Conference Call Transcript - Vodacom ...

Conference Call Transcript
8 May 2020

VODACOM TANZANIA PRELIMINARY RESULTS

Operator
Good day ladies and gentlemen and welcome to the Vodacom Tanzania preliminary results
conference call for the 12 months ended 31 March 2020. Managing Director, Hisham Hendi, will
host the conference call. I will read the following forward-looking disclaimer before handing over to
Mr Hendi.

This announcement which sets out the consolidated preliminary results for the twelve months ended
31 March 2020 of Vodacom Tanzania Public Limited Company and its subsidiaries, hereinafter
referred to as ‘the Group’, contains forward-looking statements which have not been reviewed or
reported on by the group’s auditors. These statements are in respect to the group’s financial
condition, results of its operations and businesses, and certain information relating to the group’s
plans and objectives.

In particular such forward-looking statements relate to the group’s future performance, capital
expenditure, acquisitions, divestitures, expenses, revenue, financial condition, dividend policy,
future prospects, strategies relating to the expansion and growth of the group, impacts from
regulation on the group’s businesses, expectations from the launch and rollout dates of products,
services or technologies, expectations regarding the operating environment and market conditions,
growth in customers and usage and the rate of dividend growth.

During this call, unless otherwise specified, all growth rates stated will be year on year and all
amounts stated will be in Tanzanian Shillings. If you do not have a copy of the results
announcement it is available on the investor relations section of our website at
www.vodacom.co.tz/investor-relations. All participants will currently be in listen only mode and there
will be an opportunity for you to as questions later during the conference. This being a preliminary
results announcement call, all participants are requested to limit their questions to the preliminary
results announcement only. If you should need assistance during the call please signal an operator
by pressing * and then 0. Please also note that this conference is being recorded. I would now like
to hand the call over to the Managing Director, Mr Hisham Hendi. Please go ahead, sir.

Hisham Hendi
Good afternoon everyone and thank you for joining the call. I’m here joined by Jacques Marais, our
Finance Director. I am delighted to present to you our preliminary results for the 12 months ended
31st March 2020. I am pleased with our solid operational performance which resulted in our
continued commercial momentum as evidence by the expansion of our customer market leadership
to 32.8%. We invested TSh 154 billion in our network and infrastructure to ensure our customers
benefit from superior services across the country.
We added 1.4 million customers to reach a total of 15.5 million and continued to lead the industry as
the fastest data network across the country. In spite of the intense regulatory and competitive

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pricing pressure we still delivered a service revenue growth of 0.9% or 1.8% normalised for the
reduction in mobile termination rate. Our strong performance in the first half of the year was highly
impacted by the biometric registration implementation in the second half of the year.

What stood out for me was our success of initiatives we took to ensure compliance with the new
customer registration guidelines. We spent more than TSh 20 billion to set up the registration
platform as well as ensuring there is a strong customer registration distribution network in place. We
also established over 35,000 service points across the country which saw us registering three
quarters of our customer base biometrically. Following the instructions from the Tanzania
Communication Regulatory Authority a total of 2.9 million customers were barred in the last quarter
of the year, out of which 800,000 were M-PESA customers and 600,000 were data customers. We
managed to reconnect 736,000 customers. We still have 2.5 million customers who are non-
biometrically registered and not yet barred, giving us a monthly revenue of TSh 4.2 billion.

Our growth driver, M-PESA, continues to deliver on its promise of delivering financial inclusion,
empowering customers to transact easily, and contributing to economic growth. We have 10.1
million customers using M-PESA services, processing over 1.4 billion transactions worth TSh 58.1
trillion in the mobile money system during the year. The transaction values have increased by
21.1%. We expanded the ecosystem with more services such as micro loans, international money
transfer, merchant payments and further interconnection with the banks and other operators. Our
overdraft product known as Songesha has progressed very well and extended nano or small loans
for up to TSh 70,000 to 5.3 million customers with facilities of TSh 52.0 billion provided during the
year.

