EBITDA Margin and Growth in Tanzania

Transcription

1 Conference Call Transcript 6 February 2013 Q3 TRADING UPDATE Welcome to the Vodacom Group Ltd trading statement conference call for quarter ended 31 December Vodacom Group CEO,, will host this conference call. I will read the forward-looking disclaimer before handing over to. This trading statement for the Vodacom Group Ltd for the quarter ended 31 December 2012 contains forward-looking statements with respect to the group s financial position, results of operations and businesses and certain of the group s plans and objectives. In particular such forward-looking statements include statements relating to the group s future performance, future financial expenditures, acquisitions, divestitures, expenses, revenues, financial positions, dividend policy and future prospects, business and management strategies relating to the expansion and growth of the group, the effects of regulation on the group s businesses by governments in the countries in which it operates, the group s expectations as to 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 by the group. If you do not have a copy of the trading statement it is available on the investor relations website at Please note that all participants will be in listen-only mode and there will be an opportunity for you to ask questions after today s presentation. If you should need assistance during the conference then please signal an operator by pressing star and then zero. Please note that this conference is being recorded. I would now like to turn the conference over to, Vodacom Group CEO. Please go ahead. Good afternoon and good morning to those in the US. Welcome to the Vodacom trading update conference call for the quarter ended 31 December I am joined today by our CFO, Ivan Dittrich, and our Investor Relations Officer, Belinda Williams. We have provided you with an update of the revenue performance and the key customer indicators for the quarter. I think it s important to note that the sale of Gateway Carrier is impacting our year on year growth comparisons for Q3. Gateway contributed R795 million in Q3 last year. Just to remind everyone that Gateway Carrier was sold at the end of Q2. One of the key messages for the quarter is that our reported group service revenue is down 1.7%. However, if we exclude Gateway Carrier and we look at it on a constant currency basis then it was up 1.9%. Data was stronger than service revenue at 4.8% excluding Gateway Carrier due to the boost from smartphone sales. Our group data revenue remains robust, up 23%, supported by a 34% increase in active data users to 18.5 million. Our international operations continued to deliver strong growth with service revenue up 22% and our contribution increasing to 18% coming from our international operations, up from just over 14% a year ago. 1

2 The South Africa service revenue declined by 1.7%, but if we exclude MTRs it was up 1.4%. Our Q2 comparison was 3.4% if we exclude MTRs. The slow-down from Q2 was entirely due to prepaid voice revenue. The contract revenue was more or less stable. And this was really due to the prepaid revenue being lower when we compare it to a strong performance in the prior year Q3. And in the prior year Q3 we had a big boost coming from the calling card behaviour that started in Q3 last year. We have taken a deliberate decision to reduce the market calling card and to cut the calling cards off, which has impacted our gross connections by about 500,000 connections per month. Just to remind everyone what the calling card issue was, it was effectively that the amount of money that the distribution channels was putting into an activation. It paid the distribution to activate the starter pack with value in. Customers would use it, throw the starter packs away and then buy another one. Basically the value was more than the cost of the starter pack, and this created a big issue. So we took a decision to temporarily reduce revenue by cutting off the calling card behaviour and putting more stringent rules around controlling that as we go forward. This removal has obviously impacted our revenue, but has helped us to improve our A&R spend efficiency and also has helped us to improve our overall EBITDA margin and growth. The South African results were also affected by economic and competitive pressures. So there were three things that have affected our results, one being the calling cards, two being the economy and this came through strongly in all the retailers performance and thirdly in competitive pressure. Some of the savings from the prepaid acquisition costs were redirected into contract acquisition, and that resulted in us regaining our market share in contract and adding almost 120,000 customers in the quarter, doubling our net adds versus our prior two quarters. The service revenue growth was stable too. So the shortfall is not from contract revenue. Overall we have realised savings from our actions to remove