Vodacom’s share price rallied to a new record high on the JSE on Monday after it turned in a strong set of results for the financial year to March 2011, boosting its cumulative annual dividend by 61,4%. CEO Pieter Uys reckons there’s more growth to come but analyst Irnest Kaplan thinks there are tougher times ahead for the cellular group.

Kaplan, who heads equities research firm Kaplan Equity Analysts, is worried that growth in data revenues will not happen quickly enough to offset pressures on the maturing voice side of Vodacom’s business, where the company enjoys high margins.

“How Vodacom navigates the transition from voice to data will determine how it gets through this,” Kaplan says.

He says if Vodacom hadn’t grown its data business substantially in the 2011 financial year, the results would have been “shocking”. In its SA business, by far its biggest operating subsidiary, data revenue increased by 33,9% to R6,2bn, with active data bundle users increasing by 76,2% to 2,6m and overall active data customer numbers rising by 34,6% to 9m. However, mobile voice revenue rose by just 4,2%, despite a 13,3% increase in minutes of airtime consumed.

“Its voice revenue was effectively flat in in the latest results, but minutes used were up. Vodacom is on its way to a hiding if it carries on like that,” Kaplan says. “I think we have reached the tipping point in the transition from voice to data.”

He says Vodacom now relies on “aggressive growth” in the data business to keep its profit machine ticking over. “That’s why it has set incredibly aggressive targets in this area.”

Uys says he wants to grow the number of data customers from 9m now to 25m within the next two years, a 177% increase. The company is trying to drive down the cost of smartphones to achieve this, with Uys predicting Vodacom will soon introduce a sub-US$100, Android-based smartphone as part of this strategy. Parent Vodafone on Monday took the wraps off the Vodafone Smart, a sub-$130 Android device, that it hopes will be a hot seller in emerging markets.

Kaplan says the pressure on Vodacom is going to get intense in the next few years. The company has to contain costs, which he says will be difficult given the inflationary environment and the need constantly to invest in new network infrastructure to stay ahead of its competitors. “It has to be better than MTN and Cell C all the time, so it’s forced to spend.”

Kaplan also worries that the data business may never deliver the same sort of profit margins as the voice business. “Is the data business a good substitute? Data is probably less profitable than voice.”

Also, the data market is much more competitive — and getting more so all the time. Per-megabyte prices continue to fall, with smaller players like Cell C introducing cut-price broadband deals.

“In five years, Vodacom will have voice revenues that are lower than now because prices will be a lot lower. The only question is: can data make up for that loss?” It seems unlikely, Kaplan says.

To counter the problem, Vodacom could expand into new countries, where the same pressures it’s facing in SA are not yet evident. But Kaplan says there don’t appear to be any acquisition targets on the horizon. Also, the company is restricted from operating outside sub-Saharan Africa by Vodafone.

Another option is to expand into new business areas, something it’s trying to do with Vodacom Business. However, profit margins in IT services are not nearly as high as the traditional voice business. So, it’s unlikely this will offset a looming crunch in voice margins.

For now, the only area that can keep Vodacom’s profits ticking over is data. But lack of literacy among many South Africans could prove a challenge in this regard, Kaplan says, even if everyone is able to afford a smartphone or smart device of some kind.

If another operator were to destabilise the market with aggressive pricing, it could also have a devastating impact on operators’ profits. Already, Cell C has slashed data prices, forcing Vodacom and MTN to respond with data specials of their own. If the same were to happen in the voice market, as has happened in Kenya where India’s Bharti Airtel has triggered a price war, it could “damage the telecoms industry”.

Kaplan says MTN, as a group, is better shielded from these pressures since SA contributes a far lower portion to its overall revenue and profit mix and its other markets still have a lot of growth left in voice. — Duncan McLeod, TechCentral