Demand for data services remains strong, evidenced by the data traffic growth of 14.6% with more
than 64% growth coming from 4G traffic. We continued to provide a superior data experience to our
customers across the country and helped bridge the digital divide through sustained investment in
our network infrastructure, offering low-cost smart phones as well as affordable data services. We
added 460 4G sites, 253 3G sites, and introduced an affordable $25 smart feature phone which
provides many customers with the ability to access an enhanced data experience. Before we
unpack the financial results I would now like to hand over to our Finance Director, Mr Jacques
Marais, to share with you the changes in the accounting standards. Jacques, over to you.

Jacques Marais
Thank you Hisham. Good afternoon everyone. On 1 April 2019 we adopted the new accounting
pronouncement, IFRS 16 Leases, which has replaced IAS 17. The fundamental differences
between the two standards are as follows. Under the old standard operating leases were expensed
in the income statement on a straight line basis and included in operating expenses. Under the new
standard all leases are capitalised as a right-of-use asset over a reasonable certain period of the
lease and a corresponding lease liability is raised. Right-of-use asset is depreciated over the period
of the lease leading to a depreciation charge recorded below the EBITDA line together with
depreciation on other assets.

The interest on the outstanding balance on the lease liability is recorded below the EBITDA line as
finance cost. The adoption of IFRS 16 resulted in the recognition of the right-of-use asset with a
closing balance of TSh 505.6 billion as at 31st March 2020, as well as a lease liability of TSh 545.2
billion. The leases are mainly relating to towers but also on office buildings, retail shops and

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warehouses that were previously expensed in the income statement as operating leases under IAS
17. The application of the new standard resulted in firstly the reduction in operating expenses by
TSh 121.2 billion as a result of not recognising operating lease expenses. Secondly, increased
depreciation of TSh 84.9 billion on the right-of-use assets recognised over the earlier of the end of
the asset useful life or the end of the lease term. And then finally, increased finance cost of TSh
67.0 billion resulting from interest on the outstanding capital balance of the lease liabilities.

This led to an increase in reported EBITDA of TSh 121.2 billion with an EBITDA margin of 35.3%,
an improvement of 7.1% compared to IAS 17 of the previous year. Operating profit increased by
TSh 36.2 billion with an operating profit margin of 9.3%, down 2ppts year on year. The additional
interest charge on the lease liability in the earlier years led to a TSh 30.7 billion reduction in profit
before tax. The impact of IFRS 16 is further unpacked in the financial statements accompanying our
results. I want to hand back to Hisham.

Hisham Hendi
Okay. Thanks Jacques. Now let’s move to the financial results. We reported service revenue growth
of 0.9% and adjusting for the change in mobile termination rate underlying service revenue
increased by 1.8%, aided by the strong customer net additions and increased demand for M-PESA
and data service, partially offset by the decline in ARPU due to service barring to 2.9 million non-
biometrically registered customers and intense competitive pricing pressure. Our commercial
momentum enabled by our sophisticated CVM platform continued to provide personalised offers to
our customers. Voice revenue declined 3.2% due to intense competitive pricing pressure and
service barring due to biometric registration in the second half of the year.

Minutes of usage was flat despite a decline in price per minute. Voice revenue contribution to
service revenue declined by 1.5ppts to 36.4%. We believe this trend would continue as the mobile
termination rates continue to decline. Demand for our M-PESA services remained strong. M-PESA
revenue grew 7.4% representing 35% of service revenue, an increase of 2.2%. The increasing
uptake of mobile money products has contributed to the ARPU increase by 12.3%, partially offset by
the decline in active customers in the second half of the year from service barring of non-
biometrically registered customers. We further expanded our international remittance portfolio in
partnership with global partners including WorldRemit. We have also received a total of TSh 115.6
billion across the portfolio and remitted TSh 48.6 billion within East Africa.

The underlying data metrics were strong with data traffic increasing 14.6% with even stronger data
traffic growth in the second half of the year to reach usage per customer of around 1 GB per month.
I’m encouraged by this behaviour as it means customers are truly growing into higher data usage.
We have half of the customers using data with still more opportunity to go. This translated into
mobile data revenue growth of 9.8% with increased contribution to service revenue by 1.4ppts to
17.6%. Messaging revenue increased 2.3% primarily from the continuous improvement in our
product offering and price optimisation as we saw a 3.5% decline in number of SMS transmitted.

