MTN interim financial results for the six months ended 30 June 2014

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Johannesburg –MTN is a leading emerging markets mobile operator, connecting over 215 million people in 22 countries across Africa and the Middle East. We are committed to continuously improving our customers’ experience and delivering a bold, new Digital World to them.

MTN Group President and CEO, Sifiso Dabengwa comments: “The MTN Group delivered pleasing operational performance for the six-month period to 30 June 2014. The Group benefited from good growth in data and Mobile Money across key markets but performance was tempered by tough competition, regulatory pressures and an overall weaker economic environment. MTN Nigeria delivered a robust performance and going forward expects to benefit from the growing demand for financial services and mobile content in this market. The South African operation remained under pressure, but we have started to see positive momentum in the second quarter following substantial actions to improve commercial performance.

“MTN made good progress on delivering on our strategy in the period. The Group continues to improve operational and cost effectiveness as well as explore opportunities to expand our product offering outside of traditional voice into the digital space. Furthermore, the Group continues to benefit from our ongoing investment in the network, which enhances MTN’s offering and positions us for further growth.”

Highlights

  • Group subscribers up 3,5% to 215,0 million
  • Revenue increased by 10,7% (4,1%*) to R72 759 million
  • MTN Nigeria revenue 21,5% (8,0%*) higher at R27 099 million
  • MTN South Africa revenue 7,0% (3,4%**) lower at R19 157 million
  • Data revenue increased by 38,9% (33,1%*) to R12 708 million
  • Data users 7,3% higher at 88,5 million
  • MTN Mobile Money subscribers up 24,3% to 18,4 million
  • EBITDA increased by 19,6%***(10,6%*) to R33 663 million
  • EBITDA margin widened 3,5 percentage points to 46,3%***
  • MTN Nigeria EBITDA increased by 11,3%**** to R16 280 million
  • HEPS 9,0% up at 729 cents
  • Interim dividend up 20,3% to 445 cents per share

Explanatory notes:

* Constant currency (“organic”) information disclosed in these results is the responsibility of the Group’s board of directors. The constant currency information has been presented to illustrate the impact of changes in currency rates on the Group’s results and hence may not fairly present the Group’s results of operations. In determining the change in constant currency terms, the current financial reporting period’s results have been adjusted to the prior comparable period’s average exchange rates determined as the average of the monthly exchange rates which can be found on www.mtn.com/investors. The measurement has been performed for each of the Group’s currencies, materially being that of the US dollar and Nigerian naira. The organic growth percentage has been calculated by utilising the constant currency results compared to the prior year’s results. The constant currency information presented here has not been reviewed or reported on by the Group’s external auditors.

** Includes 2013 revenue adjustments for comparative purposes

*** Excluding profit from the sale of towers of R99 million (June 2013: R856 million)

**** Organic EBITDA growth excluding 2013 management fee adjustment

OVERVIEW

The MTN Group delivered a solid operational performance for the six-month period to 30 June 2014. Good growth was experienced in data and MTN Mobile Money usage but voice revenue continued to be impacted by aggressive competition, regulatory pressures and a weakening economic environment in key markets. MTN Nigeria delivered a robust performance in line with market expectations, however the South African operation remained under pressure and steps were taken to improve its performance. The Group continued to benefit from the ongoing investment in its network, which enhances MTN’s offering and positions us well for sustained growth.

Group subscribers increased by 3,5% to 215,0 million. During the period we focused on reducing churn, offering competitive segmented offerings as well as improving network quality and capacity as key differentiators in our value proposition. Continued macro-economic weakness in some of our key markets, however, led to a decline in overall market net additions against the comparable prior period.

Reported revenue for the six months increased by 10,7%, supported by the continued weakness of the South African rand against our operating currencies, in particular the relatively stronger Nigerian naira, Central African franc and Ugandan shilling. On a constant-currency basis, revenue increased by 4,1%*. This was largely the result of 8,0%* revenue growth in MTN Nigeria, tempered by a 7,0% (3,4%**) revenue decline in MTN South Africa. The Large opco cluster delivered pleasing results in line with guidance, growing revenue by 13,4%*, with encouraging growth reported by operations in Ghana, Cameroon and Sudan. The Small opco cluster delivered a modest 5,7%* increase in revenue as conditions in Guinea Conakry, Liberia and Yemen remained challenging.

