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Executives

Shameel Aziz Joosub – Chief Executive Officer

Ivan Dittrich – Chief Financial Officer

Analysts

Jonathan Kennedy-Good – Standard Bank Group Securities

David Lerche – Avior Research

Thato Motlanthe – Citigroup Global Markets

Chris Grundberg – UBS

Craig Wilson – TechCentral

Franca di Silvestro – HSBC Bank

Asha Speckman – Business Report

Johan Snyman – Renaissance BJM Securities Ltd.

Vodacom Group Ltd. (OTC:VODAF) F4Q13 Earnings Conference Call May 20, 2013 5:00 AM ET

Shameel Aziz Joosub

Good morning. Welcome to all our shareholders, analysts, media, customers and those that have tuned in via the webcast, Summer TV and Bloomberg; a special welcome to the members of the Vodacom Board and to my executive management team. You can use the hash tag Vodacom results if you want to tweet about the results. I will give you the highlights, then take you through the review of our operational performance as well as our continued delivery against our strategy, following which Ivan will take you through the financial review and I will wrap up with our priorities.

Looking at the highlights, I’m very pleased with the strong financial performance delivering growth across all our key financial measures. Group revenue grew by 4.5% to R70 billion and organic service revenue growth was 2.9% in line with our guidance of low single-digit. Certain features of these results were the 22% growth in our data revenue and the 22% growth in our international service revenue. EBITDA grew well ahead of revenue at $10.9% as we expanded Group EBITDA margin by two percentage points well ahead of guidance.

Despite our substantial investment in working capital, free cash flow increased 11% to a healthy R12 billion. Our headline earnings per share increased 23% to 872c, benefiting from the STC charge. Underlying apps increased by 14.1% which I think is a great result. The Board has approved the final dividend of 430c bringing the total dividend to 785c, up 10.6% on the prior year. Our performance was delivered against an increasingly challenging environment and the competitive and regulative fronts as well economically.

In South Africa, the consumer is under pressure particularly at the low end and we have yet to work harder to ensure that we offer more value. We’re seeing increasing competitive pressures not only in South Africa, but also in Mozambique and DRC. We had MTR cuts in most of our markets which is often revenue growth. We work closely with industrial regulators to affect change in this area, but at the same time, it’s important that we as an industry and government find the right balance to ensure investment is not hampered.

With smartphone adoption growing, there is increasing risk of OTT services making it critical to offer integrated plans. While data continues to grow, it increases the need for access to spectrum. There is a limit in how much voice and data each base station can carry. We have reformed 2G spectrum to launch LTE to improve the data experience. But to be frank, the situation is not optimal. It is critical the regulators drive the digital migration to make available the much needed 800 megahertz spectrum. There is an ITU deadline of June 2015 after which the spectrum will not be protected anymore. So access to spectrum is essential to deliver the country’s 20-20 broadband strategy.

Lastly, we’re operating against a backdrop of raising wages, a weaker rand and increasing inflation. So we have to continue to look for ways to control and optimize our costs. Moving on to our two operating segments; South Africa delivered a solid performance in an increasingly competitive market. I’m particularly pleased with the performance in the second half with the successful launch of new products and the gaining market share exiting the fourth quarter at an estimated 52.5% market share which puts us at the same share we had at the beginning of the year. At the same time, we have gained EBITDA market share.

Service revenue was of down 0.4% as we see increasing pricing pressures, further cuts in MTRs and a weaker performance from our independent service providers. Excluding MTRs, service revenue increased 2.4%. Revenue growth was stronger given the 25% growth in smartphone and tablet sales which was boosted by the financing that we had provided. EBITDA grew by a healthy 5.4% as we saw our cost efficiency programs delivering results with savings in our network running costs leading to EBITDA margin expansion of one percentage point. We sustained a high level of capital investment of R7 billion adding just under 1000 3G base stations.

On the customer front, we added 1.4 million new customers. But despite the customer and traffic route, voice revenue declined 1% as a result of 7.5% decline in our effective price per minute which is now at R1. On the data front, we have seen the competition in mobile broadband or dongles re-pricing down 18% year-on-year. Despite this, data grew 16.3%. But I’m particularly pleased about – through refocusing the business, we’ve managed to accelerate the data growth. We exited Q4 growing data revenue at 20.5%. This was driven by smartphone take up and increasing usage. The underlying demand for data services remained strong.

Traffic on the network is up 40%, the active data users are up 18% to 14.4 million and smartphone users are up 26% to 6 million users. An exciting highlight for me was the fact that we were first to launch LTE commercially in South Africa, thereby securing our network advantage. Our international segment also delivered excellent results. Each country has delivered well against the objective of expanding distribution, investing to gain a clear network advantage especially in data and having the right people in place to deliver on our brand strategy.

Service revenue growth was 22% supported by continued growth in customers of 13% and a very strong usage growth of 51. Competitive pressures remained intense, but we responded well with new integrated offers and daily and weekly pricing options resulting in elasticity. The growth in revenue is delivered – is definitely delivering scale benefits and the EBITDA margin for international expanded by 9 percentage points. Operating free cash flow was R1.2 billion, almost three times the amount the portfolio generated last year; again an exceptional result.

