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Telkom’s fixed voice decline intensifies

By , ITWeb's news editor.
South Africa , 22 Jun 2020

Faced with a massive decline in fixed-line revenue, Telkom has posted R43 billion revenue, largely spurred by its mobile business segment.

This emerged from the JSE-listed company’s annual results for the year ended 31 March, published this morning.

The results follow last week’s market update by the telecommunications company that it was expecting a massive fall in earnings as a result its restructuring programme, the decline in fixed voice revenue, as well as the impact of COVID-19 on the business.

Telkom group CEO Sipho Maseko.
Telkom group CEO Sipho Maseko.

In its results, Telkom says group revenue grew 3% to R43 billion despite a 22.2% decline in fixed voice revenue.

When Telkom issued its interim results in November last year, CEO Sipho Maseko said profitability was being affected by deep investments in future growth.

“Telkom has enjoyed the benefits of copper over the last 30 years. It has served us well. Now, we are investing in technology that will power Telkom for the next 30 years,” Maseko says.

According to the telco, the ongoing capex investment enabled it to grow new revenue streams and showed growth in evolving technology, offsetting the traditional business decline.

Mobile push

It explains that mobile, information technology as well as masts and towers contributed positively to group revenue.

Capex of R7.8 billion, with capex to revenue of 18%, underpins revenue growth, the company notes.

“We focused our investment programmes on key growth areas and we are seeing good returns, with mobile service revenue increasing by 54.4% and the connectivity rate for fibre-to-the-home improving from 38.4% in the prior year to 48.2% in the current year – the highest in the market,” says the telecommunications company.

It adds that the mobile business grew 54.4% in service revenue from a higher base to R12.6 billion to remain the fastest growing mobile business in South Africa with 12 million customers.

“This was underpinned by our ongoing network investment and successful broadband-led propositions, which continue to resonate well with customers.

“Despite ongoing competitive threats with changes implemented by our competitors in the mobile space, our broadband-led propositions are market leading, being best in class for value and effective pricing. The mobile business remains profitable, with its EBITDA [earnings before interest, taxes, depreciation and amortisation] margin improving from 1.4% to 14.9% over the past three years,” the firm says.

On a reported basis, Telkom’s mobile EBITDA margin for the year ended 31 March is 18.6%.

It points out that the BCX IT business – an underperformer over the years – contributed positively to group revenue, despite the challenging economic environment BCX operates in.

According to the operator, the BCX performance was supported by the drive to grow the industry-specific owned intellectual property.

Telkom says the strategy to separate its property and mast, as well as tower portfolio, to increase management focus and unlock value for the group continues to be successful.

Business unit Gyro contributed positively to the group revenue, driven by the mast and tower portfolio as the demand for external leases increases.

Fixed obstacle

Nonetheless, Telkom points out that the challenge for the year was the impact of fixed voice revenue on group EBITDA as the decline intensified.

The growth in new revenue streams was not sufficient to offset the decline caused by high margin fixed voice on group EBITDA.

“Over time, as the revenue mix evolves, we expect the contribution from the fixed voice revenue to reduce and the contribution from the mobile business, with improved EBITDA to increase and offset the impact of fixed voice on group EBITDA. Until the inflection point, management will focus on sustainable cost management to protect the profitability of the business,” says the company.

Group EBITDA decreased by 8.7% to R10.3 billion, with an EBITDA margin of 24%. Telkom points out this is attributable to the change in the revenue mix as high margin fixed business is replaced by new revenue streams at lower margins.

Reported headline earnings per share decreased 66.4% to 208.1c per share and reported basic earnings per share decreased 78.4% to 121.1c per share impacted by once-off costs relating to voluntary severance package and voluntary early retirement package costs, COVID-19 and a higher effective tax rate.

Notwithstanding the impact of fixed voice revenue on group EBITDA, the group says, management contained the growth in operating expenses at below inflation as the benefits of the headcount restructuring programme implemented in the previous year were realised, despite an average annual salary increase of 6% implemented on 1 April 2019.

Direct expenses relating to mobile business were optimised from 52.6% direct cost to revenue ratio reported in the first half to 44.3% in the second half of the year, resulting in improved mobile business profitability.

The board declared final ordinary dividend number 26 of 50.08410c per share. This follows an interim dividend of 71.52636c per share in the interim results. This takes the annual dividend for FY2020 to 121.61046c per share (FY2019: 361.54461c per share).

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