Although MTN Nigeria delivered a solid performance, the operation faced regulatory pressures and localised network performance challenges. Notwithstanding this, the operation remains on track to deliver solid results for the full year. MTN South Africa took aggressive steps to regain its competitive market position. While financial performance will continue to be subdued in the short term, the South African operation expects to resume positive subscriber and revenue growth over the next 6 months.

Group EBITDA increased by 19,6% (10,6%*) to R33 663 million excluding the profit from the sale of towers. This reflects the success of the Group-wide cost-control initiatives, particularly in Nigeria where EBITDA increased by 11,3%****.

Capital expenditure for the period of R9 199 million reflected a decrease of 28,1% (32,7%*) from the same period in 2013. More than two thirds of the full year’s capex budget has been committed. The Group’s operations rolled out 1 716 2G and 2 232 3G sites, providing greater capacity, quality and faster data speeds on our 3G and LTE networks.

PROSPECTS

MTN has made substantial progress on many of its strategic themes over the period. The Group continues to improve operational and cost effectiveness with initiatives including the monetisation of passive infrastructure through tower deals across a number of key markets as well as Project Next!, the back-office transformation programme, which commenced a pilot in Ghana during the period. The shared services hub located in Johannesburg will be fully operational within 18 months and the outsourcing of non-core network management services will be rolled out wherever clear and demonstrable efficiencies exist.

We continue to explore opportunities to expand our product offering outside of traditional voice and expect to increase our presence in the digital space by leveraging technology and maximising the opportunity of low internet penetration in many of our markets. The successful completion of the transactions with Africa Internet Holding (AIH) and Middle East Internet Holding (MEIH) positions the Group well to broaden our e-commerce platform and lifestyle offerings. Furthermore, we are well placed to continue the expansion of our MTN Mobile Money and broader financial services offerings and grow our innovative ICT solutions to corporate and SME customers. We remain committed to providing a distinct customer experience through value-driven and competitive initiatives and ongoing investment to improve network quality and capacity. We will continue to explore value-accretive M&A opportunities in line with our strategy.

In South Africa, we expect to build on the momentum gained in the second quarter to regain market share by providing innovative and affordable products to both our post-paid and pre-paid subscribers.

The Nigerian operation will focus on meeting the significant market demand for financial services and mobile content with an expected positive impact on data revenue. Infrastructure sharing will be a priority for MTN South Africa and MTN Nigeria in increasing their operational effectiveness.

Any forward-looking information contained in this announcement has not been reviewed or reported on by the Company’s external auditors.

SANCTIONS

MTN continues to work closely with all relevant authorities in managing US and EU sanctions against Iran, Syria and Sudan. International legal advisors have been appointed to assist the Group in remaining compliant with all applicable sanctions.

CHANGES TO THE BOARD OF DIRECTORS (the Board)

Ms KC Ramon was appointed as an Independent Non-Executive Director of the Board, effective 1 June 2014.

ACQUISITION OF AFRICA INTERNET HOLDING

The Group has acquired 33,3% of Africa Internet Holding (AIH), a joint venture between Rocket Internet and Millicom International Cellular, to develop internet businesses in Africa. The Group, Millicom International Cellular and Rocket International have become 33,3% shareholders in AIH.

The Group expects to invest approximately EUR168 million over the next two to four years into AIH.

The transaction closed on 1 July 2014.

EXPANSION OF LICENCE AGREEMENT IN IRAN

On 4 August 2014 Irancell Telecommunications Services Company (PJSC), the Group’s joint venture inthe Islamic Republic of Iran, entered into an arrangement to upgrade its licence agreement with theCommunications Regulatory Authority in Iran to include 3G mobile broadband and higher standard (such as 4G) as well as obtain access to additional spectrum frequency for an amount of IRR 3000 billion, payable by March 2015 in four instalments which will be funded by the local operation.

