Rising costs gobble up MTN’S profits
AN INTENSE price war is cutting into the revenue of South Africa’s mobile phone giants, putting pressure on them to slash costs.
The extent of this pressure on profit margins was evident this week, when MTN released its half-year results to June.
Not only did MTN lose 400 000 subscribers in South Africa, but its operating costs grew at a faster rate than its revenue.
While revenue increased 9.8% to about R65-billion, operating expenses climbed 12.5% to R37.5billion.
The main culprit was the cost of operating the network, as well as higher selling, distribution and marketing costs — a result of the fact that MTN gave higher handset subsidies on the more expensive smartphones being used in South Africa, like the Samsung Galaxy and iPhone. There are now 6.5 million smartphones on MTN’s network.
This clearly weighs on the mind of CEO Sifiso Dabengwa, who said MTN would review its costs across the business.
In particular, the South African operation had to reflect the price levels in the market, he said.
Rival Vodacom has not escaped the effects of the price war either, and focused especially on cutting costs in its last financial year ending in March.
This worked as Vodacom’s operational expenditure remained steady at about R40.9-billion from R40-billion the previous period.
The silver lining, which Dabengwa used to comfort shareholders at the results presentation this week, is that he does not believe prices can go any lower.
The regulator, Icasa, has programmes aimed at lowering rates, and a further drop in mobile termination rates, which operators pay each other, has been mooted — which may lead to cellphone rates coming down.
Gregory Cort, an analyst at investment house Electus, said there is scope for prices to drop.
“Our cost to connect is very high by international standards, even by African standards, and there’s no real justification for it. I think if termination rates go lower or asymmetry or whatever happens, the prices could go a lot lower,” he said.
Brett Goschen, MTN’s financial director, said many of the expenses were of a temporary nature, but the group could still cut costs further, particularly by centralising its procurement.
The high number of outsourced and contract staff in South Africa would also be looked at, according to Zunaid Bulbulia, MTN SA MD.
In Nigeria, MTN face a number of challenges, but still managed to increase its subscribers by 8 million in the last six months to 55 million subscribers. But the key measure for operators, the average revenue per user (ARPU), fell 7.6% in Nigeria.
In South Africa, the downward trend of declining ARPU continued. MTN is now making an average of R105.40 from every South African customer — down from R121.52 last year.
Bulbulia said the plan was to get consumers to use more smartphones, which would increase the amount that MTN made from data downloads.