VEON Ltd

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

VEON Ltd. is a global provider of connectivity and internet services, primarily operating in emerging markets, offering a mix of mobile and fixed line services, along with data and digital offerings.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

VEON Ltd. is a telecommunications company that operates in several emerging markets primarily across Asia and Europe. VEON’s core business revolves around providing mobile and fixed-line voice services, but it has been increasingly pivoting towards data services, digital applications, and financial offerings. The company serves a diverse range of customers, from individual consumers to large enterprises. The company’s revenue is derived from the following core areas:

  • Mobile services: This forms the bulk of their business, encompassing a variety of services including voice, data, messaging, and value-added services. Growth in this segment depends heavily on subscriber growth and increased data usage.
  • Fixed-line broadband services: VEON provides fixed-line internet, which typically experiences slower growth and lower margins compared to their mobile services, but is seen as a reliable business with the potential to stabilize revenue.
  • Digital services: This is an area where VEON is seeking to diversify and grow, including the sale of digital applications, content, and financial services. These services have potentially higher growth, but are still a small part of total revenue.
  • Financing: The company also has debt and equity financing, as they use debt and financial instruments to maintain funding.

Industry Trends: The telecommunications industry is undergoing a significant transformation due to several key trends:

  • Data growth: There has been a rapid growth in mobile data consumption as users spend more time on their phones watching videos or engaging with other high-bandwidth applications.
  • Convergence of technologies: The lines between mobile, fixed-line, and digital services are blurring as users expect seamless access to all services across a variety of platforms.
  • Emerging market focus: The bulk of telecom growth is concentrated in emerging markets with a growing middle class and increasing urbanization.
  • Increased Competition: The rise of Over The Top (OTT) players such as Whatsapp or Telegram are intensifying the competitive environment and making telecom companies offer more affordable plans to attract more users.
  • Regulatory hurdles: Telecom companies are facing an increasing pressure from regulatory bodies to reduce prices and improve service quality. Also, there are rules and regulations that are particular to a market that telecom companies need to abide.
  • Technological advancement: Mobile technologies are increasing in speed, data volume, and efficiency. This has caused telecom companies to spend vast sums to keep up.

Competitive Landscape: The telecommunications market is highly competitive with some well-established giants as well as aggressive up-and-coming competitors. In each of the markets it operates, VEON is typically up against a mix of local players as well as international competitors such as:

  • Local mobile operators: This is often where VEON has the highest competition from due to established consumer recognition and networks.
  • Other global telecom providers: This includes companies like Airtel, Vodafone, and others who are competing for market share.

What Makes VEON Different? VEON distinguishes itself primarily through its focus on emerging markets, leveraging its expertise in serving these complex and high-growth environments. It is trying to pivot from a pure telco model into a more digital-based service model, and trying to leverage financial services and digital content as future growth drivers. They are also focusing on cost-efficient operations and creating “local champion” subsidiaries that better serve the regions they operate in.

Financial Analysis

Key Financial Takeaways from 2022 Annual Report and 6-K Filings (Form 6-K is used for reporting important material information, other than regularly filed financials, by foreign private issuers): VEON’s performance in 2022 was heavily impacted by the Russia-Ukraine conflict and consequent sanctions. It also showed the company’s attempts to strategically reposition itself.

  • Revenue and Profitability: There was a marginal increase in total operating revenue, at about $8 billion (from $7.9B to $8.0B in 2022). However, the net income available to owners was -$1.0 billion, vs $455 million for the previous year. The company cites impacts from the Russia-Ukraine war as the reason behind poor profits. They also reported $2.1B impairment on the Russian business to write down its worth to a little over $0 billion.
  • Regional Performance: Russia and Ukraine, previously the main source of earnings, now have dramatically reduced the company’s revenue, with the company even closing operations in Russia (which generated a revenue of $1.8B in 2021), resulting in $1B of asset write-offs and a write-down of the entire Russian business, which was valued at $500M. Pakistan and Ukraine, where they do still have operations, generate significant revenues, even though both have been subject to sanctions, conflicts, and general economic uncertainty.
  • Customer Growth: Despite market turmoil, the company increased subscribers. Pakistan added 8.4 million, Uzbekistan added 1.3M, Kazakhstan and Kyrgyzstan added 0.8M each, and Bangladesh added 0.6M. Overall, the company serves over 150M customers in the various emerging markets.
  • Cash Flow: The net cash from operating activities saw a decrease from $3.6 billion to $1.7 billion. Net cash from investing decreased from $1.4 billion to $0.8 billion. Net cash from financing decreased from -$1.9 billion to -$1.6 billion.
  • Debt: The company’s net debt stood at a hefty $7.3 billion.