unprofitable SIMs from our network. While we don t report EBITDA in this announcement I can report that we have good EBITDA growth and a continued expansion in margin despite the higher contribution from low-margin revenue equipment. Lastly, just to flag that group active customers increased 12% to 51 million. We added just over 800,000 customers in the quarter compared to 183,000 customers in Q2. If we look at our different segments in more detail, in South Africa the reported service revenue declined 1.7%, but as I mentioned before excluding MTRs it was up 1.4%. Service revenue was seasonally stronger, up 4.2% from Q2, but growth slowed year on year mainly due to the strong voice revenue performance in the prior year Q3 and the impact of removing the low calling card usage. Overall revenue was up 2.2% in South Africa, boosted by a 27% growth in equipment revenue from much stronger smartphone sales in the quarter. If we look at voice revenue on its own, voice revenue declined by 2.3% compared to a growth of 1.4% in Q2. The prepaid voice revenue growth is still positive, but growth slowed quite a bit from Q2, specifically because of the steps that we took to correct the calling card behaviour. As I mentioned, it resulted in a substantial reduction in calling cards, which reduces revenue but has given us a meaningful trading in acquisition costs which has resulted in overall prepaid profitability increasing substantially in the quarter. We are also launching new prepaid tariffs on 10 February which will reduce our high-level tariff and deal with the issue and government pressures around the cost to communicate. But at the same time it will have a distinct benefit inherent in the tariff which will allow us to differentiate from our competition and really allow us to ensure that we maintain share, if not gain share from our competitors. 2

3 Our contract voice revenue trend was stable in Q3 from Q2. We continued to see a reduction in the out of bundle spend, but our objective of increasing committed spend as we migrate more customers into integrated price plans is helping to mitigate this and support ARPU. Some of the savings we have made on prepaid acquisition costs were redirected into contract acquisition, boosting the net additions to almost 120,000 in the quarter, more than double the previous two quarters. So overall a very good performance in the contract segment. It is also important to note that part of the issue in the previous quarters that was contributing to the lower net add growth in contracts was the fact that the calling card was eating up a lot of our A&R, with the result that there wasn t sufficient A&R to put into high-end contract connections. This we have corrected in the period and that is bearing dividends. Also important to note is that in the retail segment where we weren t competitive on handsets that has also changed, and in all retailers our market share is substantially increased from Q2 to Q3. We have almost re-established the previous levels which we were achieving a year ago. Data revenue growth was stable at 17% but stronger as we exited the quarter, doing more than 20% in the month of December and into January. So we are seeing data growth in December and January exceeding 20%. Data is now 18% of service revenue compared to 15% a year ago. Smartphones remain a key strategic growth driver for us. Our continued working capital investment in handsets and tablet financing has led to smartphone net additions of over 500,000 in the quarter, extremely important for us in terms of driving data growth faster. That is almost double the average of the previous two quarters in terms of the number of smartphones. As mentioned before, it is extremely important for us to put smartphone into people s hands so that we can properly monetised the data. Smartphone traffic now generates more traffic than dongles on the network. We also saw strong underlying usage trend growth with smartphones average monthly usage up 36% to 138MB and tablets up 27% to 613MB. It is also important to note that the pricing pressures have stabilised in the data market with the effective price per MB only down 14% year on year compared to 24.5% in Q2. If we look at the performance in the international segment, in the international segment stable macro-economic growth and successful execution is continuing. Our reported service revenue declined 1.7%, but if we adjust for Gateway Carrier and currency growth was up 22%. The growth in the international segment slowed slightly from Q2 due to the benefits from price increases lapsing in Tanzania. Our successful promotions and strong commercial execution allowed us to perform well in all markets, delivering customer growth of 13% and outgoing traffic growth of 69%, which more than offset pricing pressures and resulted in voice revenues up 19% in international. Also pleasing was the international ARPU, which was up 6.5% in US dollars. The take-up of data and financial