SYRIA BUILD, OPERATE AND TRANSFER LICENCE

MTN Syria operates under a contractual service arrangement granted and controlled by the Syrian Telecommunications Establishment (STE). The contract known as a Build, Operate and Transfer (BOT) provides for revenue sharing between MTN Syria and the STE and requires the handing over of the network to the STE at the end of the licence period. Subsequent to the reporting period, the Group has made significant progress in converting the current BOT to a freehold licence. It is anticipated that this process will ultimately culminate in the awarding of the licence and termination of the related BOT contract. This process is expected to be concluded before the end of 2014 and it is estimated that the initial licence fee will be between SYP18 billion and SYP25 billion (which approximates one year’s revenue share). This will be funded through cash balances maintained within the local operation.

DISPOSAL OF BASE STATION TRANSCEIVER STATIONS (BTS/TOWERS) IN NIGERIA

Subsequent to the period end the Group has advanced negotiations to sell its tower business in its operation in Nigeria, that includes 8 640 existing and 543 towers under development, to an entity that will be managed by a large mobile telecommunications infrastructure provider. The Group intends to retain a non-controlling interest of 51% with protective rights in the new entity and will enter into a lease agreement for the use of the tower infrastructure. The contractual agreements are expected to be finalised in due course and the transaction is expected to close in various tranches under customary closing conditions.

LEADING THE DELIVERY OF A “BOLD NEW DIGITAL WORLD”

We continue to make good progress in the execution of our strategy to lead the delivery of a “bold, new Digital World” to our customers. Over the medium term, our focus is to drive growth beyond voice, create a distinct customer experience and ensure that our scale provides a solid base from which to optimise costs.During the period, we delivered on a number of initiatives towards achieving this.

VOICE

Voice revenue continued to face pressure as a result of aggressive price competition, lower mobile termination rates, particularly in South Africa and Nigeria, and lower traffic volumes in some markets. The total minutes across the Group remained stable at approximately 100 billion. These factors, together with the growing contribution of data to the revenue mix, resulted in a decline in voice’s contribution to total revenue from 74,1% in the first half of 2013 to 72,7% at end-June 2014. Despite these challenges, MTN remained competitive and successfully defended its market-leading position in 15 out of 22 operations.

DATA

Data services delivered consistently strong results across all of our markets, contributing 17,5% to total revenue, from 13,9% in the same period last year. Data traffic across the network grew by 84,8% to over 47 000 TB. The number of data users increased by 7,3% to 88,5 million as we expanded our 3G networks, enhanced the data product offering and stimulated the adoption of data-enabled devices and smartphones. At the end of June 2014, there were 38,5 million smartphones on our network, an increase of 31,6% from the same period last year. The launch of our own Steppa smartphone contributed to the availability of and access to affordable data-enabled devices.

FINANCIAL SERVICES

MTN Mobile Money and financial services are an increasingly important part of our service offering. The number of registered MTN Mobile Money subscribers grew by 24,3% to 18,4 million during the period, with a higher percentage of active users. Over the past few years, we have introduced a number of tailored financial products such as short-term insurance solutions, utility payments and remote payments for airline tickets. In South Africa, this has been extended beyond a mobile wallet and now includes a regulatory compliant bank account which allows transactions at any VISA point-of-sale and automated teller machine (ATM) within the country.

DIGITAL

During the period, MTN successfully concluded its investment in MEIH as part of the Group’s strategy to broaden its e-commerce platform. In line with this strategy, on 1 July 2014, the Group’s investment in AIH was concluded and various operations have identified areas of co-operation. Reviews are being conducted to select appropriate launch windows. The Group acquired an interest in Bidu, an online insurance price comparison and brokerage provider in Brazil, through the venture capital fund, Amadeus Digital Prosperity Fund IV.

ICT

We have made good progress in the provision of ICT services to our SME and corporate customers in all key markets where these are offered. The acquisition of 50% plus one share in Afrihost Proprietary Ltd (Afrihost), a leading internet service provider (ISP), will provide MTN South Africa with access to an established client base in both the SME and corporate segments as well as hosting and ISP best practices. The transaction is expected to be concluded before the end of 2014, pending regulatory approval. MTN Nigeria revised its enterprise business offering to include shared voice and data bundles between company employees through MTN Biz Plus, facilitating broader access to our enterprise solutions.

