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November 5, 2019
It is one of the world's top ten operators, with more than 200 million customers globally, and yet it is hard to think of a weirder-looking service provider than VEON.
Its headquarters are in liberal, low-tax Amsterdam, but its main market is Russia. Elsewhere, it operates networks in countries whose only common feature is their "emerging market" status -- places as diverse as Algeria, Pakistan and Ukraine. Controlled by Mikhail Fridman, one of Russia's controversial oligarchs, it reports financial results in dollars and has been led since last year by Ursula Burns, an American businesswoman who formerly ran Xerox. It is a bizarre assemblage of parts, a Frankenstein's monster of the telecom world.
Its performance has sometimes looked monstrous, too, with shares down 44% since early 2017. That has not always been its own fault. Speaking to analysts by phone this week, Burns drew attention to the dynamism of markets where populations are young and smartphone penetration is still low. But political risk and economic uncertainty remain high in many of these countries. Earnings take a regular beating from adverse currency movements, taxes, penalties and other one-off charges. Easy-going Amsterdam must seem like the perfect counterweight for a corporate base.
Figure 1: VEON's Share Price in Amsterdam Source: Yahoo Finance.
Not all VEON's problems have been outside its control, however. Under previous management, a high-profile attempt to create a single, app-based digital platform for the entire group ended in disappointment, sparking the resignation of Jean-Yves Charlier from the CEO post last year. The decision in 2016 to replace business support systems (BSS) across 11 markets with a single Ericsson product was another costly mistake, although VEON landed $350 million in compensation from the Swedish vendor when that project went belly-up.
The latest snafu is a partly self-inflicted loss of market share in Russia, where VEON still generates more than half its revenues. Underinvestment in mobile networks is largely to blame, says Alex Kazbegi, Veon's chief strategy officer, and exacerbated by growing enthusiasm for "unlimited" tariff plans. "Those are generally something we would rather not have," he tells Light Reading. "When network quality is not as strong as you would like, they can have a negative impact."
VEON has been taking corrective action after losing more than 4.5 million Russian customers between September 2017 and March this year, when its subscriber base had shrunk to 54.2 million. In the recent third quarter, it began installing additional 4G basestations in Russia -- 43% more, to be precise. The move has already paid off, with VEON adding 600,000 mobile subscribers in Russia since March. But it is not inexpensive: In Russia, VEON's capital intensity (capex as a percentage of revenues) hit 18.2% in the third quarter, up from 16.8% a year earlier, minus licensing fees. By the end of the year, it is expected to reach 22%. A turnaround will take "several quarters," Burns told analysts.
Kazbegi resists any suggestion that VEON's network difficulties stem partly from supplier problems amid the current trade turmoil. ZTE, a Chinese vendor, was last year banned from acquiring US components, causing problems for customers such as Wind Tre, an Italian operator that VEON co-owned until September 2018, when it offloaded its 50% stake. Similar restrictions have this year hit China's Huawei, the world's biggest network vendor. But if there has been no visible disruption in Russia, VEON has clearly backed away from the single-supplier deals previously evident in some countries.
"We have at least two vendors in each market that provide us with equipment," says Kazbegi. "We have done some swaps of equipment in Russia and also in Bangladesh." While the usual motivation for these swaps has been supplier diversification, there have also been cost benefits, he says. "Most of the time you win on price because the vendor is keen to give you a better deal." Kazbegi declines to provide details. Previously, however, Finland's Nokia is understood to have replaced some equipment, including gear made by Sweden's Ericsson, at about 2,200 mobile sites in Russia, according to sources close to the matter.
Figure 2: VEON's Alex Kazbegi joined the operator as chief strategy officer early in 2019, having previously worked as an analyst at Renaissance Capital.
With Russian capex set to rise, VEON is in no hurry to launch 5G, despite keen interest in that technology in other markets. Its coolness reflects broader Russian attitudes toward 5G but extends to VEON's other, non-Slavic territories. "We clearly see there is no need for 5G in many markets for the next two or three years and hope most governments share this view," says Kazbegi. Nevertheless, whenever possible, VEON is deploying equipment that is "5G-ready," to use an expression popularized (and occasionally derided) by the vendor community.
