Vodacom

Pleasing performance in a challenging context

This has been another year of pleasing performance in a challenging operating environment. Our South African business continues to perform well, supported by strong customer gains and good growth in data and enterprise services. As we expected, our International operations had a more difficult year. Growth slowed as a result of customer disconnections in the prior year, in compliance with customer registration requirements, and there was the added impact of high exchange rate volatility in some of our markets.

Group revenue increased 1.5% this year to R81.3 billion, with service revenue up 2.3% to R68.3 billion; normalised for the effects of foreign currency translation this was up 3.4%* and 4.4%* respectively, driven by a 16.4% increase in data revenue to R24.8 billion, and a 12.2% growth in enterprise revenue. In South Africa, customer growth was strong at 8.6%, with 3.0 million new customers. In our International operations, customers increased 9.3% to 29.7 million, signalling a return to positive net additions, after 4 million customers were disconnected due to customer registration requirements in the prior year. Group EBITDA grew 2.9% to R31.2 billion, up 7.1%*, excluding foreign currency translation impacts, with headline earnings per share up 4.5% to 923 cents per share, and a final dividend per share of 435 cents.

* Normalised growth adjusted for trading foreign exchange gains/losses and at a constant currency (using current period as base), (collectively ‘foreign exchange’).

Our strong overall performance was achieved through the successful execution of our strategy of investing significantly in network infrastructure, providing segmented and personalised pricing plans, and targeting revenue growth in data, M-Pesa and enterprise, underpinned by our continuing cost-efficiency drive.

Over the past three years, we have invested R37.5 billion in network infrastructure, further expanding our 2G, 3G and 4G coverage, increasing data speeds, and reducing our dropped-call rate across the region. With our network quality being a key competitive differentiator, we have successfully monetised this investment and delivered the return on capital, maintaining a strong lead in NPS for network quality and coverage in all our markets other than Tanzania and Mozambique, both of which have shown significant improvement. Investment in our internal systems enabled the rollout of our initial activities in big data, such as our ‘Just 4 You’ platform, and included a complete overhaul of our customer back-end billing systems in South Africa.

In our South Africa segment we are seeing positive outcomes from our pricing transformation strategy and our personalised package offerings, with our ‘Just 4 You’ platform driving the sale of over 1.5 billion voice and data bundles over the year. Prepaid customers reached 32.0 million, up 9.3%, driven by the success of an improved value proposition through ‘Just 4 You’ offers, the successful launch of our Youth (NXT LVL) proposition and a highly engaging summer promotion. We added 218 000 contract customers during the year, and improved loyalty, evidenced in the low contract churn of 4.2%, and we increased contract ARPU by 2.8% to R408. As part of our commitment to democratising Internet access, we are driving down customers’ data costs, reducing our effective rate for data by 16.0%, which over the last four years is a 54.1% decrease in data prices. We have introduced an enhanced smart notification service to pre-empt customers’ out-of-bundle expenses, and we are running targeted consumer campaigns to increase awareness on how to purchase maximum-value bundles, check balances and more efficiently manage purchased data. We will launch other initiatives to address out-of-bundle pricing. In January this year, we launched our Siyakha platform in South Africa, offering very low-cost voice and data bundles, entry-level smartphones, and targeted content offerings, including free access to content on specific education, health and employment websites, and a free, text-based version of Facebook.

We continue to make excellent progress in growing and monetising data through our four-pronged approach: having the best network; driving the sale of smart devices; offering affordable data bundles across all customer segments; and providing compelling reasons to consume data. We have extended our 3G and 4G population coverage to 99.2% and 75.8% respectively, expanded our high-speed transmission to 92.1% of our sites, and are making good progress on our fibre deployment by entering into strategic wholesale agreements with other network providers. We continued to promote the uptake of smart devices by providing financing and increasing availability of lowcost Vodacom-branded devices. By year end, the number of active smart devices on our network increased 18.0% to 16.8 million, with growth slightly slower than anticipated due to weaker local currencies. Data customers increased 8.3% in South Africa to 19.5 million, and 4G customers on the network increased 86.7% to 5.1 million, with the average monthly data usage on smartphones increasing 25.0% to 560MB, driven in part by a 16.0% reduction in the price per MB.

Enterprise revenue growth was strong at 12.7% (of which 2.8ppts relates to the impact of Autopage customer buy-backs in the prior year), supported by our fixed-line and business managed services, as well as our cloud and hosting revenue growth. We have secured the mobile voice and data communications contracts for national and provincial government departments for four years, enabling us to partner with government to support greater innovation. To drive enterprise growth, we are focusing on three principal investment areas: building market leadership in IoT; realising growth opportunities for digitalisation in the SME sector; and scaling converged services through our targeted investment in fibre, fixed wireless capillarity and next generation networks. This year, our fixed-line and business managed services revenue increased 8.3%, with cloud and hosting increasing 35.2%, and our IoT revenue up 19.1% to R662 million.