Mobile incoming revenue declined by 19.0% adversely impacted by a 50% reduction in mobile
termination rate in line with the regulated glide path. This was partially offset by a 30.1% increase in
the number of incoming minutes as operators continued to offer more value on all net bundles. We
continue to see a decline in the contribution of the incoming revenue to service revenue, currently at

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5.2%, down 1.3ppts. Our total expenses excluding depreciation, amortisation and impairment losses
decreased by 10.1% or increased by 6.2% excluding the impact of IFRS 16 adoption.

There are a few items worth mentioning as they impacted total expenses growth. The first is the
TSh 15.6 billion biometric registration cost. The second is the TSh 5.5 billion relating to the COVID-
19 pandemic and legal related expenses. Excluding the costs total expenses increased by 3.4%,
benefitting from the lower interconnect cost as a result of lower MTR as well as strong yield from our
fit for growth programme, partially offset by greater network operating costs as a result of a higher
number of network elements and inflation adjustments applied on the service contract.

EBITDA grew 26.4% or dropped 15.6% excluding the impact of IFRS 16 adoption. The decline was
primarily due to the slowdown in revenue growth in the second half of the year as well as increased
total expenses, especially biometric registration costs, COVID-19 pandemic and legal related
expenses. Excluding these costs EBITDA declined 8.3%.
We reported operating profit TSh 96 billion, a decline of 16.8% or 48.2% excluding the impact of
IFRS 16 adoption. The lower EBITDA as well as increase in the depreciation charge from increased
investment in the network has contributed to the decline in operating profit. Excluding biometric
registration cost, COVID-19 pandemic and legal related expenses underlying operating profit
declined by 28.5%.

Earnings per share declined by 49.9% to TSh 20.43. Excluding the impact of IFRS 16 adoption
earnings per share declined by 25.9%. The pressure on operating profit was offset by the increase
in net finance income from the increase in interest rates on government securities and increased
cash investments. If we exclude biometric registration costs, COVID-19 and legal related expenses
underlying earnings per share declined by 8.3%.

Lastly, I would like to touch on free cash flow. We reported free cash flow of TSh 61.6 billion, a
decline of 46.4% primarily from lower EBITDA and a decline in working capital resulting from
payment of intercompany outstanding amounts, timing difference on interest paid to M-PESA
customers, as well as tax deposit paid to object to the 2017 and 2018 tax assessments, partially
offset by the lower capex.

Now let’s move on the regulatory matters starting with the SIM card registration regulation that was
issued on 7th February 2020 by the government. The regulation provides for a biometric process
using national identification as the sole means of registering SIM cards in the country. As noted
earlier, we barred 2.9 million customers in the last quarter of the year following TCRA’s instructions
on barring of customers and reconnected about 25% of the barred customers. We still have 2.5
million customers no biometrically registered, generating TSh 4.2 billion revenue per month. These
customers will be barred on instruction from TCRA until such time the biometric registration is
concluded. The TCRA however suspended further barring of customers in reaction to the COVID-19
pandemic at this stage.

The SIM card registration regulation also introduced a limitation on ownership of number of SIM
cards for individuals and companies effective from 1st July 2020. An individual is allowed to own and
use not more than one SIM card from each network operator for use of voice, SMS and data
services. For companies and corporates only 30 SIM cards are allowed. The regulation requires an
individual and a company to seek approval from TCRA should they require any additional SIM

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cards. We continue to engage with the regulator as an industry to ensure compliance and agree on
practical steps to implement including the execution of a seamless automated process to approve
additional SIM cards. It is important to note that this remains to be a key risk that could adversely
impact the outlook if customers are allowed to own and use not more than one SIM card from each
mobile network operator. We are still assessing the potential impact and opportunity this could bring
to our business.

And lastly, the Bank of Tanzania published new regulations on consumer protection on the 22nd
November 2019 which set out a range of new customer protection measures and various
restrictions for financial service providers such as the guidelines on service charges for customers
and approval of new products. We are engaging with the Bank of Tanzania through the Mobile
Association of Tanzania to get clarifications on the applicability of the regulations.

Before we move on to our medium-term targets I should touch on COVID-19 pandemic and the
potential impact to our business. Tanzania is at an initial stage of COVID-19 pandemic with 480
cases so far and 16 deaths. Vodacom’s first priority has been to protect our employees, suppliers
and partners in raising awareness of the pandemic while we continue to deliver services to our
customers. We have done a number of initiatives to support the government’s effort to combat the
outbreak of the coronavirus in Tanzania. This included zero rating of some services as well as
education, government and health sites in order to assist during the crisis. We also contributed $1
million to be applied towards sourcing equipment and supplies and supporting the government
efforts.