For cost savings in Russia, VEON is looking at activities such as distribution. Its retail footprint swelled last year when it absorbed half the stores previously managed by Euroset, its former joint venture with rival operator MegaFon. At the end of 2018, it had 3,073 "mono-brand" and 1,761 franchise stores. "The market is very unhealthy in terms of the abundance of mono-brand stores selling one product," says Kazbegi. Accordingly, VEON closed some 120 stores during its third quarter and is now putting the emphasis on sales via online channels.
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Cost savings are a priority beyond Russia, too. VEON's overarching goal is to reduce its cost intensity (total costs as a percentage of sales) by 1% annually until 2021. That figure was down from 61.8% in 2018 to 58.9% in the recent third quarter, despite IT setbacks with Ericsson. Earlier this year, VEON switched to alternative BSS products when the Swedish vendor scrapped Revenue Manager, its "full stack" offering, because of weak demand. In Russia, it also replaced Ericsson with Amdocs, a rival BSS vendor.
VEON's original goal in 2016 had been to cut IT costs by more than 50% through simplification of its IT systems. Asked if the target had shifted with the recent upheaval, Kazbegi declines to comment but notes good progress in specific territories, including the deployment of new BSS products in Algeria and Georgia. "They are successful in terms of giving agility to the operation and allowing you to come up with new tariff plans." Across the group, he expects further savings from the automation of services and digitization of core network systems.
Next page: Turkish delight
So far, much of the cost reduction has come at VEON's Amsterdam headquarters and in other corporate functions. Here, the specific intention has been to halve annual expenses between 2017, when VEON spent $431 million on corporate costs, and the end of this year. It remains on track to meet this goal.
Ditching efforts to develop a digital platform for customers globally has helped, triggering the loss of about 200 jobs, including 100 in Amsterdam. Instead of foisting a centrally developed app on everyone, VEON is now giving its different operating companies the autonomy to build their own services. "If you want to force-feed the child with something it doesn't want to eat, it is difficult to gain traction," says Kazbegi. "Some products that weren't meant to be rolled out in Pakistan had a fair amount of resistance."
Following this strategic U-turn, VEON has been changing its top team like a Premier League soccer club with a rich new owner. The latest big-name signings include Kaan Terzioğlu, highly regarded in the industry for scoring digital successes while CEO of Turkcell, and Sergi Herrero, who previously ran payments and commerce partnerships at Facebook. The CEOs of VEON's different operating companies will report directly to these two chief operating officers.
Figure 3: Kaan Terzioğlu pictured during his days as CEO of Turkcell.
"It heralds a tilt in strategy to be focused on becoming digital telcos," says Kazbegi of the recent appointments. "We have shifted how we look at operating companies and reporting lines. The operating companies are semi-independent units." Having previously worked on introducing products for customers, Terzioğlu will have the job of providing guidance and direction to those units. Herrero, meanwhile, will focus on partnership development and digital payment tools, including the possible rollout of fintech services in Russia, says Kazbegi. (For more details of initiatives at some operating companies, see this story by James Crawshaw, a senior analyst with Heavy Reading.)
There is Russia-sized room for improvement. Along with most other traditional operators, VEON does not indicate how much revenue it generates from non-connectivity services, but total group sales fell about 1% year-on-year in the recent third quarter, to around $2.2 billion, on a purely organic basis, and digital apps and tools are still used by relatively few customers.
Figure 4: Digital Services Adoption at VEON Source: VEON. Notes: 1) Monthly active users. 2) Mobile financial services.
Indeed, just 15% of VEON's 211 million subscribers were classed as "monthly active users" of self-care apps in the third quarter. The TV service had only 2.9 million users across the markets of Kazakhstan, Pakistan, Russia, Uzbekistan and Ukraine. Financial services had 17 million customers in the same countries. In local currencies, average revenue per user (ARPU) dropped or was flat in all VEON's markets bar Ukraine and Bangladesh.
Contrast that with Turkcell, where Terzioğlu used to ply his trade. Third-quarter revenues at the Turkish operator rose 14% year-on-year, and mobile ARPU soared a fifth at the contract business thanks partly to "digital services usage," said the operator. No wonder it is so admired by senior industry executives. If Terzioğlu can bring that form to VEON, Turkish delight may acquire a whole new meaning in telco circles.
— Iain Morris, International Editor, Light Reading
International Editor, Light Reading
Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).
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