Peter Moyo – Chairman
Vodacom ended the year as a listed company, leaner, healthier, both financially and commercially, and possessing a strong base to capitalise on the new opportunities coming in 2011 and beyond.
2010 – a challenging year
Vodacom began the year as a private company facing a raft of external and internal challenges, any one of which would be difficult enough to deal with alone, but taken together were little short of formidable. Vodacom ended the year as a listed company, leaner, healthier, both financially and commercially, and possessing a strong base to capitalise on the new opportunities coming in 2011 and beyond.
It is a testament to Vodacom’s management team and employees that while dealing with some of the most pervasive changes that the Group has seen since its inception 16 years ago, their collective focus on the fundamentals of the business did not waiver. Headline earnings per share (‘HEPS’) for the year grew 22.3% to 510 cents and operating free cash flow grew 55.2% to R13.5 billion. This strong cash flow supported a reduction in the Group’s gearing, with net debt to EBITDA reduced from 1.0 times at the end of last year to 0.6 as at 31 March 2010. This in turn underpinned the declaration of a final dividend of 175 cents per share.
In conjunction with the listing of Vodacom on the JSE Limited (‘JSE’), Vodafone Group plc (‘Vodafone’), one of the world’s largest mobile communications companies by revenue, increased its stake in Vodacom from 50% to 65%. The benefits of this new relationship with Vodafone as a majority shareholder have already proven to be wide-ranging and significant. Particularly notable has been the impact of cooperation on technical and procurement matters. We have also learned much about our performance from extensive benchmarking exercises that compare Vodacom to all Vodafone’s operating units across the globe. The expertise that Vodafone brings at the Board level has also been illuminating - their experience with markets at all stages of the growth lifecycle brings a welcome new perspective to the discussion of many of the challenges facing Vodacom.
In this difficult environment, the Group managed to maintain or grow market shares and overall revenue increased 5.6% to R58.5 billion. This success reflects Vodacom’s approach of placing the customer at the heart of the business and ensuring a consistent focus on improving the value delivered to customers. There is a subtle but important difference between increasing value and simply cutting prices, a distinction that underpins Vodacom’s focus on customer value management. In addition to taking steps to grow revenue, the management team also put in place cost-efficiency programmes. While these actions gained traction towards the end of the year, we believe the main benefit will be evident in the 2011 financial year.
Regulation and the consumer
Increase in operating free cash flow
R13.5 billion(2009: R8.7 billion)
This strong cash flow supported a reduction in the Group’s gearing, with net debt to EBITDA reduced from 1.0 times at the end of last year to 0.6 times as at 31 March 2010.
We place great emphasis on maintaining a constructive working relationship with the Department of Communications (‘DoC’) and with the Minister, General (Ret.) Siphiwe Nyanda. We were pleased to support the Minister’s initiative to reduce mobile termination rates (‘MTRs’) and to lead the industry in announcing the implementation of these cuts in March 2010. Ongoing engagement with the regulator, the Independent Communications Authority of South Africa (‘ICASA’), is also a key priority. On 15 April 2010, ICASA released for public comment a proposal to make further cuts in MTRs with a view to implementation starting in July 2010. We agree that reducing MTRs will stimulate competition and therefore ultimately lead to lower call charges. Meanwhile, we have been working hard to reduce our operating costs – this gives us the scope to offer greater value to customers. Indeed, our average effective price per minute has fallen by 7.7% in South Africa over the year.
The next challenge that our regulator faces is the efficient allocation of radio frequency spectrum in South Africa. Vodacom is one of only a few companies in the country that has the existing network and customer base to be able to maximise the value of this national asset for the benefit of all South Africans. We will do this through our ability to rapidly roll out higher speed access as widely as possible and at the same time aim to provide sustainable returns for all stakeholders. The regulatory conundrum is to balance the need to provide a competitive market against the efficient usage that comes with the reasonable allocation of spectrum amongst a limited number of companies.
