Telkom's repositioning gathers momentum
In delivering the Telkom Group,s interim results today for the six months ended September 30, 2009, Group CEO, Reuben September, emphasised that despite deepening challenges, the commitment of his leadership team to "re-position Telkom to aggressively compete in the South African and African markets is gaining momentum".
"Competition is impacting Telkom's revenue generation and, as a result, Telkom is re-engineering its business into leaner, more flexible business units, developing new revenue streams through mobile services and data centre operations and creating opportunities for cost reduction. These initiatives take time and incur upfront costs," stated September.
He added that the current strategy to re-position the Telkom Group is imperative given "the tough operating environment". "The impact of competition and the weaker economic environment are evident in the Group's financial results," added September.
Group salient features for the six months ended September 30, 2009 include:
- Vodacom transaction accounts for profit of R40.4 billion.
- Impairment of Multi-Links goodwill of R2,148 million.
- Operating revenue up 4.0% to R18.7 billion.
- Headline earnings per share from continuing operations decreased by 37.9% to 242.2 cents.
- Basic earnings per share decreased 141.2% to a loss of 150.2 cents per share.
- Group EBITDA margin decreased to 27.3% from 32.3%.
- Total dividends paid out during the reporting period of R11.2 billion.
- Net debt reduced by R8.7 billion decreasing annualised net debt to EBITDA from 1.4 times to 0.8 times.
- Group restructuring into distinct profit centres is 85% complete.
- New data centre operation business unit – navbar-branded as Cybernest – launched.
- 51.1% increase in Do Broadband subscribers.
In addition, the adjusted operating profit dropped by 28.2% while profit from continuing operations dropped by 21.9%. Furthermore, group operating expenditure grew 12.0%.
Headline earnings from continuing operations decreased by 37.9% to 242.2 cents per share as a result of increased operating expenditure in Telkom South Africa and the corporate centre, partially offset by higher revenue. Basic earnings per share decreased 141.2% at a loss of 150.2 cents per share for the six months ended September 30, 2009, compared to earnings of 364.5 cents per share at September 30, 2008. The reduced basic earnings per share can mainly be attributed to the impairment of the goodwill of Multi-Links.
Annualised return on assets before taxation decreased from 17.4% to 12.9% due to the lower operating profit and a lower asset base excluding cash balances.
Data revenue, however, showed steady growth of 8.7% despite increased competition. "With regard to data, we are focusing on differentiating our service by creating value propositions that include completeness of offer, simplicity and convergence. The scope and quality of our data services is unmatched largely because of our enormous redundancy and the ubiquity of our Next Generation Network," said September.
Continued competitive pressure in the voice market has seen declines in our traffic revenue streams. This was largely attributable to Telkom's drive to offer significant value through products, managed network services and virtual private networks.
"The negative effect of fixed-to-mobile substitution is starkly highlighted in the 9.0% decrease in Telkom South Africa's traffic revenue. This continuing trend justifies the imperative for our Group to enter the mobile market," said September, adding that Telkom is focusing on growing other revenue streams to compensate for the decline in fixed-voice revenues.
"We are expanding into other geographic markets and into other domestic markets, such as our data centre operations and mobile strategies. We are improving our execution in current growth markets." explained September.
Annuity revenues grew 6.1% and the line penetration for Closer packages is up from 41.9% (March 31, 2009) to 47.8%. Telkom Closer and Supreme Call subscribers have grown 25.2% and 11.9% respectively. "This tangibly demonstrated that Telkom's defend and grow strategy is firmly on track," stated September.
With regard to the recent announcement of a reduction in peak interconnection rates from 125 cents to 89 cents, September said that Telkom will pass significant benefits of the cut in mobile termination rates directly to the consumer. He added that interconnection revenue had increased 52.5%.
In addition, ADSL and Do Broadband subscribers increased 22.6% and 51.1% respectively from the concomitant reporting period last year. Broadband penetration as a percentage of residential post-paid lines currently equals 17.5%.
"We continue to make every effort to increase the bandwidth available to our customers and are currently negotiating a triple play partnership in order to provide our customers with enhanced content. We have signed agreements with two partners for our gated community initiative, the benefits of which we expect to start showing in the 2010/11 financial year," said September.
He emphasised that prudent cost management remained a priority, with the target being to reduce operating expenditure by approximately 10% by the 2011/12 financial year.
"Telkom Renaissance and the associated re-organisation into three customer focused business units have allowed us to improve profit and loss accountability throughout the Group. It is also allowing us to more easily identify potential cost savings," said September.
He explained that expenses were expected to increase in the short term as a result of the re-organisation of the business units, clean up of inventories and costs associated with increasing under-sea cable capacity and provisioning for the 2010 FIFA World Cup™.
"We have specific Renaissance work streams concentrating on service delivery remodelling, business process re-engineering and have identified the major cost saving opportunities within our wholesale and networks division. The roll-out of our wireless network will enable us to provide connectivity in a more cost effective manner," added September.