Looking at the impact of COVID-19 on our business we have seen slow impact on our business,
especially on M-PESA. We believe that it will be aggravated as COVID-19 becomes widespread in
Tanzania, and the government imposes the total or partial lockdown to reduce the virus spread. The
government of Tanzania has not imposed any lockdown yet but has announced the closure of all
schools, restricted public gatherings and stopped all international travel. The magnitude of the
impact depends on the future developments which are highly uncertain and cannot be anticipated at
this stage.

Finally, on our medium-term outlook, we made considerable progress during the year in prioritising
financial inclusion through our mobile money platform, M-PESA, while enabling a digital society
through connectivity. We are encouraged by the progress made to ensure we comply with
subscriber registration guidelines with three quarters of our customers biometrically registered. We
will continue to engage with the TCRA to ensure that our customers resume access to services at
the earliest time possible as well as accelerate the registration of non-biometrically registered, non-
barred customers. The TCRA however suspended further barring of customers in reaction to
COVID-19 pandemic at this stage.

Due to the uncertainty from COVID-19 pandemic many parameters that would normally be factored
in for a prudent guidance are unclear and changing by the day. As a result we have decided to
postpone giving guidance and will review on a quarterly basis when the visibility of the situation
improves. While things will remain challenging in the short term we believe we are well placed to
weather the storm. We will leverage the strength of our balance sheet and our resilient business
model to ensure we continue to innovate and generate efficiencies for our customers and

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shareholders alike, while safeguarding our performance for the future. With that I conclude my
comments and I would like to take any questions which you may have. Thank you very much.

Operator
Thank you sir. Ladies and gentlemen, at this time if you do wish to ask a question please press *
and then 1 on your touchtone phone or on the keypad on your screen. If you wish to withdraw your
question please press * then 2 to remove yourself from the queue. Our first question is from
Jonathan Kennedy-Good of SBG Securities. Please go ahead.

Jonathan Kennedy-Good
Good afternoon. Thanks for the opportunity to ask questions. I just want to check with you what
trading has looked like post 1 April in terms of the impact of COVID. I know a number of operators
across Africa are reporting that month on month it looks like revenues are declining quite quickly
and that’s not offset by data revenue. Is that the same kind of trend you’re seeing in your business
and if so, could you quantify the impact we’ve seen initially and whether that’s stabilised? And then
second of all, in terms of the disconnected subscribers, the TSh 4 billion run rate that you quote,
how should we think about that over the remainder of the year? Is there some kind of rate which you
expect to recover that revenue?

Hisham Hendi
Okay. Let me just cover the first part in relation to your question regarding the COVID. What are we
seeing at the moment? So as I mentioned before, the effect of COVID-19 on our business is
continually being reassessed with the relevant teams being established and business continuity
plans being prepared and executed to deal with anticipated outcomes. So far we have seen a
slowdown in M-PESA transactions while traffic has increased slightly driven by the increase of
people working from home. And there are also a lot of initiatives that we are doing with our
enterprise team to ensure that we equip different businesses to work from home. And we have also
managed to develop a lot of propositions around entertainment. On top of that we have also done a
lot of zero rating of certain education, government and health related websites. We are expecting
this trend to continue in the short to medium term as more customers practise social distancing
through various initiatives such as working from home and people using technology to remain
connected, educated and entertained. So it’s pretty uncertain at the moment, but this is what we are
seeing as I just mentioned.

To your second question in regards to the unbarred customers again this will depend on how long
the current situation will remain. The current instructions that we have is that we will not bar further
any non-biometric registered customers until we pass this stage. Unfortunately also NIDA, the
national identification centre, is not issuing NIN numbers so we are not able to register them
biometrically. So we will have to keep them connected until further instructions from the TCRA.

Jonathan Kennedy-Good
Thank you. Just one follow-up question. The costs associated with the rollout of the registration
platform, is that complete or will we see further expense coming through in the coming year?

Hisham Hendi
Jacques, do you want to take that?

