Telkom under pressure
A competitive market and challenging regulatory environment have contributed to Telkom’s difficulties in the last six months. However, the launch of 8.ta, Telkom’s new mobile service, is anticipated to retain and expand Telkom’s customer base while growing revenue for the company.
Telkom released its interim results for the six months ended 30 September 2010 today, revealing a 5.3% decrease in normalised headline earnings per share from continuing operations to 265.7 cents per share. Group operating expenditure declined 6.3% to R15.1 billion, primarily due to a decrease in payments to other operators.
This was partially offset by an increase in employee expenses. Costs continue to be Telkom’s Achilles’ heel. While there are necessary costs such as those associated with the launch of 8.ta, cost reduction is a focus area of the group to ensure sustainable, long term benefits for Telkom.
“Although the fixed retail segment is declining, Telkom still enjoys a dominant position in the consumer retail segment, a position that it is expected to enjoy in the long term. Furthermore, Telkom’s data offering continues to grow,” says Frost & Sullivan ICT industry analyst Spiwe Chireka.
“The challenge is how the company will manage fixed mobile replacement. The much needed launch of 8.ta will be key to bolster the company’s consumer subscriber base.”
The arrival of Seacom has not had a significant impact on Telkom’s virtual monopoly on global connectivity. The wholesale segment for Telkom will continue to thrive in the short term despite challenges in its retail segment. “Wholesale offerings will continue to be the bread and butter for Telkom in South Africa, says Chireka. “Neotel is yet to emerge as a significant competitor to Telkom and while the mobile operators have started to invest into their own backbone infrastructure, Telkom’s expansive network will be its key competitive advantage. Its network will garner some revenues and Telkom will continue to enjoy its dominant position in the telecoms sector.”
Leadership issues within the company are likely to manifest in its current results reporting. “Typically, with a change in leadership, comes a change in focus and this may impact the company’s ability to achieve its short term goals,” comments Chireka. “However, so far so good, as Telkom has managed to launch 8.ta within 2010 despite the leadership uncertainties. The real challenge is whether 8.ta will give Telkom the boost that it needs,” she says.
Chireka notes that Telkom’s pan African ISP, Africa Online, has failed to impress on the company’s books. “This is because ISPs generally in Africa have not emerged as formidable challengers to the mobile and fixed line incumbents due to their inherent disadvantage of not being able to own their own networks. As a result, while they are growing, the revenue and subscriber contributions remain relatively poor.” Explains Chireka.
In addition, the decrease in interconnection fees, and subsequently tariffs, is expected to continue exerting pressure on the company’s top and bottom line in South Africa. Chireka points out, “Interconnection rate cuts will impact the company and as a result, will eventually affect Telkom’s revenue streams, similar to that of other mobile operators.”
Telkom South Africa’s fixed line voice revenue declined 19.1% to R6.9 billion over the reporting period. This was attributed to a drop in mobile termination rates from R1.25 per minute to R0.89 per minute. The fixed-line penetration rate in the country also dropped from 1.9% to 0.3% while data revenues increased 14.9% to R5.6 billion.
“Competition in the South African market has become cutthroat, especially due to the new licensing regime and the growing trend by mobile operators to infringe on Telkom’s territory,” Chireka notes. “Neotel is also slowly but surely gaining momentum. Telkom therefore needs to start bolstering its African operations and do so soon. The rest of Africa is still a potentially lucrative growth area for the operator, but opportunities are fast becoming scarce.”
Multi-Links continues to bleed the company year after year. Chireka believes that while the pressure is on for Telkom to dispose the asset, there is still room for turnaround of the company. Telkom’s Nigerian operations reported a decrease in operating revenue of 1.7% to 15,065 million Naira for the year and subscriptions and connections revenue decreased 18.2%.
“Multi-Links has an expansive, well developed network, in particular its fibre optic network which Telkom has not utilised fully to its advantage until lately,” Chireka says. “Telkom must make sure it gets things right with Multilinks because from its current portfolio of companies (excluding South Africa), Multilinks holds the largest potential to make Telkom’s pan African operations strategy successful”.
Chireka believes that enterprise data services in the rest of Africa is an area that is grossly underserved and provides a niche for Multi-Links. “Telkom, through this subsidiary, can start to garner additional revenues. However, this is pointless if the company does not bring the costs of Multi-links under control and does so, very quickly.”
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