services in our international markets also boosted growth. Data revenue doubled from the prior year and now contributes 11% of our service revenue in international. Underpinning the data growth is the expansion of our money transfer service into Tanzania where 50% of the base now utilises this service. We have now launched the same services in DRC at the end of the quarter and are planning to have it running in all our international markets by the end of Q1 of FY14. I will now hand back to the operator to assist with any questions you may have before wrapping up. Thank you very much, sir. Ladies and gentlemen, at this time if you would like to ask a question please press star and then one. If you then deicide to withdraw the question please press star and then two. Our first question comes from JP Davids from Barclays. Please go ahead. 3

4 JP Davids Good afternoon. Two questions to start with please. Firstly on South Africa. As you mentioned you re pushing integrated tariffs a bit harder. Can you talk us through the ARPU dynamic of shifting customers to integrated tariffs what you re seeing. There I m asking about what is the out of bundle pressure as they move across, but then maybe the potential to up-sell. The second question is on Tanzania. There you say in your press release you re increasing your capex, increasing your capacity in the network. I m trying to contrast that with the recent decision by the regulator to cut mobile termination rates and whether that is going to influence your rural rollout plans in that market. Thank you. To start with, on the integrated plans what we are seeing is very stable ARPU growth. We are also about to launch on 1 March 2013 a whole new set of integrated plans aligning with the Vodacom global launch of its tariff plans internationally. I think that will give us a clear differentiation point in the market. But it s also linked to a very strong CVM programme to ensure that we at least maintain ARPU or grow ARPU. What we have done with the new tariffs, just to be clear, is we have been testing the new tariff in the market since December 2012 and we re having a very positive ARPU impact in terms of the new plan. So we re quite excited that the new plans will give us a differentiation point to our competitors but will also help us to transform our integrated price plan, which will help us contain any SMS decline. In terms of Tanzania, why we re investing more in the network is effectively to be able to sustain the growth in Tanzania at the levels that we ve been achieving. One of the things that we ve done is to close the coverage gap specifically in the Lake District area to our competitors. The interconnect rate at $0.07 is well above our retail rate at $0.03. So basically the interconnect is only 1.5% of our EBITDA, so the impact on our numbers is only R15 million. So it is really a very small impact. JP Davids Got it. Just one quick follow-up, and if possible I will come back with questions on the end. On Tanzania, is the termination rate something you would expect to compensate you for rural roll-out? Is it something that is going to change the way you approach the company, or hasn t it really had a bearing on your capex plans for the market, you re just investing for capacity at the moment? Thank you. So the interconnect rates won t affect our ability, but yes, it does obviously help to improve the economics for rural sites. This is true. But at the same time if we look at the overall impact on the EBITDA in terms of the interconnect rates and remember we were anticipating a drop, and it has been a bit more aggressive than expected in the first year, but it levels out in the subsequent years I would say from what we expected the drop in the first year is probably double what we expected, but the net impact is only R15 million. So it is really not a big impact. It doesn t change the fact that we are doing exceptionally well in Tanzania. It doesn t change the fact that we are now achieving over 40% EBITDA margins in Tanzania. So the overall growth profile in Tanzania is still really strong, and we believe by increasing our coverage that gives us a better differentiation point and allows us to unlock the value that we ve been losing in that particular area in the Lake District. Thank you very much. Our next question comes from Paul Marsh from Bloomberg. Please go ahead, sir. 4