TRANSFORMING OUR OPERATING MODEL

The Group continues to leverage its scale and improve operational efficiency through the monetisation of passive infrastructure and the standardisation of back office processes. During the period we concluded tower deals in Rwanda and Zambia. Subsequent to the end of the period, the Group advanced negotiations to dispose of its towers in Nigeria to a telecoms infrastructure provider, while retaining an interest in the new entity. The Group continued to invest and restructure the organisation to ensure we have the appropriate skills to support growth in the digital and ICT segments of our business.

FINANCIAL REVIEW

REVENUE

Group revenue increased by 10,7% (4,1%*) to R72 759 million despite a 7,0% (3,4%**) contraction in the South African operation’s revenue as competition intensified. MTN Nigeria’s revenue growth maintained its positive momentum, increasing by 21,5% (8,0%*).

Revenue for the Large opco cluster increased by 13,5% (13,4%*), in line with guidance and supported by an improved performance in Cameroon (32,0% (9,2%*)) and Syria (1,2% (35,3%*)). The balance of the Large opco cluster faced weaker economic conditions, which slowed the pace of growth. MTN operations in Zambia, Congo-Brazzaville and Cyprus provided the impetus that boosted the performance of the Small opco cluster.

The movements in some of the major functional currencies positively impacted Group performance. Despite regaining some lost ground in the first half of 2014, the average rand exchange rate for the full six-month period was 16,2% weaker against the dollar than in the comparable period last year. Furthermore, the rand weakened by 10,5% against the Nigerian naira, by 18,2% against the CFA franc and by 15,6% against the Ugandan shilling, providing support to MTN Group’s reported revenue.

Outgoing voice revenue increased by 10,5% (2,9%*) compared to the prior year and contributed 62,5% to total revenue. Performance was negatively affected by price competition in key markets, a contraction of 1,1% in voice traffic and lower voice tariffs, particularly in South Africa. The average price per minute (APPM) declined by 4,5% from the comparable period last year in US dollar terms across our operations.

Group data revenue (excluding SMS) increased by 38,9% (33,1%*), supported by an expanded 3G network, strong growth in data usage and an increase in smartphone adoption. Data’s contribution to total revenue was 17,5%, 3,6 percentage points higher than the comparable period last year. MTN South Africa and MTN Nigeria were the largest contributors to data revenue and together accounted for 70,9% of total data revenue. MTN operations in Ghana, Uganda, Cameroon and Ivory Coast as well as the Small opco cluster also delivered good data revenue growth.

Group interconnect revenue declined marginally by 0,8% (7,5%*) following cuts in termination rates in our Nigerian and South African operations. These came into effect in April and May respectively. Interconnect revenue in South Africa may be further impacted by the regulatory review that is currently underway.

EBITDA

Group earnings before interest, taxation, depreciation and amortisation (EBITDA) increased by 19,6% (10,6%*) to R33 663 million, excluding the profit on tower sales. The Group EBITDA margin expanded by 3,5 percentage points to 46,3% as cost-containment initiatives gained traction throughout the Group. Distribution costs, inclusive of commissions, service provider discounts and marketing costs were significantly reduced. Staff costs remained flat year-on-year.The upward trend in the Group’s EBITDA margin was supported by increased margins in Nigeria (1,9pp), Syria (2,4pp) and Sudan (3,5pp). MTN South Africa’s EBITDA margin remained under pressure and contracted by 1,5**pp.

DEPRECIATION AND AMORTISATION

Depreciation increased by 20,7% as a result of the accelerated capex rollout in the second half of 2013, particularly in Nigeria and South Africa. Amortisation costs increased by 22,1%, driven by increased spending on software in Nigeria, Ghana and Uganda.

NET FINANCE COSTS

Net finance costs of R1 668 million increased sharply from the R88 million recorded in the comparable period of last year. This was largely due to foreign currency losses in the current year of R736 million versus foreign currency

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