Data adoption is showing tremendous opportunity in the international markets, data revenue of which half is coming from M-Pesa increase by 107%. Our active data customers are up 41% to over 4 million and we have 4.9 million M-Pesa customers. We substantially increased capital expenditure in our international portfolio to capture further growth in these markets and to remain competitive on coverage and lead in the data network experience. While each country had delivered against the Vodacom international formula, I think it’s worth highlighting the performance in Tanzania given that is more than 40% of our international service revenue.

We’ve sustained very strong top line growth and have increased our revenue market share by 5 percentage points to an estimated 45% in Tanzania placing us firmly in the number one position. We substantially grow M-Pesa offering not just in terms of customer numbers, but we have doubled the number of agents to 41,000 and have expanded the ecosystem by allowing customers to pay for their TV, electricity taxes and salaries.

We have now integrated M-Pesa with all the banks. The Tanzanian teams has focused a lot on creating innovative pricing plans with 30% of service revenue coming from bundles and while customer numbers are down year-on-year due to clean up, we are seeing improved activity in ARPU trends through focused customer value management. The team managed to keep cost well under control by outsourcing and reducing distribution costs, a key driver being the 20% of ad time is now purchased through M-Pesa. Our increased investment has allowed us to double the size of the network in the last 18 months and substantially increased our 3G footprint. This was really the main thing underpinning the success in Tanzania.

Now let’s move on to our strategy. Following a period of reorganizing of the past six months, we have delivered in our strategic priorities through enhancing our execution plans. Our customer strategy is to build a brand with clear differentiation through delivering the best network experience, the best service and offering competitive value through new plans and wire free offers.

Our growth strategy focuses on specific opportunities chiefly in extending the immense benefits of high speed data access to more customers growing our enterprise offering and leveraging the success of services such as M-Pesa. We’re also investigating opportunities to grow our exposure to attractive markets also in Africa. Supporting our strategy is our drive to standardize and simplify processes and extract greater efficiencies.

On the people front, our people strategy is mainly focused on talent development, diversifying our leadership and ensuring a high level of staff engagement. To ensure our long-term success, we’re building a company that has a reputation for a meaningful – we’re building a company that is creating a reputation for making a meaningful difference in the countries that we operate. For each strategic focus area, we have set targets to measure our performance against and I’m pleased to share with you our results.

We have adopted a new approach to pricing in all our markets, which offered clear benefits to customers by allowing them to talk for much longer by giving them more value for the same level of spend. In South Africa, we introduced Vodacom Smart and RED contract packages with larger bundles of minutes, messaging and data. We’ve seen good takeup of the offers with more than 80% of all new contracts and integrated plans and we’re seeing an uplift in ARPU.

In the prepaid market, we launched a platform called Free4Sho, which is three pricing plans giving more choice to customers. The first is a per-second billing offer at 2c per second with three calls after midnight for customers who like to make short calls. The second plan is a plan where you’re paying for three minutes at once in 20 per minute and then you get the rest of the hour free, and this is for customers who want to make long calls.

and lastly, Vodacom 4 Less with dynamic discounts up to 99% for our customers who are particularly cost-conscious. we have also reduced international calls to 89c, resulting in very strong elasticity and growth in callers. In our international markets, we introduced integrated bundles as well as daily and weekly price plans to drive the penetration of data services.

Our network strategy is to differentiate our brand by offering customers the wireless coverage, fastest speeds and best data experience to the widespread deployment of 3G, HSPA+, LTE and high capacity backhaul. We continue to invest significantly, R9 billion, R4 billion in the last year. We added over 1,750 3G sites and 1,400 2G sites across the Group and made great progress in upgrading our base stations to single RAN, which is not only more efficient in using spectrum and power, but also improves network quality.

Most of our operations will have completed the network upgrades in the next 18 months. We have two thirds of our customer base, we have two thirds of our base stations connected with high speed backhaul in South Africa, which allowed us to rapidly roll out LTE and continues to support our leadership in data speeds.

In all our markets, we want to offer Internet where we have voice and also offer the best data experience. We have improved our customer service across all our channels and have further improved improvements planned as we revised all our customer interactions. We’re owning our new retail stores geared to offer better customer experience and hassle-free smartphone start up.

From the six pilot stores launched, we have seen positive results in customer NPS and sales in upgrade volumes due to the enhanced customer experience. We have also made noticeable improvements in our online channel as well as our self-service applications.

We have 350,000 customers using our Vodacom App. Calls to customer care have reduced by almost 25% in South Africa, as we have achieved better first call resolution and successfully dealt with the root cause of customer issues. It’s really the big focus area for us and we have increased our capital expenditure and customer systems in online to ensure that we truly lead in these areas.

If you look at our international operations, the contribution from international operations has increased from 0.5%, 1% in 2011 to 17%, 3% at service revenue this year. We have significantly increased our level of investment to make sure that we capture more of the growth opportunity. These markets still offer attractive long-term opportunities with mobile penetration below 40% and strong GDP growth prospects.

We aimed a sustained growth in the region of between, 15% to 20% and our existing portfolio could easily contribute 25% to 30% of Group service revenue in three years time. We are now focusing more of our energies on increasing the penetration of data and financial services and also actively looking to enter new markets.