5 Paul Marsh Thank you. I wonder if you could maybe elaborate a little bit more on how much of the revenue growth from international was related to the M-PESA service. So out of that international growth of 22% in service revenue was that 2% or 5% coming from M-PESA? And can you say anything about how that revenue stream specifically affects your profitability? Is that enhancing to your profitability or dilutive to your profitability? As in giving you the number for the M-PESA contribution let me say that the margin that we re achieving on M-PESA now is exceeding 40%. So the absolute EBITDA on M-PESA is now exceeding 40%. So that is doing exceptionally well for us. Paul Marsh That is clearly not diluting your international EBITDA margin then. Not at all. In fact it s improving the EBITDA margin. So it is improving the EBITDA margin in Tanzania, but in other countries they have a lesser EBITDA margin. Remember Tanzania s EBITDA margin is about 40%. Paul Marsh Do you think as that service develops and becomes better taken up, more widely adopted, that kind of profitability can be sustained or do you think that something will give in the medium term and the margin from that will maybe come down a little bit? We think it s sustainable because part of the success is also driven by the fact that the customer is incentivised to use it. So when you deposit money you get free airtime, when you take money out you get free airtime. So that creates a big loyalty benefit. Paul Marsh And is it material to the revenue growth? Was it 1% or 3% of that 20% growth? Belinda Williams We haven t disclosed the money transfer revenue separately, but if you look at the international data growth portfolio it is contained in the overall data growth. That data growth was up 100%. If you strip that out that is what it would be, about 65% odd. Paul Marsh Wow. Okay, that s interesting. Thank you very much. And we ve only launched in Tanzania, so really the opportunity... you know DRC has just come on. The other two countries will come on before the end of this quarter. So there is still a lot of opportunity to capitalise on M-PESA in Africa. Paul Marsh It sounds like it. Thank you. 5

6 Thank you very much. Our next question comes from Jonathan Kennedy-Good from SBG Securities. Please go ahead. Jonathan Kennedy-Good Good afternoon. Just two questions from me. The first is relating to your calling card SIM issue. I just wondered whether you would be able to quantify the actual amount of revenue that came out in the third quarter revenue numbers as a result of pushing those SIMs off the base. And then the second question. Having a look at your prepaid minutes of use in the quarter were down on September, and yet your ARPU was up. I just wonder what the strategy was there given that you cite a weak economy and competitive pressures, and yet it appears as though you were charging customers for their voice calls in the quarter. Was that a capacity issue? To start off with, if we exclude the impact of the calling card behaviour on service revenue basically the service revenue would have been flat. If we look at the minutes of use, if we compare Q3 to Q2, they were down due to that Power Hour offer in the Q3 versus Q2. And the reason for that is that we pulled the Power Hour promotion because it was still successful in Q2 and we needed to add more capacity on the network, which we have done in Q3. And then effectively we have re-launched that again in January. Also Power Hour was massive in Q2, which basically affected our price by at least 8 cents in Q2. So there were no price increases in Q3. In effect we had a dilution in the price per minute in Q3 versus Q2 coming through on our Vodacom 4 Less dynamic discounting platform. And the reason why we didn t get the same revenue is we did not get the same elasticity in Q3 as we did in Q2. So that s where we say the economic pressures came into play as well. Ivan Dittrich Shameel, if I could maybe just respond to the question before Jonathan s. The M-PESA impact on the service revenue growth in international, that contributed 4% of the 22% service revenue growth. Thank you very much, sir. Our next question comes from Richard Barker from Credit Suisse. Please go ahead. Richard Barker Thank you very much. Two questions from me. Going back to Tanzania, you talked about the net interconnect being 1.5% of your EBITDA. I wonder if you could just elaborate on how much of your revenue it is. And also do you think that such a large reduction in wholesale pricing is going to have a knock-on impact on retail pricing so we might see a second impact on both EBITDA and on revenues from pricing competition after the pricing change there? And then the second question is you ve touched on several aspects where you re looking to make yourself a little bit more competitive going forward. The big question for me was in the last 12 months you definitely seem to have been losing share to MTN and maybe over the Christmas period to Cell C as well. I wondered whether you could just review briefly the different aspects by which you think you can aim to improve your competitiveness going forward. You talked about several initiatives, but I wondered if you could summarise and recap them. I think the first thing to point out, Richard, to answer your question on interconnect in Tanzania is that interconnect in Tanzania is 8% of service revenue in Q3 in Tanzania. Secondly, we don t foresee a big impact coming through in terms of retail pricing. In fact, remember a year ago all the 6