With respect to other legislative actions that affect Vodacom’s business, we have made good headway in implementing the Regulation of Interception of Communication and Provision of Communication – Related Information Act (‘RICA’) and have now registered almost half of our South African customer base. The implementation of RICA has been at a cost to Vodacom and it has had a dramatic, albeit temporary, negative impact on our customer numbers. However, rather than dwell on the negative, I would like to say clearly that we support RICA and the benefits that it can bring to South Africa. Furthermore, we have found that there is a silver lining to the implementation progress – we are now getting to know our customer base better and we are seeing increased foot traffic in the stores.
Empowerment – a practical approach
I have had the privilege of working in a number of very different industries, and since I started in this role at Vodacom I have been repeatedly surprised by the number of ways that our Group has the power to change lives. The initial vision of bringing communications to those who have none, to drastically simplify everyday tasks and to drive the development of crucial small and medium enterprises, is really only the beginning. Vodacom has led in the drive to deliver low-cost handsets. The Group has also placed great emphasis on bringing in more affordable smartphones, which often will offer people their first taste of the internet and the benefits that being truly connected can bring. This year will see another example of the deeply practical empowerment that mobile communications can bring. The launch of the Vodacom M-PESA money transfer system in South Africa means that millions of previously unbanked people can take another step closer to the formal economy and enjoy services that are considered basic rights elsewhere in the world.
Low-cost (<US$30) handsets sold in 2010 in South Africa
Vodacom has led in the drive to deliver low-cost handsets into all its markets.
While Vodacom SA continues to change the lives of so many people in the communities in which it operates, there is still work to be done to support broad-based black economic empowerment (‘BBBEE’) and drive transformation within the company. There is a danger when focusing too heavily on scorecards and ratings that true empowerment can be overlooked. We are pleased that we have retained our focus on the bigger empowerment picture, with more than R1.3 billion spent in excess of the scorecard target this year in support of enterprise development. By providing essentials such as training, advertising and even office space, we have given entrepreneurs the chance to flourish with community service telephones, Vodashops, and as wireless application service providers (‘WASPs’). This focus on enterprise development is a great example of all sides benefiting from empowerment and a model that we will continue to focus on.
While our overall BBBEE progress has been positive, an area identified for improvement is gender equality, particularly at the senior management level. We are in the process of implementing a number of actions to address the issue and will report on our progress.
Several issues that were linked by external observers to corporate governance gained a large amount of media attention during the year. Vodacom has a clear and unequivocal commitment to proper corporate governance, the details of which are set out in this annual report. Shareholders are assured that the matters raised have been taken extremely seriously by the Board.
The key components of the strategy remain to grow the core mobile business, extend Vodacom’s leadership in broadband, develop new converged communication solutions, and selectively expand in sub-Saharan Africa. In accordance with the strategy, the management team this year successfully laid the groundwork in terms of building market share, reducing costs and strengthening the Group’s financial position to be able to fully capitalise on improved economic conditions as they emerge.
A number of important additions were made to the Board during the year. Rob Shuter, formerly Managing Director of Nedbank Retail, joined Vodacom as Chief Financial Officer in July and was also appointed to serve on the Board. Joining as a non-executive director appointed by the South African Government is Jabu Moleketi. Finally, bringing his in-depth understanding of both Vodafone and one of its most successful markets, Paolo Bertoluzzo, CEO of Vodafone Italy, joined the Board in early 2010. We said farewell to James Maclaurin as a director of the Company and we thank him for his contribution. I want to thank the Board for the guidance and support they gave to the management team and to me.
I started this statement contrasting the difficulties and uncertainty facing Vodacom at the beginning of the year and how it emerged at the end of the year, having successfully navigated numerous major challenges, as a fitter Group poised for action. This did not happen by accident – on behalf of the Board it is my privilege to congratulate all Vodacom employees for this outstanding achievement and to say thank you to each and every one for playing your part.
To all our customers, we want to thank you for supporting us.
On a slightly less orthodox note, as I write this the 2010 FIFA World Cup South AfricaTM is well under way, and we hope the South African team which is sponsored by Vodacom will continue to show the kind of heart and determination that any nation would be proud of. As Vodacom moves into 2011 it is this spirit that will drive our actions and ensure that we continue to succeed.