Moving on, data is one of the key drivers to offset voice revenue declines. We are pushing more smartphones into our customer base. In South Africa, smartphone penetration is below 25% and in our international operations; it’s below 10%, indicating the growth opportunity.

We have to drive greater adoption by building enough network capacity to support lower usage charges, offer a range of affordable smartphones and tablets and to ensure customers leave our stores fully connected with emails and applications working. We are driving a strategy of putting data capable devices into people’s hands, giving customers that don’t use data, free data to drive adoption and driving those customers to use add on data into daily bundles, which makes it more cost effective for them.

At the same time, we’ve been converting daily bundles to weekly’s and weekly bundles to monthly bundles. My objective is to keep data revenue growth above 20% and in three years time, it should be at least 30% of our Group service revenue. financial services are another key driver of revenue growth for us, given the high level of financial exclusion in our markets.

Since we launched M-Pesa in Tanzania over half of our customers 4, 9 million now use the service for money transfer, anytime purchases, and third-party payments. M-Pesa customers are now generating an additional ARPU of R1.50. We recently launched the service in DRC and will be extending it to all our markets this year.

We are also expanding our financial services offering to short-term and long-term insurance’s in South Africa with promising take-ups to-date. We are building our commerce platforms in our charge to build on most operating platforms. We recently launched the Vodafone Protect, a solution which enables customers to locate lost or stolen phones, [wide] confidential information and protect against viruses.

We’ve also launched Vodafone Guardian, which helps manage our child's smartphone usage by protecting them from inappropriate calls and content and also can be used by companies wishing to control employee costs. We continue to provide lots of support for the development of local apps to our development program where we train developers and also reward them for the best apt ideas.

Looking at our enterprise business, our enterprise business continues to grow as we capitalize after substantial investment we have made in our fibre network, hosting facilities and our pan-African network connecting 40 countries in Africa. Enterprise including the traditional mobile business is 14%, 8% of Group service revenue. In addition to the revenue from our traditional mobile business where we have leading market shares, revenue from business mailing services was up R28 billion, R7 billion to R1 billion, R7 billion.

Our big focus area is the Hosting and Cloud Services, Machine-to-Machine and converged offerings. Machine-to-Machine connections were up 23%, 4% to just under R1 million. We have launched the Vodafone Global Data Services Platform, this places us in a position to provide Machine-to-Machine Solutions across the continent, even in the countries where we’re not present.

We have already launched several Vodafone product offerings with the successful One Net converged offering for small and medium enterprises to launch in the next few weeks. Vodafone already has R2.5 million customers on this product in Europe and we’re quite excited about launching the product in South Africa.

supporting our strategy to deliver a better service to our customers and offer competitive value is our drive to standardize and simplify our processes and expect greater efficiencies. Our substantial investment in renewing our radio access network and providing our own transmission is allowing us to reduce our network running costs. We’re also transforming our IT and billing systems to reduce costs and we are busy in mapping our customer journeys to ensure process efficiencies.

We continue to enhance our return on customer acquisition costs by reducing the spend on unprofitable calling card customers, optimizing investment in devices that offer the best returns and achieving greater efficiencies in our distribution channel. We’ve again benefitted from leveraging Vodafone scale benefits, moving more and more of our purchases where we can make a saving through the Vodafone procurement company.

Overall tight operating expense control has allowed us to reduce our Group operating expenses. We continue to invest in making sure we have the right people with the right mind-set to achieve and drive our strategy. It is important that our people feel motivated and engaged to the extent that they stretch themselves beyond their daily functions. it’s also important that they have clear goals and priorities and the necessary tools to execute.

We have recruited new executives from FMCG, banking and Vodafone to accelerate our growth initiatives and executing our strategy. We’ve also increased our investment in training programs, particularly those focuses on women to build a pipeline of future leaders. Overall, of the top 500 leaders across our operations, 27% are women in South Africa, 49% of our management team is black.

Our overall Engagement index, the primary measure to indicate employees’ commitment increased two percentage points to 75 percentage points for the Group, which benchmarks extremely well across the Vodafone Group of companies.

Our reputation is not only determined by the value we deliver to our customers, employees and shareholders, but also by our reputation in the communities we serve, given the importance of ICT infrastructure, particularly broadband access and driving GDP growth. We are working closely with governments to align our investments to the national development objectives to maximize the impact we can make.

We are getting back to society through the Vodacom Foundation and have increased our spend to R83 million, mainly in our flagship projects of health and education and also trying to ensure that we can employ mobile technologies to provide better access to these critical services.

One of the projects that we are very proud of is the Moyo project in Tanzania and that you’re educating the fistula condition. And further R5 million was raised by Vodafone employees across the world in support for the surgeries in Tanzania. We have also many other health programs in place with a focus on using mobile for disease management.

We also continue to look for ways to reduce our carbon footprint, for example, by installing the largest rooftop solar power array in Africa and our office in Cape Town, thereby providing 75% of old electricity power using the building. What is impressive for me as well is that Vodacom took first place in the 2013 RepTrak Corporate Reputation Survey, emerging with the best reputation among South Africa’s top 20 listed companies.

This was further verified by our own independent annual stakeholder reputation survey where Vodacom retained its number one position as the reputational leader in all our markets. Underpinning our reputation is of course our code of ethics that ensures that we are near to the highest level of corporate governance. We are very proud of the many accolades we have received from sustainability initiatives reporting end disclosure. That wraps up our strategic highlights.

