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Telkom 'on the road to recovery'

Nicola Mawson
By Nicola Mawson, Contributor.
Johannesburg, 30 Apr 2015
As Telkom starts to recover, it needs to solidify its position in the market and boost sales.
As Telkom starts to recover, it needs to solidify its position in the market and boost sales.

Telkom, which recently announced sweeping wholesale price cuts as it reverses its previous monopolistic stance, is on the road to financial recovery.

The fixed-line operator, which has been through several turbulent times and is in the midst of a turnaround process that includes more retrenchments, yesterday pointed to continued revenue challenges, but improved normalised profit.

Normalised headline earnings per share - a key measure of profitability - are set to gain 40% to 60% in the year to March when compared to 2014, but will decline between 20% and 40% on a reported basis when compared to 2014's 861c. Telkom explains the normalisation of its profit eliminates the effect of items such as the provision for retrenchment and voluntary service packages of R591 million, as well as tax benefits.

Its trading update was made days after it slashed the price of its wholesale offering, which Prenesh Padayachee, MD of Telkom Wholesale Services, explained was fully expected to aid consumers. Analysts see this move as a reversal of its previous monopolistic stance.

Still a way to go

Brian Neilson, a director at BMI-TechKnowledge, says Telkom's figures show an improvement that is not just surface-level, because it is only when the once-off retrenchment costs are factored in that the numbers look poor. He adds Telkom is intimating that, once the cost is through the system, normalised profit performance will remain at the new, higher level.

However, Telkom noted its current round of restructuring was taking longer than expected to wrap up as it had experienced delays in trimming its staff and renegotiating certain key contracts. Neilson says, as Telkom is a mature business, profits have to be managed through cost containment rather than organic revenue growth, although if Telkom successfully buys Business Connexion, that "could bode well for some revenue growth in future".

Ovum analyst Richard Hurst adds Telkom is a massive entity and any changes will have to go deep. He notes the operator is focusing on the fundamental facets of its business: reducing its head count, leveraging is existing assets and those of its partners, and reducing its cost to operate while improving efficiency and customer service. "I think that Telkom saw the light, in terms of financial and survival issues, some time ago but has been hamstrung by regulatory issues and government interference in being able to implement any strategic change."

Africa Analysis MD Dobek Pater says Telkom's improvement is slow, and it has a "considerable way to go to become more cost-efficient and create a strong platform for future growth". He notes Telkom has been aware of its financial situation for a number of years, and has been working on improving it, but does need to focus on profitable areas of the market.

Despite the improvements, Neilson notes Telkom's share price dropped 3% yesterday, which suggests unhappy investors. However, he says, the decline could be transitory, considering the stellar performance of the share price (from about R15 to R85) since 2013.

Mobile gains

ICT commentator Adrian Schofield says, at first glance, revenue improvement is limited to the mobile business, which seems to have undergone a "significant" turnaround after being a drain on the business, as other improvements come from reduced expenses, mainly related to human resources.

Neilson adds Telkom notes its mobile business has performed quite well. Telkom Mobile delivered a "commendable" performance driven by subscriber growth and higher average revenue per user. "But we still need to see actual numbers, as they are coming off a very low market share base here."

Schofield says the name of the game now must be sales - to boost fixed-line sales (ADSL still offers the best speeds), fibre connections and keep the new momentum on mobile going.

Pater adds growing competition is beginning to exert pressure in the broadband space, with fairly quick long-term evolution deployment and fibre-to-the-home beginning to happen on the back of fibre-to-the-business. "The landscape will look very different in a couple of years' time, therefore, Telkom needs to try and solidify its position in the market while it is still a large player."

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