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  • Vodacom Group Limited (Incorporated in the Republic of South Africa) Registration number: 1993/005461/06 (ISIN: ZAE000132577 Share Code: VOD) (ISIN: US92858D2009 ADR code: VDMCY) (Vodacom)

    Vodacom Group Limited trading update for the quarter ended 31 December 2018

    24 January 2019

    Salient features

    - Group revenue up 1.5% (0.7%*) to R23.0 billion# and service revenue up 2.4% (1.6%*) to R18.9 billion# - Group customers increased 7.1% to 79 million, up 5.4% in South Africa and 9.3% in our International operations - Group data revenue increased 2.2% to R6.8 billion#; International data revenue grew 25.4% (21.3%*) - South Africa service revenue declined 0.9% to R13.9 billion#, impacted by pricing transformation and customers optimising promotional data bundle allocations - International service revenue increased 13.2% (9.4%*) to R5.2 billion#, driven by strong commercial execution

    Rm

    Quarter ended 31 December % change 2018

    IFRS 15 2018

    IAS 18# 2017

    IAS 18 IAS 18 IAS 18

    Normalised*

    Group service revenue 17 874 18 850 18 402 2.4 1.6 South Africa 12 975 13 932 14 061 (0.9) (0.9) International 5 160 5 179 4 574 13.2 9.4 Group revenue 22 172 22 977 22 647 1.5 0.7 South Africa 17 172 17 974 18 211 (1.3) (1.3) International 5 312 5 315 4 719 12.6 8.8

    Following the prospective adoption of IFRS 15: Revenue from Contracts with Customers on 1 April 2018, the Group's results for the quarter ended 31 December 2018 are on an IFRS 15 basis, whereas the results for the quarter ended 31 December 2017 are (as previously reported) on an IAS 18 basis. Comparisons between the two bases of reporting are not meaningful and to ensure appropriate disclosure during the period of transition onto IFRS 15, results for the quarter ended 31 December 2018 have been disclosed on both an IFRS 15 and IAS 18 basis. Our commentary describing our operating performance in the Operating review has been provided solely on an IAS 18 basis. The accounting standard applied is clearly marked in the heading of relevant columns in the trading update.

    Shameel Joosub, Vodacom Group CEO commented:

    A strong performance in our International operations helped to offset the slowdown in South Africa during the quarter. Growth in revenue and service revenue at a Group level increased by 1.5% and 2.4% respectively. Excluding Safaricom, we added 198 000 customers in the three-month period and now serve 79 million across the Group, having added a healthy 5.2 million customers to the Vodacom network in the past year.

    In South Africa, service revenue declined 0.9%, impacted by the effects of our pricing transformation strategy in order to reduce the cost to communicate, as well as the transitioning of traffic between our roaming partners. We implemented a number of generous promotions in the quarter, including our SummerGigs campaign, in addition to the introduction of lower-priced bundled offers during the course of 2018. These efforts have impacted data revenue growth, as it did not yield the expected elasticity given a tougher than anticipated consumer spending environment. However, our proactive efforts to keep customers in-bundle have reduced our future exposure to out of bundle revenues.

    In our International operations, service revenue increased by 13.2% on the back of sustained data revenue growth and M-Pesa's continued success. Our International portfolio (excluding Safaricom) now contributes 27.5% to overall Group service revenue. The significant increase in customers in the quarter and strong commercial execution contributed to data revenue growth of 25.4% and to the 30.3% growth produced by M-Pesa.

    Notes: The quarterly information has not been audited or reviewed by Vodacom's external auditors.

    All growth rates quoted are year-on-year and refer to the quarter ended 31 December 2018 compared to the quarter ended 31 December 2017, which are based on IAS 18 accounting principles, unless stated otherwise.

    Certain financial information presented in this results announcement constitutes pro-forma financial information in terms of the JSE Listings Requirements. The applicable criteria on the basis of which this pro-forma financial information has been prepared is set out in the supplementary information below. The pro-forma financial information includes:

    - Financial information, on a comparable IAS 18 basis, for the quarter ended 31 December 2018, marked as '#' in this document. - Amounts marked with an * in this document, represent normalised growth which presents performance on a comparable IAS 18 basis. This excludes foreign currency fluctuation on a constant currency basis (using the current reporting period as base).