I will now hand over to Ivan to take us through the financials. Ivan?

Ivan Dittrich

Thank you, Shameel, and good morning everybody. Before I take you through the results in a bit more detail, there are three items that I would like to focus on which are worth noting. The first issue is foreign currency. The movement in the rand and our other trading currencies affect the translation of our international portfolios’ results.

There was a boost of growth rates as the rand depreciated in the region of 10% to 20% against our other currencies. We also had trading foreign exchange losses recognized in operating expenses, although not materially different from the quantum in the prior year. The second issue is the cut in mobile termination rates in South Africa. We had our last cut in this current glide path of 29% on the March 1, 2013, which resulted on a 2.8% drag on South African service revenue growth.

Lastly, we sold Gateway Carrier Services in August 2012 for US$35 million. So we have often stripped out the numbers, so that you could just see the underlying core organic growth of the ongoing business.

So bearing in mind, these items and looking at the income statement from a high level, service revenue was up 1.9% or 2.9%, if we look at growth in constant currency for the ongoing business. We had data revenue growth of 4.5% due to equipment sales running stronger in the year with the increased level of financing provided for smartphones and tablets.

A key highlight of these results was the strong EBITDA growth of almost 11% well ahead of the revenue growth with the EBITDA margin expanding by an impressive 2.1 percentage points. Gateway Carrier Services was sold at a profit of R224 million, which boosted the bottom line.

The taxation expense decreased by 9%, and I will take you through the detailed issues that we had surrounding tax a bit later in my presentation. The increase in non-controlling interests over the prior year relates to improved profitability in the DRC and in Tanzania where we have large minority shareholders.

Headline earnings per share grew by 23%, favorably impacted by a strong underlying operating performance and by the replacement of secondary tax on companies or STC in South Africa with dividend withholding tax. Adjusting to exclude the change in STC underlying HEPS grow by 14%, which we are really very pleased about.

Just looking at service revenue in a bit more detail, this waterfall chart looks at service revenue in constant currency from ongoing operations. Interconnect revenue declined by 11.7%, mainly as a result of South Africa just declining just under 19% due to the MTR rate cut, offset by strong growth in the international interconnect revenue stream arising from a reduction in off-net rates and favorable elasticity. Compensating for that, we had mobile voice revenue at 3.3% in the Group with international growing at 29% and South Africa declining by about 1 percentage point.

Mobile messaging, which is a relatively small number increased by 1%. Messaging revenue declined 3.7% in South Africa, as we see smartphone penetration and the use of instant messaging apps accelerating. This was offset by 55.2% growth in international messaging revenue where we had great success from our various promotions and bundle offers.

Mobile data revenue is still a stand-out feature growing at an impressive 22.2%. International data revenue increased by a very strong 106.7% as Internet, Blackberry, and M-Pesa services gain traction.

In South Africa, data revenue grew by over 16% and the reduction in pricing was more than offset by the growth in data traffic. Other service revenue mainly comprises visitor roaming revenue and managed converged services. The growth in managed converged services revenue of approximately 29% more than offset the decline in visitor roaming revenue. So we ended with underlying service revenue growth of just under 3% for the Group.

Let’s look at the quarterly trends for service revenue. Starting with South Africa, reported revenue growth in the fourth quarter was impacted by the leap year effect as well as the additional MTR cut at the beginning of March. Adjusting for both these factors, Q4 revenue growth was 1.3%, which is stable on Q3, and that’s quite an important factor to note. The International segments reported service revenue was down 12.9%, largely due to the impact of the sale of Gateway Carrier.

During the year, we reviewed our internal controls in the International operations around revenue reporting, and ensured alignment to the Group. This resulted in a reduction of Q4 revenues of approximately R200 million as the revenue was deferred. Underlying growth in constant currency was 17.6%, slower than Q3 largely due to increased competition in our key markets.

Let’s turn to expenses. This slide sets out our three key operating expense categories for the Group and each of our geographic segments.

South African operating expenses reduced by 1.3%, which is truly exceptional given where inflation is currently running. The savings made in our network and support costs more than offset the increased publicity expenses. Staff expenses were lower mainly due to reduced incentive payments.

International operations expenses were well contained and the business continued to benefit from ever increasing sale. We had greater benefits from negotiating as a group and using the Vodafone procurement company for some of international purchases as well.

Group operating expenses were lower on a constant currency basis for the ongoing operations and they reduce as a percentage of service revenue from 24.4% to 24% in the current year.

Moving on to EBITDA, walking forward to movement adjusting for the trading Forex, first we had R194 million unfavorable impact on Group EBITDA, when we take a chunk out for the MTR rate impact of R560 million, mainly in South Africa. South Africa has been contributed R1.7 billion excluding the MTR impact.

The international OpEx excluding Forex made a healthy positive contribution to EBITDA of R1.2 billion this year and this all resulted in underlying EBITDA growth of 10.3%.

Net finance costs were relatively stable at R687 million and the increase in finance costs from higher average data balances was offset by the gains on derivatives mainly relating to the devaluation or the revaluation of foreign exchange contracts on our CapEx and on our OpEx and as we saw the Rand depreciate against the key foreign currencies.

