MTN South Africa

Profit analysis

“Strong uptake of MTN South Africa’s expanded data offerings, supported by a world class network, led to growth of 47% in data (excluding sms) revenue”

Launched June 1994 Market share 36% Mobile penetration 105% Population 50,2 million Forecast market size in 2015 63 million MTN shareholding 100%

Operational and financial performance

MTN South Africa achieved a strong and encouraging performance in 2010 in a challenging environment of increased competition and a mature market having more than 100% mobile penetration. The economy recovered slowly from the recession, while interest rates and inflation declined. However, unemployment and consumer debt levels remained stubbornly high.

MTN South Africa increased its market share to 36% from 32%, underpinned by strong growth in the prepaid segment, a stable network and improved billing, better distribution as well as a firm focus on appropriate segmented product offerings to customers. The MTN brand was greatly supported by the Group’s affiliation to the 2010 FIFA World Cup™ and the continued success of the Ayoba advertising campaign.

Subscribers increased by 17,3% to 18,8 million, mainly as a result of the 18,6% increase in prepaid users to 15,5 million in the year. The strong value propositions in this segment, including the enhanced MTN Zone and prepaid data offerings, were a considerable contributor to growth. It should be noted, however, that growth in the prepaid sector was off a lower subscriber base in 2009, following disconnections related to the implementation of the regulatory process in that year to register subscribers’ details. MTN South Africa believes the prepaid base is now more resilient.

The postpaid segment (which includes hybrid users) increased by 11,3% to 3,4 million at the end of December 2010. The greater use of hybrid packages (which give contract customers a fixed monthly fee, with an option to “top up” with prepaid offerings if required) was partly offset by a fall in classic packages.

MTN South Africa’s revenue grew by 8% for the period, driven mainly by 8% growth in airtime and subscription revenue. Strong uptake of MTN’s expanded data offering (supported by a world-class network) led to growth of 47% in data (excluding SMS) revenue. This trend is expected to continue as data services become more accessible and smartphones more affordable.

The strong growth in data was partly offset by a 10% decrease in interconnect revenue in the year as the first reductions in mobile termination rates (from a peak rate of 125 to 89 cents) came into effect in March 2010. Following the publication of the final termination regulations in October 2010, reductions will continue until both peak and off-peak rates are at 40 cents in March 2013.

Prepaid average revenue per user (ARPU) increased to R112 a month from R100 because of an increase in the percentage of revenue-generating subscribers in the reported base and an increase in spending on data. Postpaid ARPU declined R36 to R329 a month as users continued to feel the pinch of the tight economic conditions, reducing their out-of-bundle spending and increasingly opting for hybrids over traditional postpaid packages. The reduction in postpaid ARPU was also a result of the increased number of telemetry SIMs in use.

MTN South Africa’s EBITDA margin increased 2,6 percentage points to 34,0%. This was attributable to increased data and prepaid revenue and a rise in on-network traffic which resulted in interconnection costs reducing by more than the reduction in interconnection revenue. Margins were also positively affected by relatively lower distribution costs, changes in the licence fee terms and improved collections on international roaming, assisted by the presence of international visitors to the 2010 FIFA World Cup™.

Effective and efficient network and IT investments and upgrades

MTN South Africa continued to invest in and upgrade its network, rolling out 369 3G and 284 2G BTSs in the year, and bringing the total BTS count to 8 912. At R3,91 billion, capital expenditure dropped to 11% of revenue, from 18% (R6,03 billion) in 2009 that marked the peak in the company’s efforts to modernise and expand core capacity. MTN’s 3G coverage grew to 49% of the population, in support of the growing data revenue opportunity.

As part of the IP-migration strategy, the company embarked on migrating the various voice bearer interfaces to internet protocol, allowing for enhanced scalability and network simplicity from a backbone perspective.

To further support the network, MTN advanced its self-provisioning efforts for transmission, completing the southern and northern Gauteng metropolitan rings, which comprise 220km of fibre. The rings are carrying the core needs in the Gauteng region and have proven to be stable.

In November, MTN South Africa was awarded the “best network improvement” award at the AfricaCom awards. It also won the award for the “best marketing campaign” for the Ayoba campaign, the pervasive nature of which contributed greatly to getting South Africans excited about the 2010 FIFA World Cup™.

Ensuring the right products and value added services

Greater use of 3G data cards, smartphones and telemetry (machine-to-machine communication, including vehicle tracking) contributed to increased take-up of secondary SIM cards in the year, during which MTN launched a prepaid data value proposition and also revised its postpaid data offering. More customers started using their phones for email and to surf the net, with almost half the subscriber base using packet data in the year. MTN South Africa’s subscriber base used 1,6 million smartphones and nearly one million modems. At just 9%, South Africa’s internet penetration rate means there is considerable room for data use to grow.

MTN Zone was the most preferred prepaid price plan, ending the year with over 9,6 million customers as a result of the Mahala4Life campaign. Being able to attract most of MTN’s prepaid base to MTN Zone allowed for better control of effective rates and network utilisation as discounts could be adjusted based on historical traffic levels by cell site.

