Our performance
Governance review
Other
This has been a solid year of execution for the Group, meeting our strategic goals and delivering returns for shareholders by focusing on achieving our key objectives: continued network infrastructure investment, personalised products and segment offerings, and targeted revenue growth in data, M-Pesa and enterprise, while maintaining a clear focus on cost efficiency.
The Group delivered good results despite a tough operating environment. Group revenue increased 1.5% (3.4%*) this year to R81.3 billion, with service revenue up 2.3% (4.4%*) to R68.3 billion. In South Africa, we have seen continued growth in service revenue of 5.6%, driven largely by a growing demand in data, supported by our network infrastructure investment, successful pricing strategy execution and strong customer growth, with three million new customers. Service revenue declined in our International operations by 5.6% (up 2.2%*) to R16.8 billion, impacted by customer registration requirements, tough economic conditions and exchange rate volatility in some of our markets. We added 2.5 million customers throughout the year by rebuilding our customer base following the change in customer registration requirements in three of our four markets. Group EBITDA grew 2.9% (7.1%*) to R31.2 billion, and we delivered strong operating free cash flow growth of 18.4% to R19.6 billion.
Network superiority is at the heart of Vodacom’s strategy of ensuring excellent quality for our customers. This year, in line with our guidance, we invested R11.3 billion mainly in the network and IT (representing 13.9% of Group revenue), adding to the R26.2 billion spent in the previous two years. This illustrates our continued commitment to drive communication infrastructure development across all the countries we operate in. We continued to increase our 2G, 3G and 4G coverage, improve voice quality and increase data speeds. In South Africa, we further extended our high-speed transmission to 92.1% of our sites, and completed the development of our new customer management and billing systems to future proof our operations, having migrated all of our consumer contract customers to this new platform. We also entered into a commercial agreement with WBS which will enable us to roam on their 4G network. Our investment into new growth areas like IoT, FTTx, big data and video services is preparing us for the next evolution in telco, assisting us to continue to deliver good returns to our shareholders.
Group data revenue increased 16.4% to R24.8 billion, following strong demand for data. Data traffic grew 46.7% supported by improved affordability of both devices and data bundles. Data revenue now constitutes 36.3%^ of service revenue, up from 31.9% a year ago. In South Africa, data customers were up 8.3% to 19.5 million, while in the International markets data customers were up 29.3% to 13.0 million. In South Africa, the average monthly data used by customers on smart devices continued to increase, this together with incentives to migrate to better data devices, resulted in benefits to ARPU. There was an ARPU uplift of approximately 25% when a customer migrated to a 4G device. Improvements made to our out-of-bundle notification system, coupled with segmented propositions, including micro bundles, resulted in data being more affordable to customers.
Customers across our International operations have enthusiastically embraced our mobile payment solution, M-Pesa. The security and convenience in the solution has seen a 40.1% increase in customers to 12.9 million, delivering a 19.4% increase in revenue to R1.9 billion. This service has also resulted in more airtime recharges via M-Pesa driving customer loyalty and the commensurate savings in commissions.
We believe that we can still improve further on monetising the data opportunity, particularly in all our International operations, which will be a key priority for the next financial year as data demand continues to grow.
Enterprise continued to grow, with revenue up 12.2% now contributing 22.4%^ (2016: 20.5%) of service revenue. We continued to leverage our network reliability and leading mobile brand to move more deeply into fixed-line in South Africa. Fixed-line and BMS revenue grew 8.3% to R1.8 billion with cloud and hosting increasing 35.2%. IoT provided new and exciting opportunities with revenue increasing 19.1% to R662 million. Having secured the mobile voice and data communications contracts for national and provincial government departments, focus will now shift to migrate these customers to Vodacom from the first quarter onwards.
We continued to make good progress with our ‘Fit for growth’ programme, which contributed to the Group EBITDA margin expanding 0.5ppts to 38.4%. EBITDA growth in South Africa was again strong at 7.2% to R26.8 billion, supported by good revenue growth and a continued focus on cost efficiencies and contribution margin improvement that resulted in a 1.2ppts expansion in EBITDA margin to 41.4%. We focused on driving efficiencies across all distribution channels. Other cost initiatives included self-providing more of our mobile backhaul transmission and renegotiation of key contracts with suppliers. The savings from these efficiencies assisted us in offsetting higher network operating costs due to our continued network expansion, as well as a trading forex loss of R250 million (2016: R531 million gain).
