Without Vodacom, Telkom looks in trouble
If you strip out the contribution from Vodacom in Telkom’s interim results to September, it wouldn’t take much analysis to realise the numbers could’ve been much worse.
At an operating level, revenue – one of few positive numbers from the financial highlights – grew by 8,3%. But, when seen in context of a 17% increase in Vodacom’s revenue, the numbers don’t seem that healthy. On the fixed-line side, the slowdown in growth has been there for some time.
Group operating profit totalled R7,3bn (down 4,8%).Vodacom contributed about half the number. Headline earnings per share dropped 15% to 742,3, while net debt jumped by half to R17,7bn. Added pressure is evident in the drop in EBITDA margin to 37,5%. The interim dividend, though, is up to R11 per share (from R9).
Telkom cautioned the market last Monday and blamed the declines on an aggressive marketing initiative, higher depreciation, a stronger rand and increased capital expenditure.
However, a R55m increase in marketing expenses (on total operating expenses of R12bn) is hardly going to knock profitability badly. Bad debts, while a relatively small number, have jumped by 43,5%. An opaque characterisation of “other” selling, general and administrative expenses has jumped by almost 60% to R441m. Employee expenses have actually decreased due to the a marked decrease in benefits paid; essentially the company did not reach certain internal financial targets and employees did not earn bonuses.
At Monday’s presentation, acting CEO Reuben September described the company’s strategy on the fixed-line side as one of “defending and growing revenues”. This follows on from its stated intention at the presentation of its last full year results to focus on growing annuity revenues.
Mobile strategy review
September trumpeted the convergence of data, fixed-line and mobile to drive revenue growth. The review of the group’s mobile strategy, announced six months ago, continues. While September would not be drawn on when this review will be complete, he said that it needed to be finished “as soon as possible”.
Telkom says its talks with Vodafone and MTN are continuing. What’s clear from the numbers though, is that if it disposes of its 50% stake in Vodacom, it will be forced to buy or merge with another mobile operator.
Even though it says “there can be no guarantees that Telkom’s mobile strategy will change or that any change will be successful”, one cannot help but feel that the company has already made up its mind about Vodacom.
One worrying breakdown is in the fixed-line traffic split. It saw a decline, largely as a result of tariff reductions, in local fixed-line revenue (down 22,3%), long distance call revenue (down 14,9%) and slight increases in fixed-to-mobile and international outgoing call revenue. At the volume level though, local call minutes decreased substantially to 7 114m minutes (down 17,8%). Executives blamed this on bundling (consumers typically get “free minutes” with Closer packages) but the company admitted it simply doesn’t know how much of this loss is due to the introduction of these bundled services.
ADSL numbers a bright light
The number of active ADSL subscribers has jumped to 335 112, and over the past few months Telkom has been installing about 20 000 DSL connections per month. It says it is well on track to meet its target of 420 000 ADSL subscribers by March of next year. However, at this point data as a whole only counts for a quarter (R3,9bn) of the fixed-line company’s revenue.
Telkom has decreased the provision made for a payment to Telcordia in order to settle the long standing supplier dispute. It now stands at R441m (from R527m), and the decrease is due to provisional payments made and exchange rate movements.
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