Telkom's mobile business plan was approved during the reporting period under review. "We estimate that the capital expenditure required to implement mobility will be a maximum of R6 billion over 5 years," stated September.
He added that Telkom is currently negotiating innovative financing structures with its suppliers in order to potentially reduce its capital investment in favour of operating lease-type payments which include technology renewal. Arrangements regarding co-location and sharing are also in the process of being negotiated. The latest technology combining both 2G and 3G composite technologies, which significantly reduce inter-operability costs, will be employed.
Furthermore, 8,744 W-CDMA subscribers were moved onto Telkom's W-CDMA network and provided with a mobile data service and fixed look-alike products, particularly in those areas hard hit by copper theft. "Competitive sensitivities prevent us from disclosing further information about our mobile plans at this stage," said September.
With regard to the Data Centre business unit, September emphasised that Telkom's move into data centre operations - highlighted by the formal launch of the Cybernest navbar-brand offering in Bellville, Cape Town, last week is evidence of Telkom’s drive to grow and diversify its revenue streams and take costs out of its current operations.
Providing data centre services is a natural progression for a telecommunication provider up the value-added IT service chain and Telkom is uniquely placed to offer significant value to customers in this area. International demand for data centres exceeds supply in the region of 6:1.
Telkom's proven track record indicates that we have the required stability, reliability and flexibility to succeed in the data centre environment. The Company has also ensured that the latest of its six data centre facilities, Bellville 2, complies with the best in class "green" infrastructure and operating principles which will enhance the attractiveness of Cybernest’s service offering.
"The current economic downturn is creating opportunities as firm's look to cut costs," explained September.
Despite trading conditions being tough as a result of local economic factors, pricing pressures, the relative strength of the reporting currency (the rand) against the Nigerian Naira and newly established distribution channels that are still in their formative stage of development, the Nigerian Multi-Links operation has started to show steady improvements, although it remains our major challenge.
Improvements are indicated by the monthly revenue growth that continued its upward trajectory having exceeded the 3 billion Naira level for the first time and has continued to do so for both August 2009 and September 2009. Revenue has continued to remain above this new level for the first month subsequent to the period under review. Second quarter revenues increased by 41% over the first quarter as various initiatives, including international carrier services, have come to fruition.
A key focus area in Nigeria continues to be the provisioning of an extensive fibre network for future benefit and good progress has been made in this regard over the last six month period, albeit under a significantly reduced capital expenditure programme.
Active voice subscribers increased 29.6% compared to September 30, 2008. ARPU has decreased to USD 7 from USD 12 at March 31, 2009 (excluding non-revenue generating subscribers) but the medium term ARPU target of USD 10 is still possible.
Data (EVDO) subscribers show an increase of 615.7%, at March 31, 2009 and are generating 30 USD ARPUs. EVDO revenues are now exceeding narrowband data revenues. Fixed data customers increased 24% for equivalent 2 megabit circuits representing four wholesale operators and five corporate clients.
However, operating expenses increased by 35.4%. Employee expenses increased to 1,138 million Naira as strategic staff were recruited. However, Multi-Links is currently undergoing a headcount rationalisation including outsourcing of non-core activities. Payments to other operators increased by 6.6% as a result of increased outgoing minutes. These additional minutes were primarily driven by the new revenue stream of international carrier services. This business is expected to open new revenue streams for Multi-Links. Selling, general and administrative expenses increased 15.3% as a result of increased maintenance costs, marketing and expatriate fees.
Operating leases increased by 150.5% as a result of the increased utilisation of leased infrastructure as opposed to owned, specifically as it relates to cell sites. This translates to significant capital expenditure savings. Further savings, to date, have been realised from contract renegotiation with other benefits and other cost reductions realised from the management of staff costs.
Depreciation, amortisation, impairments and write-offs increased significantly due to the high investment in IT assets to support the expansion programme and the network roll out during the period.
Multi-Links' results to the six months ended September 30, 2009 produced an EBITDA loss of R164 million and a negative 20% EBITDA margin. However, the monthly trend of the EBITDA margin is on a positive trajectory.
September stated that the integration of Africa Online and MWEB Africa is proceeding well and that he looked forward to the completion of all due processes so that the integrated management team can proceed with growing the business.
With reference to Group guidance, capital expenditure for the Group is expected to range between 20% and 23% of revenue over the next financial year, including the first year impact of Telkom’s mobile investment. The targeted ceiling of net debt to EBITDA is aimed at a maximum of 1.4x.
Looking ahead, September emphasised that he remained confident about the strength inherent in the fixed-line network, the Telkom Group's business leadership and operations skills of Telkom’s employees. "These considerations will allow the Group to offer our markets simple, quality, cost effective services that will be competitive in our markets," concluded September.