    The pro-forma financial information has not been audited or reviewed or otherwise reported on by external auditors.

  • Looking ahead, we will be implementing the End-User Subscriber Service Charter Regulations on 1 March, which will drag on data revenue growth in the near-term. However, we are particularly encouraged by the positive momentum on the regulatory front in South Africa following firm commitments by Government and the regulator to stage an auction of '4G spectrum' in the early part of this calendar year, which together with the success of our pricing transformation strategy support the medium term outlook for data revenue growth. With an enhanced M-Pesa platform and high speed 4G now available in all our International markets, we expect the solid performance in these operations to continue gaining momentum.

    Operating review

    South Africa (IAS 18 commentary)

    Service revenue declined by 0.9% (flat adjusting for the transition between national roaming partners and the change in call termination rates), impacted by customers optimising promotional data as part of our Summer campaign and a subdued consumer spending environment. Revenue fell by 1.3% following lower growth in equipment revenue, with device sales negatively impacted by the weaker rand against the US dollar.

    Customer numbers were up 5.4%. Prepaid customer growth was resilient, while efforts to reduce once-off use of SIM cards started to take effect, resulting in lower gross additions in the quarter. During the period, we gained 86 000 contract customers to 5.6 million, up 5.7% yoy, supported by gains in both the Consumer and Enterprise segments.

    Contract customer service revenue was down 2.7%, impacted by reduced out-of-bundle data spend, as well as customers continuing to migrate to more inclusive value contracts as part of our pricing transformation strategy. In the period we have also seen more customers selecting from our lower value packages in order to control their spend, in the context of the weaker economic environment.

    Prepaid customer service revenue grew 0.8%, lower than the previous quarters, with increased number of customer opting for lower priced bundles with shorter validity periods, especially in data.

    Voice revenue remained resilient, declining by only 0.5%, stimulated by strong demand supported by our Airtime Advance product, which makes it easier to buy airtime when a customer is not close to traditional channels.

    Data revenue was flat on the prior year, as customers used data rewards from our Summer campaign to offset their usual spend. Utilisation remains encouragingly strong, with data traffic up 41.4%. Active smart devices on the network were up 13.3% to 20.2 million, with average gigabytes per smart device increasing by 31.9% to 1.1GB. 4G customers increased 40.5% to 9.2 million. We sold 209 million data bundles this quarter, as we continue to migrate customers to more in-bundle usage. We are managing out-of-bundle spend, with more inclusive value contracts and affordable data bundles with shorter validity periods, both of which are increasing in popularity with customers. The long-term benefit from this pricing transformation, is expected to offset the short-term growth impacts as customers migrate to offers with lower effective rates, despite lower elasticity currently being experienced in the market.

    Our platform strategy, designed to stimulate reasons to consume data, is gaining momentum. Our Videoplay platform now has over 700 000 active users paying for services, and our recently launched music platform, Muze, is steadily gaining customers.

    Fixed line service revenue grew 11.3% with strong growth in wholesale transit revenue. Internet of Things (IoT) connections increased 24.0% to 4.3 million. We have started the process of migration between Cell C and Telkom roaming on our network and are expecting increased traffic from Telkom to start offsetting the reduced Cell C traffic within the next couple of quarters.

    During this quarter, our capital expenditure spend of R2.6 billion was focused on increasing our network coverage and enhancing our IT systems. Our data network reaches 99.5% of the population on 3G and 90% on 4G.

    We maintained our lead on Net Promoter Score to our nearest competitor by 7ppts, based on best network performance, service and value.

    International (IAS 18 commentary)

    Overall, our International operations performed well, with, improved trends in Tanzania and strong growth in Mozambique and the DRC.

    Service revenue growth in our International operations, which accounts for 27.5% of Group service revenue, remained robust at 13.2% (9.4%*), underpinned by our strategic drivers of M-Pesa and data growth. Our mobile network operations, excluding Vodacom Business Africa, grew 15.2% (11.1%*).

    We added 449 000 customers in the quarter, reaching 35.2 million, up 9.3% yoy. We continue with our efforts to improve customer registration processes