We continued to deliver significant operational efficiencies through our ‘Fit for growth’ programme, a Vodafone Group-wide initiative that allows us to leverage global best practice on optimising costs. We rebalanced our subsidies towards dataenabled devices, resulting in improved take up of data services and improved returns. We secured material savings across our retail and distribution operations, and also benefited from improved inventory management and reduced office accommodation expenses, as we rationalised offices and adopted the new ways of working.

This positive overall performance has been achieved despite the challenges experienced in our International operations, where service revenue declined 5.6% year-on-year; normalised for currency fluctuations, we delivered 2.2%* growth in these operations. Growth has been impacted by exchange rate volatility and by the expected slowed growth resulting from the disconnection of customers most notably in the prior year in compliance with customer registration requirements in the DRC, Mozambique and Tanzania. Short-term pressure remains, with signs of improvement in Tanzania, very strong execution in Mozambique and Lesotho, but a challenging macroeconomic environment in the DRC. We have introduced ‘Just 4 You’ personalised offers across all our operations and take up is progressing well, contributing to the demand for data with data customers increasing 29.3% to 13 million. We continue to focus on our commercial and network offering to drive data growth, ensuring customers have access to better low cost smart devices, especially Vodacom branded devices, increasing data network speeds and driving the adoption of data bundles. Our inclusive finance offering, M-Pesa, remains a significant source of growth: we now have 12.9 million M-Pesa customers across our operations, up 40.1% on the prior year, contributing to M-Pesa revenue growth of 19.4%. We are building on our success with M-Pesa through various new inclusive business initiatives that we are developing in agriculture, health and education.

* Normalised growth adjusted for trading foreign exchange gains/losses and at a constant currency (using current period as base), (collectively ‘foreign exchange’).

Subsequent to year end, Vodacom Group has agreed terms with Vodafone to buy a strategic interest (34.94%) in Kenya’s marketleading telco, Safaricom. Apart from being a household name in Kenya, Safaricom is a high growth, high margin, high cash generating business that operates in a high growth market with 28.1 million customers. Closer cooperation with a quality asset such as Safaricom will create further value and lead to mutually beneficial opportunities for both companies, such as best practice sharing, replicating Safaricom’s success with M-Pesa, and creating new pan-African enterprise solutions in other East African markets. Safaricom’s leading mobile money platform, M-Pesa, is an important driver of Kenyan economic growth, providing essential financial services to over 19 million customers. The proposed transaction will improve Vodacom Group’s presence in East Africa, jointly increasing the company’s growth in financial services customers to 29 million¹, making it a formidable player in financial services on the continent.

1. Number of unique customers who have generated revenue related to M-Pesa in the past 30 days.

Positioning ourselves for a changing operating context

This year, we revised our strategy to ensure that we are best positioned to seize the opportunities, and manage the risks, of a rapidly changing marketplace, characterised by significant levels of digitalisation, highly connected consumers, and a changing landscape of competition and collaboration, with continuing regulatory challenges.

Recent developments in digital technology – in areas such as big data analytics, artificial intelligence and the rise of virtual and augmented reality, autonomous vehicles and the Internet of Things – present significant opportunities for business growth. Our new strategy positions Vodacom to be a leading digital company that empowers a connected society. Digitalisation offers valuable opportunities for us to extend revenue streams beyond connectivity, and requires us to rethink the networks and technology of the future, redefine customer engagement and develop a company culture that attracts the best digital talent. It also presents unparalleled opportunities to drive positive social change in areas such as education, healthcare, financial services and agriculture.

Our Vision 2020 strategy has five key strategic elements:

