Whose line is it anyway?

Telkom’s ominous prediction – made several years ago – that a second operator could take away as much as 15% of its market share, is becoming reality.

The ailing fixed-line operator saw its subscriber base shrink by 180 000 lines between September 2011 and this year, while Neotel added more than 30 000 users during the same period. The second national operator currently holds 6% of the fixed-line market.

Telkom this morning said its total installed base declined year-on-year by 4.4%, to 3.89 million, and it again said traditional voice revenues were under pressure. Data, which gained 3% in revenue and 5.8% in subscribers, failed to offset the slowdown in voice.

Turnover was 1.5% lower, at R16.5 billion, while group operating expenses increased 1.6%, to R15.6 billion, most of which was due to the group’s fixed-line business, where voice revenue continued to slow. However, the group reported a R222 million profit, slightly lower than last year’s R233 million, but an improvement on the R179 million gain it made from continuing operations at year-end.

Telkom says its future performance hinges on its ability to address several key issues, including filling an execution capability gap, resolving the future of the fixed-line business, an inappropriate termination rate regime, a rigid cost structure, regulatory obligations, and government engagement.

Declining trend

Telkom says its results reflect the tough environment faced by fixed-line incumbents. The key factors affecting its performance included a decline in voice revenue, a 3% growth in data, infrastructure competition, and increasing costs. It says while its mobile business is on track, challenges remain.

Telkom has lost 181 000 fixed-line subscribers over the past year, while competitor Neotel recently said it grew consumer customers 30 000 in six months, to reach a base of 130 000, while enterprise gained 18%, to 2 400.

8ta, Telkom’s mobile arm, added R898 million – or 5.6% ? in revenue but incurred expenses of R1.65 billion and made an earnings before interest, tax, depreciation and amortisation loss of R587 million.

Frost & Sullivan says Telkom experienced a marked increase in data subscribers and revenues, and saw an increase of more than 46 000 ADSL subscribers.

Despite the increase, Telkom continues to face challenges as its fixed-line subscribers continued on a downward trend, recording a 10.2% decrease in voice usage and a decrease of 181 000 fixed-line subscribers, says Frost & Sullivan.

Revenue from voice use dropped to 27.3% in the first six months of the year, from 30.9% a year ago, while voice subscriptions gained some ground, from 23.3% of turnover to 23.9%. Fixed-line data now accounts for 32.3% of Telkom’s income, up from 30.9% last year.

Profit before tax came in at R547 million, some R523 million, or 48.9%, lower than the first half of last year, due to salary increases, lower fixed-line revenue and the provision for a fine. These issues were partially offset by lower mobile termination rates and no impairment charge.

Telkom was this year fined R449 million for abusing its monopoly between 1999 and 2004, but has lodged an appeal against the fine.

Under pressure

Telkom’s short-term priority is to focus on its business and ensure management stability, says outgoing CEO Nombulelo “Pinky” Moholi. The group has recently seen several top-level resignations and has replaced a number of board members, including former chairman Lazarus Zim.

Moholi states, in the results presentation: “Telkom is engaged in constructive dialogue with its key stakeholders to chart a more successful way forward. Strategically, Telkom has reached a pivotal crossroad.

“While we anticipate government providing an understanding of the policy direction, we remain focused on achieving our current business strategy.”

Earlier this year, the state nixed a proposed R3.3 billion investment in the group by KT Corporation, which would have seen the Korea-based entity buy 20% of Telkom.

The group says its strategy is to achieve “leadership” in data and convergence. It says it wants to grow Telkom Business revenue by diversifying its service portfolio, regain market competitiveness in the consumer segment, consolidate its position as a wholesaler of choice, enhance operational efficiency, and focus on profitable market segments and services.

Infrastructure investment

Operational and managerial priorities to support improved execution includes completing transformation to an all IP-enabled network, building a differentiated mobile network, rolling out high-speed broadband network, as well as improving cost-efficiencies.

The group invested R1.6 billion in capital expenditure, excluding its spend on 8ta, of which R276 million went into converting its network to IP, and R1.3 billion was spent on its existing telecoms and IT networks, while R521 million was invested in 8ta.

Telkom expects to spend between R18 billion and R21 billion over the next three years and ended the period with a cash balance of R4.8 billion and net debt of R2.7 billion.

Moholi says Telkom is determined to strengthen its competitiveness, improve its operating model, and manage its financial resources carefully.