7 operators pushed the prices up. So you ve actually had a price increase as opposed to a price decrease. So a lot more sensibility is returning to the market. We don t see a big change in the Tanzanian market. In South Africa I think the first thing to point out is in terms of revenue share overall if we look at the revenue share overall we don t expect to have lost overall revenue market share. We ve said that we do expect to have lost revenue share relative to MTN, but only from a revenue perspective. On an EBITDA perspective we don t expect to lose EBITDA market share to MTN at all. I started by saying that firstly the revenue market share and the gains that we had just after rebranding is probably brought up in terms of revenue market share relative to MTN. And obviously that would have impacted EBITDA. What has happened by fixing the calling card behaviour we are giving up a little bit of the market share that we gained after the re-branding, probably taking us back to what it was before the re-branding. Having said that, on the ground what is happening? Where MTN were taking the fight to us was really in the rural markets. They have put more foot soldiers on the ground walking the streets and selling their products. We now are introducing our own foot soldiers. We have foot soldiers, but we need to increase the quantum of those foot soldiers on the ground, walking the streets and effectively selling our product. That is more prevalent in the rural market. I d also say that over the last year and that changed with me coming back, to be quite frank there was a view within Vodacom that a lot of the handsets were being sold to the market with the result that they tried to cut the number of handset sales in prepaid retail. That had an impact of us losing some of the good prepaid retail customers. And we were doing exceptionally well in the wholesale segment. We have always done really well in the wholesale segment, but the wholesale segment was over-indexed due to the calling cards. Our strength was always we dominated in retail. So what we have done since September was effectively to go back in and ensure our competitiveness in the retail segment. And that we changed from 1 September. And we have progressively seen our retail market share restored. Now, you won t see that impact coming through necessarily within the first month or two of us having done that. But we are now ensuring that we re getting a better prepaid customer, if you like. By dealing with the calling card issue I think what we ve done is we ve dealt with what I would call fictitious revenue and unhealthy practises. We have done away with that. Having said that, you do give up some good revenue in the process. The fear there is that that will move a little bit to some of the others. But it is being financed from A&R. I think what is important is when you look at revenue one must look at it relative to the EBITDA margin and relative to EBITDA growth. In the end if you re financing that growth from A&R then it s not really growth, is it? That s what we ve done. We have gone back and said this is an unhealthy practise. Let s change it. That means we re going to take a knock in the quarter, but it s the right thing to do. Let s get this thing back on track. Otherwise what happens is it s compounded and you re getting more and more of this. And then your A&R is getting eaten up by lower-end prepaid connections and you don t get sufficient money to put into contract. You end up giving up contract share. So it s that re-balancing that s effectively what we ve done in the quarter. Richard Barker Thanks very much. I just want to clarify. Do you therefore expect essentially to reinvest all of the saving that you re seeing on the A&R side that you see from the wasteful calling card behaviour into other areas? Obviously putting people on the streets in rural areas is going to cost money. Being a bit more generous on handset offers is going to cost money. What s the balance? Should we expect to see margin improvements, or not too much change in margins but a little bit better top line growth? 7

8 I think you will see lower SIMs with better top line growth as these things start to bear dividends. We will create a sustainable revenue growth going forward. But at the same time I think you will see some of the benefit coming through in a stronger EBITDA margin. Ivan Dittrich In the period that we ve reported on you begin to see in Q4 that as you reduce your acquisition costs, as Shameel has said, associated with these calling cards your EBITDA margin expands. Richard Barker Thanks very much. Thank you very much. Ladies and gentlemen, a reminder that if you would like to ask a question please press star and then one. Our next question comes from David Lerche from Avior Research. Please go ahead, sir. David Lerche Good afternoon everyone. Two questions. Firstly, can you give us any indication on the operations in the DRC and Mozambique whether the margins have trended up or