Overall, gearing remains very conservative with a net debt-to-EBITDA ratio of 0.3 times, which is consistent with that of the prior year. Average debt increased by R1.3 billion largely due to further investments in working capital.

The Groups’ effective tax rate decreased from 36% last year to just over 28% mainly resulting from the replacement of STC with dividend with holding tax, which is excluded from the current year tax expense.

Walking through our tax rate recon, the 28% has increased slightly by some non-deductible interest with holding tax in the international OpCos and this allowed expenditure. The utilization of tax losses in the year and the recognition of further deferred tax assets in Mozambique reduced the effective tax rate by a further 2%.

So, how do we look from an earnings perspective? Viewing the slide from the bottom, earnings per share increased by an impressive 27.8% impacted by impairment losses recognized in the prior year and the profit on the sale of gateway in the current period.

Headline earnings per share increased strongly by 23% to 872c per share favorably impacted by tax. Excluding the STC impact, underlying HEPS growth was a healthy 14.1%.

The main movement on the balance sheet is in current assets and liability as well as property plant and equipment. The increase in current assets was due to an increase in cash and cash equivalent, which was boosted from a further Vodafone loan of about R3 billion at period end.

The increase in liabilities is due to significant increase in short-term borrowings from R1.1 billion at the previous year-end to 5.3 this year as one of our large loans fall due within the next 12 months and has been reclassified from long-term to current liabilities. The net asset value increased by 12.1%. We will look at PP&E and intangible assets in a bit more detail on the following slide.

The property plants and equipment movement was driven by an increase in net additions of R7.6 billion. This is a hit of our depreciation charge of R5.2 billion. Intangibles were increased by new software as well as the license investment for 3G in DRC.

So let’s look at our cash flows. Walking you through from the reported EBITDA growth, cash generated from operations was at 3.3% due to working capital investments of a R1 billion relating to handset finance deals. This resulted in a slight increase in overall working capital cash flows, compared to a very large in flow of R1.7 billion in the prior year.

Cash CapEx in the year of R7.2 billion is less than the prior year number of 7.6 and well below the balance sheet additions of R9.5 billion due to significant non-cash items. These include rand renewals of just over R600 million capitalized finance leases for five billings of about R350 million, R360 million and the movement in our CapEx creditors of about R800 million.

The balance sheet additions also include our WACS investment and R315 million is the non-cash element relating to this. We achieved 7% growth in operating free cash, which totaled R18.2 billion and after paying our interest and our cash taxes we generated free cash flow of just over R12 billion at 11%.

We have declared a final dividend of 430c per share exactly in line with our policy of paying out 90% of headline earnings per share. This brings our total dividend to 785c per share for the year which is up 11% from the prior year.

Looking from a shareholder return perspective working in the dividends and the share price since listing, we have delivered a respectable 23%, compound annual growth rate in total shareholder returns. And wrapping up on guidance, we anticipate low single-digit service revenue growth for the group over the medium term. We aim to grow EBITDA ahead of service revenue delivering growth in the mid to high single-digits, as we continue to realize scale benefits and execute on our various costs programs.

Our capital expenditure as a percentage of revenue was slightly ahead of guidance this past year. But we have planned for it to again be between 11% and 13% over the medium term.

That concludes our financial review and I will now hand you back to Shameel. Thank you.

Shameel Aziz Joosub

Thanks, Ivan. In summary, we have several key priorities to ensure that we deliver on our strategic objectives. Our customer strategy, we need to continue our pricing transformation, invest in the state of the art experience in dealing with customers in retail and online and make sure that we accelerate our data networks rollouts.

To insure, we sustain growth, we need to increase smartphone penetration in all our markets as well as increase the penetration of converged services in SMEs particularly through the successful launch of One Net in the next few weeks. We’ll also be launching M-Pesa in all our other markets. While our international portfolio continues to sustain good growth, we are actively looking for new markets to enter.

On our operation strategy, we have a cost program in place to insure OpEx remains flat in South Africa and that we continue to contain costs in the rest of our footprint. We will continue to invest in network and IT platforms to deliver future cost savings and have increased our focus on optimizing our customer acquisition and retention spend. On the people front, we remain focused on talent development and acquisition as well as ensuring that we advance our diversity targets. And lastly to ensure we maintain the best reputation, we make sure that we have a high level of involvement in our flagship health and education projects and also work with governments to deliver on their broadband rollout plans.

That concludes our presentation. Ivan and I are ready to take questions.

Question-and-Answer Session

Shameel Aziz Joosub

Questions?

Jonathan Kennedy-Good – Standard Bank Group Securities

Morning, it’s Jonathan Kennedy-Good from Standard Bank. Just a question on your medium-term guidance, seems to be unchanged and yet if you look at in say, voice revenues, the last two data points over the last two quarters have deteriorated further. Looks like if I do the numbers, you’re down 4% in the final quarter, obviously there’s some issues around number of trading days, but I just wonder what your views are, have you seen some stabilization in the voice market that makes you think you can continue to achieve your low single digit service revenue over the next 12 to 24 months? That’s question number one. And then just one other question on, you mentioned a weak performance by your independent service providers, could you give us some color on that and what the issues are there? Thank you.

