Ignore voice, it’s all about data
It’s hard to believe operators were that concerned about the regulated decline in mobile termination rates (interconnect). Fortunes were spent lobbying government (parliament, the Department of Communications and the Independent Communications Authority of South Africa (Icasa)) to move slowly on interconnect. The networks would arguably have liked them to not move at all.
Interconnect is the payment made between various operators to connect calls on other networks. The thinking was that a regulated drop in this price would magically flow through to retail tariffs – the price you and I pay for calls.
Vodacom, in its annual results last week, quantified the decline. R1.512bn in interconnect revenue simply evaporated during the period. Evaporated. Pieter Uys, Group CEO of Vodacom, however, highlighted that the impact on the bottom line was far more muted. The decline in mobile termination rates translated into a R500m knock on profits.
The group delivered on an ambitious cost-efficiency (read: cost cutting) programme – which saw expenses trimmed by R500m across the board. No more Vodacom Stormers, Vodacom Cheetahs, Vodacom Park. Marketing was the obvious manifestation of the cuts, but Vodacom also trimmed its cost of sales in the channel and reduced group headcount.
But, how was Vodacom able to grow revenue by 5.5% (in constant currency terms), increase group free cash flow by 22.4% and headline earnings per share by a staggering 28.6% when R1.512bn in revenue had vanished?
The answer: mobile data. In the 2011 financial year, Vodacom grew data revenue by R1.684bn – a 33.9% increase year-on-year. This follows 31% increase between 2009 and 2010. A business worth R3.5bn two years ago is now generating over R6bn a year. But, despite this growth, it’s still dwarfed by mobile voice revenue:
- Mobile voice: R28.58bn
- Mobile interconnect: R6.75bn
- Mobile messaging: R2.92bn
- Mobile data: R6.18bn
In the 2012 financial year, it will be the second-largest revenue contributor. Now, margins on data are not nearly as high as those on voice calls. But that’s where the growth is – at least for the next two to three years.
By any metric, mobile data usage is exploding.
Uys reiterated an aggressive target at last week’s presentations: reaching 25m data customers by 2013.
Today it has over 9m (a 35% jump from 2010). See how closely those numbers correlate – a 35% increase in data customers meant 34% growth in revenue. Extrapolate another two years of 35-40% growth and do the maths.
The impact of both Eassy and WACS entering commercial service (both undersea cables have landed but aren’t up-and-running yet) will be a nice lift on the data margin. You can be sure that while data tariffs will become cheaper – a price basket of both voice and data is already between 12 and 15% lower than it was in 2010 – Vodacom and MTN (and Cell C) will be tweaking their products to ensure maximum profitability without sacrificing growth.
Suddenly both Vodacom and MTN look a little more attractive as investments. The data business in both companies’ Africa operations is still relatively nascent. Wait for that to kick in (look at the data growth being achieved by Safaricom in Kenya). Vodacom, for example, saw an 88.8% jump in mobile data revenue in its operations outside South Africa. It’s a low base (R134m to R253m in 2011), but extrapolate the growth seen in those markets and suddenly two years out you have a healthy chunk of international data revenue as well. Plus, voice isn’t going anywhere just yet.
Just, imagine how much cash MTN and Vodacom would be churning in South Africa if nothing had changed in the interconnect regime!
Ignore voice, it’s all about data << Comments and views
*Hilton Tarrant contributes to “Broadband”, a column on Moneyweb covering the ICT sector in South Africa. What he wouldn’t give for a multibillion-rand business growing at 30%-plus a year!
Source: Moneyweb
Loading ...