down since the first half? And then secondly, there has obviously been some noise about you guys doing an acquisition somewhere on the continent. Is there any update you can give us on that? Thank you. I think on the margins in Mozambique and the DRC, margins are stable. The good growth that we saw in EBITDA margins in Q2 and Q1 have basically gone up slightly in Q3. So there is definitely an improvement in Q3. Ivan Dittrich And then I think your second question was around acquisitions. We have indicated in the interim results that we are looking at further expansion in Africa through smaller bolt-in acquisitions, and that strategy remains unchanged. David Lerche Thank you very much. Thank you very much. Our next question is from Johan Snyman from Renaissance Capital. Please go ahead. Johan Snyman Good afternoon. Just two or three questions. In the corresponding period last year you had an outlook statement, although very short. I m missing it this year. Maybe just go through the drivers on service revenue. That s the first question. Secondly, you indicate obviously that you have accelerated your capex programme in Tanzania. Will that have any impact on your guidance previously on capex? And then thirdly, with the Carrier services now gone maybe you can update on the Vodacom Business in SA and also in international. Thank you. 8

9 To start in terms of the guidance or the outlook for Q4 I think we can say that we re expecting some improvement during Q4 in South Africa. So overall we should see flat growth in terms of service revenue in SA with a much stronger data growth coming through. International will be slightly weaker from increased competition and obviously a market slow-down in Tanzania in Q4. But that s just slightly weaker. Overall we are still guiding for low single-digit growth. And capex will be around about 13%. Ivan Dittrich At the top end of our guidance, or perhaps because of the accelerated capex in Tanzania perhaps slightly above. If we look at Vodacom Business Africa and Vodacom Business in South Africa they are growing between 15% and 20%. Johan Snyman Thank you. Thank you very much. Our next question comes from Chris Grundberg from UBS. Please go ahead. Chris Grundberg Thanks very much. I wonder if you can give the volume of handsets shipped a year. I am interested to see the trend there, if that s possible. And then could you clarify what your expectations are for the working capital profile in the second half. Should we expect a large outflow or would it be about the same size as H1 or larger, given the strong handset sales? And then as a follow-up, are you able to give any colour or guidance as to your one to two year view on South African SMS revenues. It is a really small part of the overall picture, but highly profitable. I m interested to see your thoughts on what the penetration of smartphones is going to do to that revenue line. Thanks. Ivan Dittrich Working capital and cash flows in general we expect as we guided at the half year that our operating free cash flow in H2 would be stronger than the operating cash flow than we had seen in H1 due to the fact that it is a seasonally stronger cash flow period. And then with regards to the working capital there has been a significant increase in smartphone levels during the quarter. And that is partly as a result of the financing transactions that we do. And from a working capital perspective we probably expect similar levels and outflows that we ve seen in H1. On the question of how many smartphones in the quarter we sold 3 million handsets versus 2.4 million handsets last year. But what we are seeing is that there is a higher value of smartphones that we are putting into the market and also more financing. More financing, so the average value per smartphone has gone up. Chris Grundberg Thanks. And on the SMS outlook? On the SMS outlook I think what we are trying to do is make sure that we can contain the SMS decline. I think we can look at SMS declining by about 9% to 10% per year going forward. Having 9

10 said that, what we are trying to do is to minimise that decline by moving customers into integrated plans where we allocate bigger value of SMS bundles. Chris Grundberg Thanks. Maybe just one last one. In the guidance just now you didn t mention anything about margins. Previously you had talked about some incremental margin improvement in SA. Is that still the picture? And if so, where specifically on the cost line are you hoping to see improvements there? I think the EBITDA margins in South Africa will continue to expand in our outlook going forward. So that guidance that we ve given previously remains intact. In terms of the expense growth some of the savings that will continue to come through from expenses is first and foremost transmission which obviously plays a big role. But we also have targeted every expense line, and also focussed a lot in terms of support costs and seeing where and how we can reduce those support