VEON investors are as used to bumpy rides as amusement park addicts. But the emerging-markets player has found some form under CEO Kaan Terzioglu, who previously led Turkcell. For its most recent quarter, it managed a double-digit percentage rise in sales, while its underlying profitability was up 9%. It is now forecasting the sort of growth that most operators in developed markets have not enjoyed since smartphones were a novelty.
The latest forecast out today is that local-currency sales will rise at a compound annual growth rate of 10% to 14% over the 2022 to 2024 period. Profitability is set for a boost as well. For the all-important (to operators) EBITDA margin (that's earnings before interest, tax, depreciation and amortization), VEON thinks it can achieve a three-percentage-point uptick, thanks to a mixture of sales growth and cuts. In Amsterdam, where VEON is headquartered, its share price closed up 5.3%. "We are going to be known as the hypergrowth telecom operator in the market," Terzioglu tells Light Reading.
The upbeat sales guidance is based largely on market dynamics. Outside Russia, its biggest single market, VEON tends to operate in countries with very large and young populations where smartphone penetration is still relatively low. Bangladesh and Pakistan are the prime examples – what Terzioglu calls "blue ocean markets where we are still trying to cover everyone." New customers bring additional sales.
VEON CEO Kaan Terzioğlu (seated third from left) meets Pakistani Prime Minister Imran Khan (Source: VEON)
On top of that, many existing customers have an unsated appetite for more advanced smartphone services. "These customers will be buying 75 million smartphones over the next few years," Terzioglu tells Light Reading. An upgrade to 4G, the mobile technology on which VEON remains focused, is expected to boost spending and reduce churn.
Sticky Toffee streaming
The real differentiator, though, is VEON's re-invention as what Terzioglu calls a "digital operator." That has been a turbulent process. Under previous management, VEON tried imposing a single app and technology strategy on the entire group, with all its disparate geographical parts. It failed badly, sparking the resignation of Jean-Yves Charlier, a former CEO. Terzioglu's big move has been to hand greater autonomy to country units, aiding the development of products and services tailored to local circumstances.
Jazz Cash, a mobile finance app in Pakistan, and Toffee, a TV service in Bangladesh, are two examples of successful innovation in markets where big tech rivals have barely made an impact. "We have almost 60% market share in mobile payments with Jazz Cash and close to 15 million monthly active users, and the total amount of transactions we do in Pakistan is equal to 6% of GDP," says Terzioglu.
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He is even more ebullient about Toffee, which has ranked as the most downloaded Android app in Bangladesh for 83 weeks and counting. What makes it especially interesting is that VEON is only the number-three player in Bangladesh, with a market share of just 17%. Of Toffee's 7 million monthly active users, 70% have never been a customer of Banglalink, VEON's local subsidiary. The 30% who are also network customers spend four times as much as other Banglalink subscribers and rarely churn.
For the remainder, Toffee provides a major incentive to switch networks. "Toffee has gigabytes provided directly from Banglalink so you can watch as much as you want," says Terzioglu. "If you are not a Banglalink customer, then guess what – it is going to cost you to top up." Such tactics could have the net-neutrality brigade waving their "Keep the Internet free" placards outside VEON's offices, but few operators will sympathize with their cause. "Telecom networks are very happy to share their networks with the OTT providers," says Terzioglu. "Let them share a bit with us."
More streamlining ahead
Cost cutting has been a priority in recent years as VEON has focused on shrinking its bloated corporate function, which had swelled before decentralization became the new mantra. Employee numbers at the company headquarters hit 640 in 2017, accounts show, but had dropped to just 187 last year. "We have made phenomenal progress in reducing headquarters costs in the last few years, almost to the level of cutting 60% of costs," Tarzioglu says.
Across the entire company, however, headcount rose from fewer than 40,000 employees in 2017 to nearly 46,500 in 2019, before dropping back to exactly 43,639 in 2020. Christened "Project Optimum," the next phase in the efficiency program aims to cut annual expenses by $250 million before the end of 2024. "We believe this is quite achievable with synergies in the virtualization of our networks and smart capex deployments as well as the digitalization of our distribution," says Terzioglu.
VEON's EBITDA margin has risen from 40.8% for 2015 to 43.3% last year. If Terzioglu can achieve his target, it should be looking at a margin of around 46% or 47% in 2024. An improvement in equity free cash flow, supporting debt reduction and dividend payments, is also an objective. Terzioglu thinks he can achieve that partly by cutting VEON's capital intensity – its capex as a percentage of sales. Today, VEON pumps between 22% and 24% of revenues into capex. By 2024, the figure will be less than 20%, it predicts.
This may seem counterintuitive given that VEON has not even begun its 5G rollout in earnest. Terzioglu, however, thinks he will be able to start winding down his 4G investments before 5G becomes a mass-market necessity. "I am not interested in the vanity of 5G and I believe that in our markets we have to bring 4G for all and not 5G for a few," he explains. The drop in capital intensity is planned to coincide roughly with 4G penetration rising to 70% from 46% today. It has been steadily ticking up by a percentage point each month.
What's more, the 4G focus does not mean there has been no 5G-related investment activity. "The reason I don't see 5G as big incremental capex is that we have been deploying 5G-ready technologies," says Terzioglu. Virtualization, massive MIMO antennas and carrier aggregation are a few he reels off.
Tower divestments are perhaps the final element in his strategy. In September, VEON sold 15,400 Russian towers for $970 million to Service-Telecom, a towers specialist and long-standing partner. It is now eyeing sales in Bangladesh, Pakistan, Ukraine and Kazakhstan. Proceeds should help reduce US-dollar-denominated debts to below 40% of net debt, a target announced today. They might also support capex reduction.
Few other operators have sounded as willing to cede full ownership of their towers, but Terzioglu brushes off the suggestion that VEON will lose control of an important asset. "Frankly, I do not see towers as strategic assets anymore," he says. "No telecom operator has the luxury to own exclusive networks and it doesn't stop at towers."
Terzioglu's targets have been warmly received by shareholders on first inspection. They will know that he made his name at Turkcell, heralded as a rare example of an operator with a successful non-connectivity business. If he can work the same magic at VEON, investors will have a lot more to applaud.