Era of easy pickings may be history as Vodacom slumps

The surprise 5.5% decline in Vodacom's earnings for the six months to September indicated tougher trading conditions to come and the slowdown of mega growth rates for the telecommunications sector, industry analysts say.

The dip in earnings knocked the share price by a similar percentage.

Farai Mapfinya, head of equities at JM Busha Asset Managers, said: "We think there is going to be a structural shift in growth and profitability for the telecoms companies."

Historic high profitability despite high barriers to entry is likely to taper off.

"There has never been a need to have geared balance sheets.

"[But] we could see higher gearing on balance sheets going forward to enhance profitability," Mapfinya added.

Although analysts say data revenue will not entirely compensate for lower voice revenue because of intense competition, Vodacom CEO Shameel Joosub said this week that data "continues to strongly offset declining voice revenue".

For example, revenue from data in South Africa increased 21% to R6.1-billion to boost service revenue, which improved 2.9% to R23.4-billion. But service revenue for the group would have been higher had it not been for the impact of regulation. The industry regulator in South Africa, Vodacom's largest market, recently halved mobile termination rates to 20c. This reduced Vodacom's service revenue by almost R1-billion.

Rival MTN is also affected because it and Vodacom have the largest subscriber bases, so their customers make more calls and they pay more to terminate their calls on the networks of smaller competitors Cell C and Telkom Mobile.

Vodacom has since revised its guidance for three-year earnings before tax to mid-single-digit growth from initial mid- to high-single-digit growth. The dividend, which generally moves according to earnings, was cut by 5.1% to R3.75.

MTN is faring better as a group because its lower earnings in South Africa are being offset by good performances in other countries.

But Cell C is struggling and fears that market consolidation will reduce its chances of survival. Only Telkom is upbeat about earnings and expects an up to 20% rise in headline earnings per share for the six months to September.

After three years, the rates, which affect voice revenue, will decline to 12c as the government tries to reduce the cost of communicating.

Recent data from Research ICT Africa, however, shows that South Africa's high communication costs may be improving - at least on prepaid. For about 40 calls a month on the cheapest prepaid product (which is the Organisation of Economic Cooperation and Development's benchmark), South Africans pay $4.90 (R55) compared with $18.71 in Swaziland, where MTN is the dominant operator.

Analysts believe that data can grow materially to offset voice. But it is not more profitable from a margin perspective.

Dobek Pater, director at Africa Analysis, said: "We see very strong consumption of data, but prices are declining so quickly. The real price is not providing sufficient growth in data revenue.

"Between now and the next six months, we see operators suffer." But expansion of value-added services, which included financial services such as funeral insurance, was providing additional revenue sources, he said.

Mapfinya argued that even if data grew by 25%, it would not offset declining voice revenue by 15% or even 5% until the government released additional spectrum to mobile operators. Then, data could even be free, he said. Delays in finalising the migration from analogue to digital broadcasting, in order to free spectrum that the broadcasters are using, is impeding spectrum allocation.