continually improving our network quality as a key differentiator. During our first year, we invested R13.3 billion, representing 17.9% of Group revenue. This year, in line with our guidance, we invested R12.9 billion, or 16.1% of Group revenue. Over the last two years we added 3 471 2G sites, 5 243 3G sites and 5 198 LTE/4G sites across the Group. To future-proof for rapidly growing data traffic and to keep incremental cost low, we have continued to invest in high-speed microwave or fibre connectivity to 88.5% of our sites in South Africa. To further facilitate our transition from a predominantly mobile company to a unified communications provider, we invested over R1.0 billion in our Customer 3D project. This is one of our largest transformative projects that will see the modernisation of our billing and customer interaction system to support our changing customer needs and demands.
Group data revenue increased 28.5% to R21.3 billion, following exceptional growth in the demand for data. The improved affordability both of devices and data bundles supported a 53.7% increase in data traffic. Although we expect usage growth to be ahead of revenue growth, we continue to see improvement in data monetisation, while also moving customers to a more worry-free experience in their in bundle data usage. Group data revenue comprises 31.9% of service revenue, up from 26.7% a year ago. In South Africa, the average monthly data used by customers on smart devices continues to increase, with the resulting benefits to ARPU highlighting the value in encouraging customer migration to 3G and LTE/4G devices. We are seeing an approximately 20% uplift in ARPU when a customer migrates to these devices. Device affordability is an important enabler for data growth. While the declining rand/dollar exchange rate created upwards price pressure, we have been able to secure competitive prices through our combined purchasing power with Vodafone. This year, more than a quarter of all device sales were Vodacom branded devices.
Our Group EBITDA margin was 37.9%, delivering a 1.8 ppts margin expansion, with 1.6 ppts expansion in South Africa to 40.2%, and 3.2 ppts in the International operations to 29.3%. We have made good progress on cost efficiency with our ‘Fit for growth’ programme, with total expenses growing 5.1%; this is 2.4 ppts below revenue growth, ahead of our target. As a fairly efficient operation, a pure ‘cost cutting’ approach could be over-simplistic and compromise our ability to deliver excellent service to our customers. Our main focus has thus been on innovation and long-term sustainable changes in our cost structure. Examples of some of these have been offering our customers easier and more convenient ways to assist themselves on basic queries, via the My Vodacom App and our focus on improving the root cause of problems being experienced by our customers, thereby reducing calls to call centres by approximately 15% year-on-year.
We constantly explore opportunities to improve the efficiencies in our network. Investing in our own transmission to base stations reduces our network running costs, enabling us to carry incremental data at a lower cost than leasing it. We have also achieved material savings in energy costs through the use of innovative technologies that reduce our energy usage and carbon footprint.
We have made valuable progress in optimising our customer acquisition and distribution costs. In buying back our customer base from Nashua (Pty) Limited, we have reduced commissions and deliver services directly to our customers. At the end of this financial year, we concluded the purchase of our customer base from Altech Autopage (Pty) Limited, and will realise the benefits of this transaction in the next financial year.
During the year, we fostered a cost-conscious culture at an individual employee level through our ‘1000 small things’ initiative, a business-wide project that encourages employees to develop cost savings initiatives, identify wastage and use resources more efficiently.
A portion of our purchases are foreign currency denominated. In South Africa, we mitigate our exchange rate exposure by fixing our pricing in rand under our contract conversion schemes and we use forward exchange contracts to secure exchange rates for extended periods. In addition, in all our markets we strive to maximise local procurement where appropriate. This approach has led, for example, to a proud partnership with Mace productions, through which we have created employment opportunities for women in a local community in Buhle Park in Ekurhuleni, sewing branded promotional items for Vodacom. Albeit small on a Vodacom scale, we believe that these efforts are making a significant difference in the lives of the people we touch.
Over the past five years, we have returned R57.9 billion in dividends to our shareholders, maintaining an average dividend yield of 6.2%, while our share price has risen 102.2% over the same period. This year, the Board has approved to pay out a final dividend of 400 cents, taking our total dividend to 795 cents, in line with our dividend policy of paying out at least 90% of HEPS.
+7.4%
Group service revenue
R66 763 million
+12.8%
Group EBITDA
R30 345 million
+28.5%
Group data revenue
R21 306 million
R12 875 million
Capital expenditure
16.1% of revenue
+21.8%
Group operating free cash flow
R17 054 million
+48.2%
Return on capital employed
We continue to allocate our capital efficiently to projects that create long-term value for shareholders. This requires making trade-offs and sometimes taking tough decisions, such as the recent phasing out of the M-Pesa product in South Africa. We took this decision as M-Pesa had not achieved the expected uptake in South Africa.
Our five-year average return on capital employed (ROCE) is at 57.3%. The effect of the mobile termination rate cuts and the increase in assets incurring higher depreciation charges and financing costs reduced the ROCE. As we see top line growing, EBITDA margin expanding and our capex intensity lowering, I am confident that our ROCE will stabilise and improve in the future.
Our key goals for the next three years are to build on the improving commercial execution of our customer CARE programme, reviewed in more detail under our customer strategy.
Our balance sheet remains strong, providing us with sufficient capacity for leverage thereby enabling us to execute our growth strategy and realise possible future M&A opportunities where these contribute to adding shareholder value.
We revise our medium-term targets upwards to low to mid single digit Group service revenue growth, mid to high single digit Group EBITDA growth and Group capital expenditure of 12% to 14% of Group revenue over the next three years. These targets are on average, over the next three years and are presented on a normalised* basis, and exclude any M&A activities and spectrum purchases. In addition, we assume broadly stable currencies in each of our markets and stable macro and regulatory environments.
Till Streichert
Chief Financial Officer
3 June 2016