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Jacques Marais
Yes. The set-up costs have been covered. But unfortunately we also have the cost of registration.
So of course there is also a scramble for market share gain by the operators, so the incentives for
biometric registration went up quite a bit and you actually pay the agents to make the registration.
So that cost will remain. All costs involved, the physical registration, set-up and systems cost and
platform costs have been covered and will not reoccur.

Jonathan Kennedy-Good
Can you indicate what kind of cost per subscriber it is to set that up going forward?

Jacques Marais
Currently the going rate on the street is about TSh 1,000 per biometric registration of a customer.
And of course you need to be competitive. If one of the operators leads, you have to be competitive
to ensure you get your customer back. That is one. There is also a TSh 500 which has to go to
NIDA. So those are the main ongoing costs. Of course there are also costs relating to campaigns,
which for the moment have been halted. But normally there will be campaigns. And of course we
are also trying especially in the areas where we are under-penetrated in terms of biometric
registration because of lacking NIN, we also work with NIDA there to try and increase that
penetration. So that campaign costs as well. So that is more or less what we are looking at.
Systems, networks, devices, all of that is on the ground and working.

Jonathan Kennedy-Good
Thank you.

Operator
Thank you very much. The next question is from Silha Rasugu of EFG Hermes. Please go ahead.

Silha Rasugu
Hi everyone. Thank you very much for making time for this call. I just have about three questions
with regards to M-PESA. The first two are a bit granular. Just a bit more colour on your overdraft
facility if possible in terms of what the average size is of the overdraft per customer and perhaps the
average duration for these facilities. And lastly perhaps if you could share the split between
Vodacom and the partner banks in terms of revenue. The last question is more high level.
Strategically how would it work given the transaction between Vodacom and Safaricom for the M-
PESA JV? Does this affect your accounting for M-PESA going forward in any way? And if so, how
would that be? Thanks.

Hisham Hendi
Let me go through the first question and then I’ll let Jacques take you through the second question.
So just high level of M-PESA, what we have seen basically is we saw an M-PESA transaction
increase of around 7.5% in total transactions. And we have also recorded 15.1% increase in the first
half of the year and a lot of that was also associated to the increase on Songesha as well, which is
the overdraft. What we’ve witnessed is the 0.3% increase in transaction volume in the second half
of the year. And if you look at where the growth was coming from roughly 60% was coming from the
traditional business and the remaining from what we call new business. Now, in the traditional
business the transfer business is doing well. Interoperability [?] transfers are also growing very well.
And withdrawals grew around 0.6%. So if I look at the new business we saw the growth that is

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coming from lending and our merchants as well. I spoke about Songesha earlier as well. And what
we have seen as well is almost 5 million customers engaged in Songesha with a significant
borrowing amount in that. We continue to engage more customers into the Songesha platform.
Jacques, you can take the second two questions.

Jacques Marais
On the second question of course the partner is taking the full credit risk. We are not taking any
credit risk as Vodacom. I would not like to disclose the exact split for competitive reasons, but I can
assure you that it’s a decent share for Vodacom and that the product is profitable, quite significantly
profitable. I hope that is sufficient for you.

Silha Rasugu
Yes, that’s sufficient. Understood. Perhaps on the recent transaction, the JV between Safaricom
and Vodacom for the M-PESA brand. Does that affect how you account for M-PESA revenues in
any way going forward? Thanks.

Jacques Marais
From an accounting perspective no. We will get support and of course faster functionality and
products coming to the ecosystem and to the platform. But from an accounting perspective what we
charge to our customers and in terms of IFRS revenue recognition we don’t see any change in that.
But we do see more agility in terms of platform development. Like I said new functionality, new
products, and of course bringing us a competitive advantage going forward.

Silha Rasugu
That’s clear. Thank you.

Operator
Thank you. Ladies and gentlemen, again if you wish to ask a question please press * and then 1
now. We will pause a moment to see if we have any further questions. Gentlemen, we have no
further questions in the queue then. Would you like to make some closing comments?

Hisham Hendi
Thank you very much, Chris. Thank you all for joining the call. We appreciate it. And stay safe, and
we will talk again soon. Thank you.

Operator
Thank you very much sir. Ladies and gentlemen, that then concludes this conference call and you
may now disconnect your lines.

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