costs. So inherent in the plans for the year ahead is that opex will remain flat. Chris Grundberg Thank you. In a 6% inflationary environment. And this will be the third year where we re managing to keep opex flat. Thank you very much, sir. Ladies and gentlemen, a final reminder that if you d like to ask a question please press star and then one. Our next question comes from Ziyad Joosub from JP Morgan. Please go ahead. Ziyad Joosub Hi everyone. Just one quick question on data please. You mentioned that your data growth picked up to 20% in December and January. What is that a function of? We ve seen traffic growth drop from 42.5% in H1 to around 30%, but obviously the price per MB has only gone down 13.5%. So what caused that re-acceleration to 20%? Have you seen data traffic pick up or have you see pricing drop further? And what is your outlook for the rest of the year on data pricing? Traffic was up in Q2 42% and in Q3 it was up 36%. What we also had coming through in the data numbers is a slower decline in terms of the price per minute. So your price per minute decline has slowed to 13.5% in Q3 versus 24.5% in Q2. So that is coming through strongly. Also the number of active data users is increasing, and the number of smartphone users has expanded by 500,000 in the quarter as well. So what is driving the underlying data performance is putting more smartphones into people s hands, executing on the data strategy which we ve created, which effectively is give people free data, get them using data and get them into daily bundles, from daily into weekly, from weekly into monthly and so on. We have already implemented this strategy and it is starting to work. Also making sure that we push more smartphones as opposed to feature phones into the market is also helping us to monetised data a lot better. 10

11 Ziyad Joosub Thanks. That s very useful. Just on pricing, do you think pricing will continue to drop at only 13% going forward for the rest of calendar year 2013? Or do you think we could see faster declines in pricing? I think data pricing is more or less stable. There might be a little bit more price impact, but I don t see anything overly aggressive. We are already below the European rates in terms of data pricing, so anything more is just destroying value in terms of where we re going. The big push now is really more in the smartphone category and the integrated price plans versus dongles. More and more what we are seeing is that more and more people are starting to use their smartphones as opposed to dongles and rather channelling via the smartphone instead of using a dongle. What we also are introducing and will be pushing more aggressively is integrated plans, the ability to add more devices into your integrated plan and to utilise the same bundle. Ziyad Joosub Sorry, just one more quickly. The growth slow-down in data traffic, has that got to do with your traffic mix moving very fast more into tablets and smartphones and away from dongles? 20% data growth is not that much for a mobile network. Has that got to do with your traffic mix changing? Obviously smartphones and tablets use a lot less data than the dongles. I d say that does impact it because obviously smartphone growth is a lot faster than dongle growth. And obviously your reference point to last year is also important. Ziyad Joosub Thank you very much. Belinda Williams What I would add is remember we have this huge dongle market. So 50% of our traffic is dongles which is quite different to a lot of our peers. So if you had to just look at the smartphone data traffic that is what is really driving the overall growth in traffic, but it is obviously only half the base. Ziyad Joosub Thanks very much. That s very useful. Thank you. Thank you very much. Our next question comes from Franca Di Silvestro from HSBC. Please go ahead. Franca Di Silvestro Hi. Can I just ask one quick question? In terms of the re-launch of your Power Hour now in Q4 do you feel you have sufficient headroom now in your network to be able to accommodate the subscribers that will be taking up the facility? Yes, very much so. We basically added more capacity. It wasn t throughout the network. It was just a few regions where the Power Hour uptake was so significant that we had to go back and reinvest those regions. That has been fixed and we now have sufficient headroom to be able to cope with it. That has helped in the January numbers. And with the new offer that we re putting in you will see 11

