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Telkom in for rough ride


Johannesburg, 24 Jun 2009

Telkom's bottom line is facing stagnation and the company says it knows it has significant work to do in the coming year.

At its results presentation yesterday, Telkom explained it has embarked on a group-wide cost-cutting exercise to promote profits. However, CFO Peter Nelson says: “We can't just save costs to claw our way out of the difficulty we are [in].”

Telkom saw a marginal rise of 3.3% in total fixed-line revenue and a decline in network traffic of 3.9%. While this was expected, the company also saw a dramatic drop in EBITDA margins, from 36.3% to 25.8%.

The only two significant boosts for the business were its data revenue increase of 12.1% and interconnect revenue increase of 18.6%. Telkom has been slowly pushing up its annuity-based revenue, which reached an increase of 6.8% and now constitutes around R7.4 billion.

Telkom CEO Reuben September says the company's focus will be to defend and grow over the next year, with a particular focus on increasing network traffic and harnessing interconnect revenue. “We are clear about winning profitable traffic back to our networks.”

He says Telkom's new mantra is: “Free sustainable cash flow and a reduction in capital expenditure.” Globally, large telecoms businesses are facing declining margins and struggling to increase network traffic. Many are trying to streamline and cut costs.

According to Nelson, the company is no exception to this. Last year, the company planned to start outsourcing parts of its business to help it cut down on bulk. However, union protests and the coming 2010 Soccer World Cup held the plans at bay.

Nelson says the outsourcing plans have not been completely forgotten and may still go ahead at some stage in the future. “We have to be sure of the business plan before we make any decisions in that regard.”

Mobile aspirations

Telkom will also focus its attention on several new business areas that it hopes will help boost growth. The first is accessing the mobile space, a market Telkom has been kept out of because of its ownership in Vodacom.

September says it will only go into the market where it makes sense, and the company has been engaged in an industry analysis for some time to ascertain how it can enter the market. It already has a nomadic wireless solution that was initially aimed at combating copper theft, which has also formed part of an experimental trial into fixed mobile services.

Telkom will also move more aggressively into data centre services. The company recently created a business unit to manage this. However, it has not yet announced an MD for the unit.

Telkom chief of strategy Naas Fourie says Telkom's data centres do not yet have a significant number of clients; however, those clients it has attracted are large-income clients. Fourie explains that, while Telkom has R2.4 billion worth of IT assets in the centre, it has not been good at the marketing and sales of the business, something he hopes to change in the coming year.

The two areas are lucrative, although there is stiff competition from the likes of Business Connexion, Internet Solutions in the data space, and MTN and Vodacom in mobile services.

Can it recover?

Irnest Kaplan, of Kaplan Equity Analysts, says Telkom has its work cut out for it over the next three years. “Telkom's core business is under pressure. Even if you strip off the once-off payments for this year, it is still showing declining margins. Its costs are growing faster than its revenue.”

He says Telkom may face three years without significant growth, because its data growth is not enough to compensate for stagnation in voice growth. “The slowed growth is bad news for Telkom. Under the backdrop of Neotel and smaller players like Vox Telecom biting at its heels, it will be difficult to maintain the voice business.”

He says that until there is certainty around how Telkom plans to handle its mobile strategy, there is no way to know if it can help sustain the business.

However, Kaplan says the company's data figures are encouraging and, at upwards of 12% revenue growth, Telkom remains the largest provider of data in the country.

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