Shameel Aziz Joosub

Thank you. So I think firstly to start up with the revenue growth, so if we look at taking out the ForEx impact changes and so on, then we see a flat revenue growth from Q3 to Q4. Having said that, I think the second half of the year was characterized by us changing the way we did business and fundamentally, underlying that was the fact that we decided to do away with non-profitable calling cards as an example, but at the same time, LCRs had an impact on the numbers as well and basically reduced the numbers as well, and then, MTRs played an impact on the revenue numbers as well for the quarter. Also handset financing played a big role in terms of coming out of revenue and moving into financing.

So if we take all of these things out, actually the revenue in South Africa was still a very strong growth, a very comparable to the prior – previous quarters. We did this so that you can see we still maintain a strong EBITDA growth through the year, but we’ve restructured the way some of the business that we were doing, and I think we’ve got a good base on which to grow. Also I like to add that if we look at voice revenue going forward, we think revenue will be – voice revenue will be slightly negative, but will be more than offset by strong growth in data as we go forward, and we see data growing by at least 20%.

Ivan Dittrich

And just to add to that, I think the run rate at which we’ve exited the data growth this year is particularly encouraging, because you will recall that for the first half, it was about 10% and for both Q3 and Q4, it was in the 20s range, so we comfortably exited the year at 20% plus growth for data in South Africa.

Shameel Aziz Joosub

On the service provider question, the service providers basically were very exposed to the Least Cost Routing business and effectively they have used this last year to clean that up, and that’s had a big impact on our numbers. If we remove the impact of the service providers, so the revenue from the service providers decreased by almost 19%, and if we remove the impact of the service providers, then the, actually we had a positive service revenue growth in South Africa.

Jonathan Kennedy-Good – Standard Bank Group Securities

Thank you.

David Lerche – Avior Research

Hi, David Lerche here from Avior Research. Shameel you spoke about looking more actively for expansion opportunities in Africa, is there any some further color you can give us there, whether it will just be Africa? What sort of sizes you’re possibly looking at?

Shameel Aziz Joosub

Sure.

David Lerche – Avior Research

And of course, how it will be funded, please?

Shameel Aziz Joosub

Okay. Ivan, you can take the funding question.

Ivan Dittrich

I’ll do the funding a bit, yeah. Okay, so I think if we look at where we are – what we look at as we’re going to Africa, firstly, we’re quite confident about our operating model and the success of our operating model. So we look at countries that have population sizes of 10 million plus, so we don’t want to look at too small operations. We also look at operations that are non-aligned if you like, that are kind of stating obvious, but they are not part of any of the big groups. And then you look at the level of penetration in the country and the GDP growth, the stability of the, let’s call it, the politics, so the number of different measures that we consider before looking at opportunities, the opportunities will only be in Africa.

Ivan Dittrich

Yes, I think to add on what Shameel has said, the opportunities that we’re looking at in the African continent are sort of smaller bolt-on type acquisitions, and we’ve got substantial capacity on our balance sheet to gear up. We’re pretty under-geared. As I said, our net debt to EBITDA ratio is only 0.3 times. So there is more than sufficient capacity on balance sheet to gear up to fund transactions.

Thato Motlanthe – Citigroup Global Markets

Hi. This is Thato Motlanthe of Citigroup. Just three questions from me, please. The first one, I am not sure if you’d have the data off hand, but can you give us an indication of what percentage of your traffic was out of bundle and what happened to the rates in that respect? The second question just a quick one, what do the deferred revenues in international operations relate to? And then the third one, if you can give us an indication of the sustainability of your tax rate at 28%?

Shameel Aziz Joosub

Okay. I think all three of those questions are for me. So out of bundle traffic on our contract base was just over a third, I think it was 34%, and prepaid is mostly out of bundle. The sort of the deferred revenue matter relating to the international operations relates to review the we’ve done on revenue recognition in our international op cost to just make sure that we’re fully aligned with Group policy and this review has discovered some amount that had to be deferred. So it was just purely an accounting adjustment, which is not considered to be material for us as a group. And then thirdly, in terms of the sustainability of the income tax rate with the change in STC, which is going to continue, we expect the tax rate to perhaps be sort of slightly more than where we exited the current year, but not substantially different, so 28%, 29%.

Chris Grundberg – UBS

It’s Chris Grundberg from UBS. Just a couple from me, on the data forecast, I wonder if you can give us a bit more detail there. Within your growth expectations, can you split out what you’ve kind of are assuming for price reductions and volume growth? And then as a second question, can you give any color on your margin expectations and what impact data might have in that context? And then a couple just on M-Pesa, what do you see as an achievable ARPU there, you mentioned the R1.5, what do you think that can go to? And lastly, what percentage of your 30% of revenues coming from data would be M-Pesa? Thanks.

Shameel Aziz Joosub

Sure. Okay. Let’s start this question – let’s take it one at a time. Okay, so question one was?

Chris Grundberg – UBS

Okay. (Inaudible) expectations in data, price versus volume?

Shameel Aziz Joosub

Okay. So on – so basically, where we exited the year in South Africa was a 40% increase in data, 18% decrease in pricing. We see the pricing decreases coming off. We ended the quarter – last quarter was 8%. So we’re prepaying, basically we feel that the data growth will more than offset any price declines for us to consistently grow at 20% plus in South Africa.