12 the new offer with inherent benefit which launches this weekend will also help to increase prepaid ARPU going forward. Franca Di Silvestro Can I quickly as well, in terms of dropped call rates on the network is there an update you can give us on that? Where is it bad and where is it good? Effectively if we look at comparisons on the network, the network has been improving. So I would say there was a slight change in the network quality with the launch of LTE which forced us to go back and re-address some of those areas where we did see an impact on LTE delegated service slightly. But we have gone back and corrected those issues. So there is still a lot of work going on in the network in certain areas, specifically the Western Cape where we re busy swapping out the network, and also Bloemfontein and the Northern Cape where the swap is still ongoing. The Eastern Cape has been swapped, and what we now have is 75% of the network on the new equipment. We are now optimising those areas to make sure that you get the optimal benefit. It takes two or three months before you see the optimal benefit of the swap coming through. Thank you very much. Our last question comes from Peter Takendesa from Rand Merchant Bank. Please go ahead. Peter Takendesa Good afternoon. I got dropped twice, so apologies if my question has been asked already. Shameel, any update you can give us on the glide path in SA beyond this one that we have now, and spectrum? On the MTR front there have been no new developments in terms of further declines or talk or further declines at this stage. ICASA is busy initiating a study to look at long-term incremental costing and so on. But there is no news yet. I think there is probably still an opportunity to look at further glide paths proactively and maybe come to a negotiated settlement as opposed to a regulated settlement. But I think for this year we will definitely not agree to any further declines in the next financial year. I think my own expectation is that we should plan for further declines going forward. In terms of spectrum, no news on spectrum. Basically the ministry or the Department of Communication has agreed to change the 30% requirement, but that has not as yet been gazetted, so no new developments on that front. And no new moves in terms of allocating the 2.6 spectrum. I think also it s safe to say that there is still an issue in terms of the start of the migration from the 800 MHz spectrum. If you are not aware there is a court case where e-tv is taking the Department of Communication to court and so on. And that is delaying the migration from the digital which I must say is not good from the perspective that as a country we need to meet the deadline of 2015, and the longer we take to start it the more we re at risk of achieving that date. Having said that, what we have done is optimise the spectrum that we have and launched LTE because we thought it was crucial to launch LTE to create a differentiation point for us. We have over 600 sites live and we have started switching all the iphones last week onto LTE. And let me also add that that has been very successful. We are doing that with the 1,800 spectrum Peter Takendesa Thank you very much. 12

13 Thank you very much. Gentlemen, that concludes the questions we have. If you would like to make concluding statements. In summary, we have delivered organic growth in service revenue of 1.9%, which is within our medium-term guidance of low single-digit growth. I am particularly pleased with the sustained high growth delivered by the international operations and their increased contribution to the group. Data remains important to our growth path and the increasing uptake of smartphones and data services such as M-PESA have laid a good foundation for growth in this space. We will continue to drive innovation and accessibility to these services as we go forward. In South Africa our focus is to ensure our pricing remains competitive and that we address the high level of published tariffs in the market. On 10 February 2013 we are launching a new prepaid price plan which will substantially lower our published tariff, but with the clear intention that we continue to maintain ARPU. In the contract market we will continue to push more value to customers as we increase the committed spend on our integrated price plans. Again extremely important to protect against the over-the-top players, but also to create the transformation from pure voice plans into voice and data integrated plans. While we expect to have lost revenue market share in the 12 months to December 2012 as we have removed unprofitable prepaid SIMs we do not expect to have lost EBITDA market share as we have improved the overall quality of our customer base and continued to see good margin expansion. We continue to maintain a high level of investment in all our networks and to drive differentiation as such. Specifically an example of that is LTE in South Africa and 3G in the DRC. We are also accelerating capex in Tanzania to ensure we remain competitive on both coverage and capacity, and expect to end the year at the top end of the 11% to 13% capex to revenue guidance range we have provided. That brings us to the end of the conference call. Thank you to everyone for dialling in. Thank you very much, sir. On behalf of Vodacom Group Ltd that concludes this afternoon s conference. Thank you for joining us. You may now disconnect your lines. END OF TRANSCRIPT 13