MTN South Africa continued to focus on the timely introduction of appropriate devices to meet customer requirements and reinforce its leadership position. With the ZTE S308, an ultra-low-cost handset priced below R100 was introduced, while at the other end of the spectrum the launch of the Apple iPhone was a milestone in MTN’s smart device portfolio. The Sony Ericsson W205 offered unique football content and accessories for the 2010 FIFA World Cup™.

Efficient distribution and a good customer experience

Good and diverse distribution was a key contributor to a better overall performance. Increasing the distribution footprint, ensuring an appropriate location and customer experience remain MTN’s key objectives. MTN closed 42 MTN-owned stores and converted 73 owned stores to franchisees. At year end, there were 448 stores, a third of which were owned by MTN. The company also launched a new dealer commission model and benefited from regional segmentation and a closer focus on the top contributing distributors.

Sustaining our success

A highlight of 2010 was the improvement in MTN South Africa’s black economic empowerment (BEE) rating to level 3 from level 5. Elements that contributed to the improvement were enterprise development, socioeconomic development and preferential procurement. MTN’s preferential procurement strategy includes commitment plans and inclusion of B-BBEE in the tender adjudication process. This resulted in more than 86% procurement spend with B-BBEE-compliant suppliers, of which more than 26% was from black women-owned enterprises. To further improve the B-BBEE performance, more emphasis will be placed on empowerment of black women-owned enterprises and small- and medium-size enterprises. MTN is also reviewing some initiatives where it can invest in enterprise development. The MTN Zakhele transaction, facilitated by the Group, will further enhance MTN South Africa’s BEE ownership credentials.

In addition to MTN Zakhele, MTN Group also issued 0,1% of its issued ordinary share capital to level 1 and 2 employees as an employee share incentive scheme. Employees continued to benefit from the activities of the MTN Academy, with MTN South Africa employees participating in training during the year.

The MTN South Africa Foundation maintained its focus on helping develop rural communities where there are high rates of unemployment, poor education and lack of healthcare resources. Its efforts remained concentrated on programmes aimed at improving education and health, stimulating arts and culture and facilitating entrepreneurship, and so providing communities with the tools to shape a brighter and more self-sustaining future.

The company also co-ordinated employee volunteerism efforts, harnessing the intellectual capacity, financial generosity and community spirit of the MTN South Africa workforce. Special projects in the year included support for 16 Days of Activism Against Women and Child Abuse campaign as well as the Women in Arts programme. The 21 Days of Y’ello Care campaign forms part of a culture of giving that spans 365 days of the year.

In pursuit of a lower carbon footprint, in August MTN unveiled a first-of-its-kind tri-generation plant to produce power and recycle water at the 14th Avenue, Fairland, campus. The plant uses clean-burning methane gas to generate electricity and, through a second re-absorption chiller cycle using the waste heat, generates water for the air-conditioning systems in MTN’s buildings. The water from the six huge cooling towers is used to cool down the heat from the engines. As it is not used in the absorption cycle, this “grey water” is then recycled for facility use. All the plant’s processes have been designed to result in savings in water and electricity costs. This 2MW plant complements the more than 20 solar, wind, biogas and hybrid-powered BTS sites and switches across South Africa. MTN also retained its ISO 14001 status and is working towards US-based leadership in energy efficient design (LEED) status in 2011.

Engaging with the industry regulator

MTN continued to work to meet the requirements of the Regulation of Interception of Communication and Provision of Communications Related Information Act (RICA), and by year end 81% of prepaid users and 71% of postpaid subscribers had been registered. The deadline for outstanding RICA requirements was extended from 31 December 2010 to 30 June 2011.

Looking ahead

With sharp hikes in electricity and fuel prices forecast, South African consumers will continue to be under pressure. This, together with increased competition and further reductions in mobile termination rates, will likely weigh on MTN South Africa’s revenue.

In a mature market, 3G data services and smartphones and partnerships in the mobile content and application space will be key drivers of revenue growth. This growth will come not only from higher-income users, but also from the lower end of the market as the cost of smartphones and data dongles decrease and further segmented value propositions are developed.

MTN will continue to focus on enhancing customer experience.

The Group has budgeted capital expenditure in 2011 in South Africa of R3,9 billion, mainly in IT and value-added services as well as investment in the core network and physical infrastructure.

While managing convergence and service integration, MTN South Africa will also have to adapt to changes in the regulatory environment, including further reductions in mobile termination rates, the introduction of carrier pre-select and the requirements of the new Consumer Protection Act. Carrier pre-select provides customers with the choice, on a call-by-call basis, of which operator should carry calls.

Given these considerations, MTN estimates that the total addressable mobile market in South Africa will increase to 58,5 million SIMs by the end of 2012 and 62,9 million by 2015. For 2011, MTN South Africa expects to achieve net additions of two million.