On the face of it, Telkom’s capital expenditure plans for the next three years are either very brave, or very stupid.
During the next year, capex will range between 20% and 25% of its revenue. Between the 2013 and 2015 financial years, Telkom is planning capex (including its mobile investment) of between R18bn and R21bn. Its current market cap? R10.4bn.
There are a few things Telkom has going for it. Group CFO Jacques Schindehütte reminded analysts and the media Friday that Telkom remains profitable. It has strong cash flows (free cash flow of R2.1bn in FY 2012). Its net debt to earnings before interest, taxes, depreciation, and amortisation (Ebitda) is at 0.5 times, which it says it could increase to 1.4 times (if the markets allow). And it has cash reserves of R2bn (which would’ve been far larger if money wasn’t squandered in Africa).
Realistically, Telkom really has no other options but betting on data.
Fixed-line voice is a declining market and Moholi says this is precisely the reason the operator decided to go it alone and build out a mobile network. Without a mobile future, revenues will keep evaporating.
It also cannot compete in the traditional mobile space because, as Schindehütte (who’s also acting MD of the mobile business) reminds everyone, your “ability to compete strongly with Vodacom and MTN is linked to [the size of] your on-net base” because of interconnect. The real margin exists on your on-net calls. “This is a race we will lose”.
Its legacy network (which is often its Achilles heel) is still unmatched by any other operator. It’s this “legacy” fixed-line network that’s allowed it to build out a significant mobile network in little over two years. 1 849 base stations were built, as at May 31, with 1 316 of those sites live. This does not seem significant when compared to MTN and Vodacom’s networks, but all of Telkom’s mobile sites are 3G enabled. And the difference is Telkom is building a data network (and doesn’t have legacy 2G equipment to deal with).
CEO Nombulelo “Pinky” Moholi, Schindehütte pointed out Friday, reminds her team often that there is little difference between building a fixed network and a mobile one. And there isn’t. The complexity and cost isn’t at the base stations or towers, the real demand is on the backhaul layer (the part that even rivals use Telkom for).
It’s refreshing to see a strategy as clear and determined as this from a company which has made almost tragic missteps over the past five years. It’s playing to its strengths (versus spending billions on a market it didn’t have experience in, in a country it didn’t have experience in). Telkom, Moholi says, will lead in data/broadband and fixed-mobile convergence.
All investments from this point on will be “datacentric”. Everything.
Telkom wants to grow its (fixed) data and mobile revenues from a combined 34% currently to 50% of total income in the next four years. This is a big needle to move. The traditional voice business (36%) will be defended as well as possible, with the company continuing its push to move this to annuity/subscription revenue (currently 21%).
There are promising signs. The 8ta/mobile network build-out continues apace. And the speeds, quality and pricing of data services are difficult to match. Entry-level ADSL speeds are being increased to a minimum of 1024kbps. And it’s aiming (very ambitiously) to install 90% of all new ADSL orders within seven working days (obviously subject to areas where it already has service). “We are not” at the moment, admits Moholi. And it’s piloting high-speed ADSL (up to 40mbps) as well as targeted fibre-to-the-home services. Just 24 months ago, it was largely unthinkable that Telkom would be committing to services like this.
But there are risks. Lots of them.
“We have to win in mobile,” Schindehütte drummed home.
Also, the numbers in its traditional business (especially in lucrative leased line annuity revenue) are increasingly concerning.
There will be a cash shortfall in the year ahead which the company will need to fund of somewhere between R2bn and R3bn. “But there’s certainly not reason to panic,” says Schindehütte.
“The margin of error is smaller”.
That margin is so small and the transformation required over the next three years so large that Telkom is literally betting its future on it.
I know where I’d put my money.
The whole of South Africa (this goes far beyond just a few million customers) needs to hope and pray Moholi, Schindehütte and the rest of the excellent management team she’s assembled get it right.
*Hilton Tarrant contributes to “Broadband”, a column on Moneyweb covering the ICT sector in South Africa. Repeat after him: For the sake of South Africa, Telkom has to succeed.