Johannesburg, South Africa – 17 November 2014, Telkom SA SOC Ltd (JSE: TKG) today announced Group interim results for the six months ended 30 September 2014.
The operating environment has been challenging over the past six months. The telecoms industry remains very competitive and as a result, margins are under strain, particularly in the enterprise segment. Fixed-line revenues also remain under severe pressure and leased line revenues continue to decline.
Our customers are also feeling the effect of the adverse economic environment and are adjusting usage and purchasing patterns. Telkom’s good reputation and relationships have served us well in retaining key customers, however, discounts are deeper owing to competitive pressure.
Our transformational strategies, which began in 2013, are still on track, and our results for the first six months of the 2015 financial year confirm our continuous intent of stabilising the business for future growth.
Net operating revenue of R13.3 billion or 1.6% higher was stable despite the tough economic and operating environment, competitive pressures and a customer base seeking better value for money. Over the period, Group fixed-line voice revenue and data leased line revenue continued to decline, the latter as a result of self-provisioning by other licensed operators, which was partly offset by higher mobile revenue.
Customer service is a strong priority across all areas of the Group. Our efforts and progress in this regard are evidenced by the achievement of the best compliments to complaints ratio in the industry in the HelloPeter telecommunications league table, as well as being recognised as the best fixed and mobile broadband providers at the 2014 MyBroadband forum. These awards are based on services offered and innovation in the broadband space.
Group operating expenses remain an area of focus as we address our entire operating cost base extracting efficiencies as well as improving our ability to respond to an evolving industry. As part of our multi-year cost transformation programme, the focus has been to reduce all costs including employee , marketing and security costs. We also decreased our number of leased vehicles. Operating expenditure, excluding depreciation, decreased by 2.4% to R9.2 billion. This was largely due to a R199 million reduction in employee expenses relating to lower service and interest cost as a result of the lower post-retirement medical aid liability and a lower headcount.
Group EBITDA improved 12.1% to R4.4 billion, with a consolidated EBITDA margin (excluding one-off items) of 27.7%. The mobile business produced a solid performance with EBITDA improving 50.7% from the prior period. We expect to realise our operating margins as cost savings linked to our various initiatives begin to filter through.
Our capital structure remains strong as we continue to take a measured approach to our capital expenditure programme with a focus on returns. In this regard, we continue our focus of extracting efficiencies from our assets and liabilities. This has resulted in a significant increase in free cash flow to R1.7 billion. Over the next six months, we will continue rigorously focusing on project selection, concentrated roll-outs and relevant technology deployment, and expect an accelerated capital expenditure over this period.
We are aware of the significant challenges that lie ahead for the next six months, including the continuous decline in voice revenue, self- provisioning by other licensed operators and the need to improve our service offering.
We remain determined to successfully execute our strategy by focusing on the following priorities and enablers in the near term:
Given our performance in the past six months, we are still committed to our financial guidance, but remain cautious of the negative economic headwinds.
Subject to the financial performance of the Group, the operating environment, growth opportunities and debt and cash levels, the Board intends to reinstate a dividend for the 2015 financial year.
We continue to work with the regulatory authorities in respect of the acquisition by Telkom of the entire issued share capital of Business Connexion Group Limited. The salient dates relevant to the proposed transaction, as previously announced, are no longer applicable as relevant regulatory approvals are still being obtained. We are pleased to confirm that the Botswana Competition Authority recently concluded its investigation and approved the transaction without conditions. Shareholders will be informed if and when all the relevant regulatory authorities approve the proposed transaction, and revised salient dates will be announced accordingly.
We have also been in discussion with MTN South Africa regarding the extension of our existing roaming agreement to include bilateral roaming and outsourcing of the operation of our radio access network. Our agreement with MTN, if approved by the Competition Authorities, improve the capabilities of each operator to compete at the wholesale and retail levels; and will allow for the footprint of both parties to increase. Both operators will have access to significantly larger voice and data capacity, at lower cost than would otherwise have applied. The objective is to improve our position in the mobile market and allow Telkom to compete with much larger and stronger competitors. Although this is not a complete solution for our mobile business, it represents a step in the right direction.