Chris Grundberg – UBS

And then the impact to margins from data growth?

Shameel Aziz Joosub

So it won’t have any impact on decreasing margin. We should be able to continue to expand margin. So just to be clear, data doesn’t dilute margins in anyway. And I think we’ve now shown that over the last couple of years and effectively we see margin still expanding slightly in South Africa as we continue to optimize costs.

Chris Grundberg – UBS

So the margin expansion is kind of going to come over from the expense side?

Shameel Aziz Joosub

Correct.

Chris Grundberg – UBS

Okay. And then on M-Pesa achievable ARPU and what percentage of your data growth is assuming or it seem to be M-Pesa?

Shameel Aziz Joosub

So in Africa basically in the DRC, it’s now 14% of overall revenue.

Chris Grundberg – UBS

Tanzania?

Shameel Aziz Joosub

Sorry.

Chris Grundberg – UBS

Tanzania?

Shameel Aziz Joosub

Yeah, in Tanzania it’s 14%. In the Group it’s 6% of overall revenue. And we see that growing strongly as we roll it out into the different countries. So it’s a phased approach. Within three years, we’re hope that we can get to at least 15% of revenue.

Unidentified Company Representative

From the webcast, [Craig Anthony] from Miller Capital Markets. He has two questions. He says, currently 20% of airtime in Tanzania sold is via M-Pesa. What is the realistic long-term target for this? And to what extent is access to wireless spectrum constraining your SA business?

Shameel Aziz Joosub

Okay. So I think we’ve answered the M-Pesa question, have we? So, today 20% of airtime is purchased through M-Pesa in the Tanzanian market. And as time goes on, we see that growing. Probably in the next three years, it will get up to at least 30% to 35% of airtime being purchased for M-Pesa. Second question?

Ivan Dittrich

The second question is related to spectrum and how do we see the lack of spectrum constraining our South African business. Was that the question?

Unidentified Company Representative

To what extent is access to wireless spectrum constraining your SA business?

Ivan Dittrich

Yeah.

Shameel Aziz Joosub

So it’s not constraining our business at the moment, but we can provide a better service to customers in a more – faster speed and so on. So, quicker access to spectrum will allow us to deliver broadband access in every home a lot faster and a lot quicker. So we’ve been investing quite heavily in preparing the network for it.

Today 75% of the network is already LTE ready, 66% of our sites are already has high-speed transmission. So for us to roll out LTE fast and quicker is not an issue. It just means that we need access to spectrum and that’s the missing ingredient if you like. We’re currently reforming and optimizing spectrum, but that’s not – it’s not the best route to go if you want faster speeds and better experiences. We need clean spectrum if you like, or new spectrum.

Peter Takaendeasa – RMB Morgan Stanley

Congrats for the quarter. It’s Peter from RMB Morgan Stanley. Just two questions; the first one, maybe let me start by saying, well done on margin expansion, particularly in South Africa in this environment was quite an achievement. And maybe a question on that is in your guidance you seem to expect margins to expand further and is this driven more by your revenue expectations or more by specific cost reductions in programs? And the second question to Shameel is any further developments on termination rates in South Africa?

Ivan Dittrich

So I’ll take the first question. So we expect the further margin expansion to come more on the cost side. We continue to be very efficient from an operating cost perspective. As we continue to build more and more of our own transmission, network operating costs reduce, so that that results in good savings for us. And we also continue to procure more and more through the Vodafone procurement company, which helps us to get the benefit of scale and also helps to get OpEx done. On the direct costs, we’re also being much more focused on our acquisitions and retention cost line. So perhaps, a little bit that could be going there as well.

Shameel Aziz Joosub

On the mobile termination rates, basically we’re now into the final year of the glide path. We expect that there will be a further glide path after expiry of the current one. I think it’s early days still in terms of the discussions for the next glide path and it will probably heart up in the coming months.

And then I think the important thing just to mention on MTRs is that it’s important to find a balance. Balance in terms of how rapid you bring them down versus – that it doesn’t affect the level of investment that’s going into building the networks.

Unidentified Company Representative

[Morgan], what is your average usage for smartphone in SA and percentage of data traffic that is derived from smartphones and tablets?

Shameel Aziz Joosub

Okay. So our average usage is 139 megabits per customer. And the total data traffic has now increased by 40% year-on-year in terms of data traffic. 60% of all traffic is coming from smartphones.

Craig Wilson – TechCentral

Hi, I’m Craig Wilson from TechCentral. Data hasn’t done very well in South Africa. Are there plans to try and drive uptick in this market? And also what other sorts of OTT services are you looking at offering to drive data usage?

Shameel Aziz Joosub

So M-Pesa hasn’t done well in South Africa, that’s correct. What we’re doing is we’re looking at re-launching the product in South Africa, but under a whole new platform. And also I think some of the new legislation that’s been passed by the Reserve Bank that have basically made it easier for people to transact and so on and less information required and so on will help a lot for the weaker process, will help a lot in terms of driving the usage. With those, we’ll be taking a very different approach to distribution. So yes, we will re-launch it in South Africa in the coming months.