• Segmented propositions: Using big data analytics and machine learning, we will develop a complete 360 view of the customer, and develop personalised customer propositions to lead in our chosen segments. We have established dedicated acceleration units to develop product and service offerings for each of our targeted customer segments. Across each of these segments we are identifying new opportunities to monetise data and grow data usage by delivering relevant digital content services (in TV and video, music streaming, gaming, news and sport), as well as developing new offerings in areas such as mobile financial services, insurance and IoT. We have already achieved impressive results this year in the youth segment, with our recently launched NXT LVL campaign. Since launch in May 2016, we have achieved impressive results with more than 1.5 million youth customers on the platform with much stronger ARPU uplift and more data usage.
• Best customer experience: Our aim is to provide customers with a seamless and frictionless one-channel experience, ensuring consistent, personalised and efficient customer engagement, across all touch-points, with digital the dominant support channel and MyVodacom app the channel of choice. Having successfully delivered on our three-year retail strategy – transforming 97% of our Vodacom-branded stores, achieving a 10% year-on-year improvement in total NPS – we are placing greater focus on enhancing our digital customer channel. We are investing in richer and more intelligent interfaces, big data analytics, and IT-based customer engagement and management tools to optimise the customer experience and achieve greater efficiencies across all channels. We experienced limited operational challenges this year in the transition to our new Customer 3D billing system, which is expected given the scale of this change. Although this caused a drop in our NPS score on billing, we retained our healthy lead in overall NPS.
• Best technology: We are preparing the network for the future to be the leading telco with the best network, and are placing an increased focus on technology and intelligent information systems to unlock big data capabilities and improve organisational agility. We will further expand both mobile and fixed connectivity (FTTx) and deploy new network technologies, while rolling out a national IoT network and developing new IoT applications and solutions. In November 2016, we commenced network build in the narrowband Internet of Things (NB-IoT), a low-power wide-area network technology that brings significant new opportunities for the types of IoT use cases that we are developing, including in e-health, connected agriculture, smart metering and logistics.
• Digital organisation and culture: Becoming a leading digital company requires a digital transformation within our own organisation. We have begun the process of transforming Vodacom into a truly digital organisation, with our investment in acquiring new skills and talent in areas such as big data, analytics, actuarial science and digital marketing. We have partnered with tertiary institutions to develop and access the required emerging skills for our digital future. To ensure that we capitalise most effectively on the rapid rate of change across the ICT sector, we are developing a culture of innovation and agile decision taking, simplifying our existing systems and processes, and empowering our people to use their skills and resources to develop and deliver innovative products and services through more collaborative structures.
• Our brand and reputation: Our aim is to ensure that Vodacom is the customer brand of choice, with a strong purpose-driven brand and a deserved reputation for responsible leadership. This year saw further progress in promoting financial inclusion, education, agriculture, and healthcare, through our businessdriven partnership initiatives such as M-Pesa, the Connected Farmer platform, Vodacom e-school, and our various healthrelated mobile applications. Taken together with our corporate social investments activities, and our core business of connectivity, these initiatives are making an important contribution to national developmental objectives and the global UN Sustainable Development Goals. For example, on education, one of South Africa’s most pressing development challenges, we have provided more than 220 000 learners with free access to relevant education content, supplied ICT equipment and Internet connectivity to 3 000 schools, trained over 100 000 teachers on the use of ICT, and equipped and connected 92 teachers across the country. We have continued to demonstrate leadership in Black Economic Empowerment (BEE) in South Africa, and are seeking to drive this further with a particular focus on promoting transformation across our distribution channels. I believe that our evident commitment to promoting transformation and driving digital inclusion are important contributors to the strength of the Vodacom brand and to the numerous brand and reputation awards that we received across markets and consumer segments.

Future outlook

The rapidly developing digital environment, and continuing political, regulatory and market uncertainty, highlights the need for us to be highly agile in our operations. The anticipated sustained pressure on consumers in most of our markets, underscores the relevance of taking a segmented consumer view, with highly personalised offerings. Regulatory and policy developments remain an important challenge across our markets. In South Africa, we held constructive engagements with government and the regulator on the ICT White Paper. We are fully committed to the overarching aims of the White Paper, and have a shared interest in promoting universal access to connectivity, ensuring the success of the proposed wireless open access network, and sharing the important social benefits that ICT provides. We will continue to engage with government and the regulator during the process to give effect to the objectives of the White Paper, with the aim of finding an optimal solution for all parties. We believe that the solution lies in a hybrid model which ensures that the industry gets spectrum to achieve key societal milestones while ensuring the success of the wholesale access network.

I believe that with our new Vodacom Vision 2020 strategy, and the steps we have already taken towards implementing the strategy, Vodacom is well placed to realise and share the significant opportunities associated with the increasingly rapid uptake of digital technologies. I am confident that we have both the right strategy and the right team to deliver on our core purpose: connecting everybody to live a better today and build a better tomorrow.

In closing, I would like to thank my colleagues on the Board and the executive team for their guidance and assistance over the year. Particular thanks to our Chairman, Peter Moyo, who will be stepping down from the Board after eight years of dedicated service. I wish him much success in his new role at Old Mutual.

Shameel Aziz Joosub

Chief Executive Officer

2 June 2017