As previously communicated, our aim is to successfully conclude the proposed MTN South Africa and Business Connexion transactions within the current financial year.
Shareholders are referred to the various cautionary announcements published on the Stock Exchange News Service of the JSE Limited, the last of which was released on 10 October 2014.
Shareholders are further advised that Telkom and MTN South Africa remain in discussions regarding the potential extension of their existing roaming agreement to include bilateral roaming and outsourcing of the operation of Telkom’s radio access network, which if successfully concluded may have a material effect on the price of Telkom’s securities. The parties will update shareholders as soon as they receive the appropriate legal and regulatory approvals.
Accordingly, shareholders are advised to continue exercising caution when dealing in Telkom securities until a further announcement in this regard is made.
The guidance provided below excludes the impact of the successful conclusion of the MTN and Business Connexion transactions discussed above.
2015 |
2016 |
|
|---|---|---|
| Net revenue | Stabilise to grow | Stabilise to grow |
| EBITDA margin | 26% - 27% | 27% - 28% |
| Capex to revenue | 14% - 17% | 14% - 17% |
| Net debt to EBITDA | ≤ 1 | ≤ 1 |
| *Our intention is to reinstate dividend for the 2015 financial year | ||
| * In terms of dividend considerations
stated above. The information above has not been reviewed or reported on by our auditors. |
||
In line with the Group’s convergence strategy, key performance indicators are measured and evaluated on a Group-wide basis. The Group therefore consists of one operating segment.
However, this report provides further details of the fixed-line business which offers fixed-line access and data communication services through Telkom South Africa and the mobile business which offers mobile voice services, data services and handset sales through Telkom Mobile. The contribution of the subsidiaries, Trudon and Swiftnet, is also shown separately. The Telkom category represents Telkom Company’s contribution to the Group, including consolidation entries.
The comparative information for September 2013 has been restated as a result of the reclassification of iWayAfrica as a discontinued operation and to account for the change in accounting policy regarding the Cell Captive. Refer to note 2.3. in the condensed consolidated provisional annual financial statements.
In addition, the following items in the comparative reporting period have been reclassified to provide more relevant disclosure:
The Group recorded a profit after tax of R1.2 billion (September 2013: R3.0 billion). This is significantly lower than the previous year and was driven by a one-off R2 173 million net gain recognised on the curtailment of the post-retirement medical aid liability included in the comparative reporting period as well as retrenchment, voluntary early retirement and severance package costs of R325 million for 406 employees in the current reporting period.
The Group recorded a normalised profit after tax of R1 390 million (September 2013: R791 million) and EBITDA of R4 403 million (September 2013: R3 927 million), resulting in a 14.9% increase in headline earnings per share. The increase was driven by the benefit from lower payments to mobile operators and lower employee expenses due to lower service and interest cost as a result of the lower post-retirement medical aid liability, which was curtailed in the prior period as well as lower full-time and part-time staff headcount.
We managed to reduce the EBITDA loss in of our Mobile operations by 50.7% by increasing service and subscriptions revenue (excluding equipment sales) by 48.0%. We also recorded promising growth of 39.3% in mobile data revenue and 23.3% in IT Business services revenue. Data revenue now constitutes approximately 34.2% of Group revenue, which increased 0.5% from the prior reporting period. However, we still face significant challenges in our fixed-line voice revenue as fixed-to-mobile substitution continues. Fixed-line data revenue continues to be impacted by lower pricing driven by competition.
We managed to reduce operating costs by 2.4%. This reduction was largely driven by lower employee, marketing and security costs and a decrease in the number of leased vehicles. Increased bad debts and property management costs partly offset these savings.
The Group generated strong cash flows as we took a measured approach when considering capital investment as well as focusing on managing our balance sheet more efficiently. This resulted in a healthy capital structure with net debt decreasing by 74.1% to R 545 million at 30 September 2014.