On the OTT side, we have services through Vodafone. We have different technology development centers and innovation centers. South Africa is one of them. And effectively what we’re doing is we have created a product, which was co-joined that has been launched internationally. We were looking at the success of those products before we bring them to the South African market.

Unidentified Analyst

Mike from Deutsche Bank. Two questions, first of all, it looks like the pressure on working capital that we saw at the interim stages is not as intense. Have you changed the way in which you are handling that financing of smartphones, which was quite a big issue at the interim stage? And then the other thing is what is the possibility of maybe doing some other deal toward Barclay’s and exit it in terms of placing the African operations of the Vodafone Group under your control? I understand that probably it’s not great from a minority’s perspective out of Vodafone labeled process. I’m wondering how you think about that as an option from an expansion perspective?

Ivan Dittrich

Okay, so I’ll take the first one, I guess. So on the working capital side, the number of finance deals that we do has exponentially increased during the year. Second half has been historically much stronger from a cash flow perspective than the first half. So we did guide that at the interims and we also – I mean that turned out to be true.

And I would say probably our controls over the working capital finance deals have probably increased or improved somewhat over the last six, seven months and then there is also the impact of timing differences. They were particularly just before the cut of date at interims there were a large number of deals that some of that has unwound in the second half as well.

But we will continue to see working capital pressures as a result of finance deals going forward in the absence of us finding let’s say, an alternative way to fund those, because you finance your customer over a 24-month period, but you obviously need to prepare your supply within 30 or 45 or 60 days, whatever the case maybe. So you always have a mismatch. But I mean we are looking at ways that we could, on a permanent basis sort of improve the working capital mismatched.

Shameel Aziz Joosub

On the Vodafone, Vodacom assets I think the important part is that for both Vodafone and Vodacom, it’s important that we increase our footprint in Africa. So, just moving things around that necessarily benefit Vodafone. So I think that the big part for us is more focusing on actually growing the footprint and just moving things around.

Ivan Dittrich

And you’re quite caught in the leakage relating to minorities that’s clearly important to you.

Franca di Silvestro – HSBC Bank

Hi, it’s Franca from HSBC and just two quick questions please on your marketing expenditure, do you anticipate maintaining this level of expenditure going forward. And secondly, just in terms of outlook for the SA economy. I’m pretty interested to hear what you see in post-Feb, March. Are you seeing the market improving, not improving?

Ivan Dittrich

Okay. so in terms of the publicity expenditure, we don’t expect the run rate of our second half to continue, so we would expect it to be slightly lower and then Shameel, if you could answer the second one.

Shameel Aziz Joosub

On the economy itself, I mean what we are seeing is that there is definitely a softening in the economy, especially at the low-end. And what we’re going to compensate for that is obviously making sure that we provide better value in that market.

Asha Speckman – Business Report

Good morning, Shameel, good morning Ivan, Hi, Ivan. It’s Asha from Business Report. I see that you’ve actually fit hold with Moto Mabanga and DRC. I wanted to just get a sense of have you been paid up fully, how much – what was the settlement amount and also previously, Vodacom has denied that it is actually in dispute with Moto. So is this an acknowledgment of Vodacom, perhaps having owed them money?

Ivan Dittrich

Look we settled for an undisclosed sum and the terms of the settlement are not public.

Shameel Aziz Joosub

Is it confidential, it doesn’t…

Johan Snyman – Renaissance BJM Securities Ltd.

Johan Snyman, Renaissance. Shameel when you arrived from Spain, there were a lot of talks about our sharing, perhaps any update on that topic?

Shameel Aziz Joosub

Sure, what we’ve done on that topic is, so we are doing site sharing for instance with MTN. We’re also doing a lot more facility sharing, so we’d be using some of – sharing some of our data facilities with the different operators. and we’re also doing a lot more fibre sharing already. we built a national long-distance fibre together with MTN and Neotel. but we’re also doing more, what we call sharing on the fibres that we’ve already built in the cities. so what we call one-for-one sharing. you give us one; we give you one type of thing. and that’s working exceptionally well, and helping us to reduce costs. But as we go forward, we’d probably be doing a lot more in the fibre front in terms of sharing together.

Johan Snyman – Renaissance BJM Securities Ltd.

And maybe just my last one, any comments around the Neotel news held last week?

Shameel Aziz Joosub

Look, I think that the big thing is, we always look at different opportunities. but we’re not in a position to comment in any specific ones at this stage.

Ivan Dittrich

No further questions?

Unidentified Analyst

(Inaudible) revenue in the next three years?

Shameel Aziz Joosub

Yes.

Unidentified Analyst

Okay. is that over the Group?

Shameel Aziz Joosub

That’s over the Group.

Unidentified Analyst

Okay.

Shameel Aziz Joosub

Definitely in South Africa.

Unidentified Analyst

Okay. and can you maybe break that down to South Africa and International, what do you expect?

Shameel Aziz Joosub

So we said, 25% to 30% in the Group.

Unidentified Analyst

Okay.

Shameel Aziz Joosub

I would say South Africa could firmly be 30% plus, I’d say International parts could at least be 20% to 25%.

Unidentified Analyst

Okay, thank you.

Shameel Aziz Joosub

Any other questions? Thank you. Thank you for joining us.

Ivan Dittrich

Thank you.

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