Key Financial Metrics:

  • Return on invested capital (ROIC) : (3 year average) ranged from 10% to 11%, this is relatively good for the telecommunications industry. They were unable to maintain the peak levels of ROIC achieved earlier, and have seen some deterioration recently due to reduced margins and performance from some core markets.
  • EBITDA margins: Have seen some fluctuation because of the regional problems, with the global margin in 2022 at around 43%.
  • Revenues: Revenue has stayed relatively stagnant in the past couple of years, as opposed to earlier, where they would experience considerable increases annually. This is due to less expansion in core markets and more focus on maintaining performance rather than growth.
  • Net Income: Net profit is highly volatile, and due to the above issues and impairments, it is negative.

Recent Concerns and Controversies:

  • Russia-Ukraine Conflict: The war has significantly affected VEON’s operations and financials. It has resulted in the loss of revenue from the Russian market which was one of their main markets, along with massive write-offs and a loss on the Russian investment that the company previously enjoyed.
  • Regulatory & Compliance Issues: VEON has been under scrutiny in some regions, particularly after a settlement with regulators for issues of corruption and bribery. This suggests they may be vulnerable to more actions.
  • Emerging Market Risks: VEON’s operations are mostly in developing economies, which inherently come with political risk, economic instability, and currency fluctuations. These factors affect the stability of the company’s earnings.
  • Debt Burden: With a debt of over $7 billion, the interest expenses on the debt may affect cash flow, especially with raising interest rates globally.

Management Perspective: The management acknowledges the challenges and the need to restructure the company to be more competitive in the changing market. While they claim to have a strong balance sheet, they also mention their ability to raise new funding is reliant on continued improvements in their performance. On the Q4 2022 results call they acknowledged having to restructure after divesting its Russian and Ukrainian businesses. The management also seems to believe that the digital transformation push will improve revenue in the coming years and that a streamlined business will help the core ROIC. Management has also stated their plans to improve margins in key areas to improve earnings. The management has stated that one of their major focuses for the next 12-18 months is to reduce debt. They are also implementing multiple initiatives to streamline the operations of the company and to increase profitability.

Moat Assessment

VEON has some characteristics that could provide a moat, but they are not particularly strong or sustainable.

  • Switching costs: High switching costs are an advantage when it comes to mobile services. The hassle and costs of switching telecommunications providers can induce customer lock in.
  • Network effects: They may benefit from network effects in some of its mobile services. As a communication provider, the value of their service grows as more people connect and use it.
  • Scale economies: They have some economies of scale, since they have a large subscriber base in some emerging markets. This can allow to spread fixed costs to generate higher profits in those areas.
  • Limited brand recognition: They don’t have any meaningful brand presence or recognition in the developed markets.

Given the above factors, VEON gets a Moat rating of 2 out of 5. They have some network effects, switch costs, and economies of scale, but it is not really a moat that has the potential to generate consistent high returns for long periods. They have considerable competition and they’re also susceptible to various macro and regional issues. The lack of clear moats limits the stability and the long-term profitability of this company.

Understandability

VEON has a business model of providing mobile, fixed, and digital services in multiple markets. While this mix of services adds some complexity, each component on its own is not difficult to comprehend. There are a few things to keep an eye out for, such as the various licenses, emerging market macroeconomics, local market conditions and regulations, but all of that information is accessible through the company reports. The underlying business operations are not especially hard to comprehend. Thus, they get an Understandability of 4 out of 5.

Balance Sheet Health

With a debt balance of ~$7 billion and significant operating losses, the financial health is under pressure. But they still have a decent amount of liquidity and their debt appears to be manageable. They also have significant non-operating assets, such as joint-ventures, which can be sold in the future, although the sale may not have the impact on overall profitability the management expects. Overall, this leads to a Balance Sheet Health rating of 3 out of 5.

Summary

VEON operates in a competitive and rapidly changing telecommunications industry, and is facing many challenges that are limiting its growth and profitability. They have to deal with the impact from the war in Ukraine, other regional geopolitical issues, accounting issues, as well as regulatory burdens. Their moat is also not strong enough to justify a long-term investment based on its competitive position and profitability. While management is aware of these challenges and are trying to reposition the company, and while it is an interesting business to explore, there is still a lot of uncertainty in the future.