In the International operations, EBITDA declined 15.6% (8.6%*) to R4.5 billion, with EBITDA margin contracting 3.1ppts to 26.2%. The impact of customer registration and exchange rate volatility resulted in slower revenue growth, however, the impact of this on EBITDA was limited by our contribution margin improvement through the promotion of our own channels such as M-Pesa for recharge, and continued savings in network operating expenses.
Our footprint has exposed us to volatile macroeconomic and regulatory conditions, including access to spectrum, fluctuating foreign exchange rates, inflation, interest rates and sovereign credit rating downgrades, all of which had a negative impact on consumer and enterprise spend, operating costs and capital expenditure. Together with the Vodacom Group Board, the management team has critically reviewed the strategic risks faced by the business and provided mitigating actions presented here.
* Normalised growth adjusted for trading foreign exchange gains/losses and at a constant currency (using current period as a base), (collectively ‘foreign exchange’).
Our segment performance is reviewed here.
In June 2016, the Parliament of Tanzania passed The Finance Act, 2016 which amends listing requirements under the Electronic and Postal Act, 2010, to introduce mandatory listing requirements and require licensed telecommunications operators to list 25% of their authorised share capital through an initial public offering (IPO) on the Dar es Salaam stock exchange (DSE). Vodacom Tanzania opened its offer in compliance with the legislation on 9 March 2017 and the offer period closed on 11 May 2017. The listing of shares is expected to take place in June 2017, subject to approval by the Capital Markets and Securities Authority (CMSA) and the DSE.
Subsequent to year end, Vodacom Group has agreed terms with Vodafone to buy a strategic interest (34.94%) in Kenya’s marketleading telco, Safaricom. It’s an opportunity to acquire a significant interest in a quality telco asset. The proposed transaction also offers an opportunity to diversify Vodacom Group’s financial exposure in a single transaction. We are aiming to complete the transaction in the first half of the new financial year.
Recently, the Vodacom Finance team received an unparalleled set of awards for Strategy Execution, Finance Transformation and CFO of the Year. This acknowledgement by the jury of CFO South Africa, the Community for Finance Professionals in South Africa, underpins the good work done by Vodacom’s Finance team.
Our five-year average return on capital employed (ROCE) is 53.7%. Delivering on key growth areas of data, enterprise and new services will deliver top line growth. We continue to target EBITDA margin expansion and together with lower capex, following two elevated years, I am confident that our ROCE will stabilise and improve, continuing to create long-term shareholder value.
Over the past five years, we have returned R59.0 billion in dividends to our shareholders, maintaining an average dividend yield of 6.1%, while our share price has risen 40.5% over the same period. This year, the Board has approved to pay out a final dividend of 435 cents, taking our total dividend to 830 cents, a growth of 4.4%, in line with our current dividend policy of paying out at least 90% of HEPS.
The telecommunications landscape is rapidly changing; coupled with high levels of political, regulatory and market uncertainty, requires us to be more innovative and agile. Our steps to implement the Vision 2020 strategy will ensure that Vodacom realises opportunities in the market and mitigates risks that may hinder our success.
The recent sovereign credit rating downgrade in South Africa increases uncertainty and may lead to increased rand volatility, consumer pressure and debt exposure. This highlights the need for us to be agile to mitigate such risks. We are already driving the localisation of foreign-denominated costs, utilising hedging instruments, using big data to further enhance our personalised and segmented offers, and reviewing our fixed-to-floating debt structure to balance financing cost and risk exposure.
Our balance sheet remains strong, providing us with sufficient capacity for leverage, enabling us to execute our growth strategy and realise possible M&A opportunities where these contribute to adding shareholder value.
We target Group service revenue growth of mid-single digit, previously low-to-mid single digit, Group EBIT growth of mid-to-high single digit, and capital intensity of 12 – 14% of Group revenue over the next three years. The change to an EBIT target reflects a change in management short-term incentive targets, which are now based on EBIT, previously EBITDA. The main aim of this is to align to the Board’s objective of optimising capital allocation and maximising returns on investments. These targets are on average, over the next three years and are on a normalised basis in constant currency, excluding spectrum purchases and any merger and acquisition activity. This assumes broadly stable currencies in each of our markets and stable macro and regulatory environments.
In closing, I would like to thank the Board for their continued guidance throughout the year, and personally wish our Chairman, Peter Moyo, much success in his new role at Old Mutual Emerging Markets.
Till Streichert
Chief Financial Officer
2 June 2017
