Telkom under pressure

Telkom's revenue was almost stagnant in the year to March, as it continued to face declining fixed-line penetration in SA and challenges from its Nigerian operation.

The company this morning released its results and said turnover from continuing operations - which strips out Vodacom and Telkom Media - grew a mere 0.7%, to R36.8 billion.

Most of this increase was thanks to the inclusion of 11 months' turnover from MWeb Africa, which added R311 million, and growth in revenue from its 64.9%-owned directory service company Trudon, which grew revenue from R1 billion to R1.114 billion.

Outgoing CEO Reuben September says the financial year was “tough with muted revenue growth”. He says the company's figures were impacted by competition and the weaker economic environment.

Telkom saw expenses grow, mostly as a result of restructuring into three business units and the start-up of Telkom Mobile, which is expected to go live in the fourth quarter of the year.

The telco's operating expenditure grew 8.4%, to R32.7 billion, but it trimmed capital expenditure during the year. Telkom spent R5.4 billion on capital items during the year, down from the previous year's R9.6 billion.

As a percentage, this is 14.5% of group revenue, a decline from 2009's 26.2%. September expects to spend between 20% and 25% of revenue in the next financial year, which includes Telkom's mobile investment. The mobile investment should come to R6 billion over the next five years.

“Our strategy seeking to re-position the Telkom Group is imperative given the tough operating environment,” says September. He explains that Telkom wants to grow alternative revenue streams and is looking to its African, mobile and data centre strategies to combat declining fixed-voice revenue.

“We are improving our execution in current growth markets, such as broadband and wholesale, and are taking actions to defend our consumer and enterprise markets,” says September.

The decline in fixed-lines and fixed-voice use impacted Telkom SA's revenue, which declined 0.1%, to R33.487 billion. However, the slowdown was partially offset by higher interconnect and data revenue. ADSL subscribers increased 18.1%, to 647 462.

Fixed-line penetration again declined during the year, and the company now has a penetration rate of 8.7%, a 4.4 percentage point decline year-on-year.

In addition, the negative effect of intensifying competition and fixed-to-mobile substitution also accounted for a 9.3% decrease in Telkom SA's traffic revenue.

Telkom's problem child, Multi-Links, saw revenue grow 35.1%. However, operating expenses at the Nigerian unit soared 67.7% as the company again wrote down goodwill and inventory.

Telkom has impaired Multi-Links' goodwill by another R2.148 billion, and written down its assets by R3 billion, making this the fifth successive reporting period the company has written down the Nigerian operation.

Last year, Telkom wrote off R2.14 billion of Multi-Links' value in the half-year to September. In the year to March 2009, it wrote off R1.7 billion against the Nigerian operation.

September says the Nigerian Multi-Links operation is still a major concern as it again reported operating losses of R659 million. This is a 191.6% increase from the loss of R226 million reported a year ago.

Telkom says the widening operating loss is mostly due to trading conditions in Nigeria, tough local economic conditions, pricing pressures, and its short-term strategy to reduce inventories and acquire subscribers.

September says it is necessary to continue investing in the Multi-Links network and operations in order to complete capital projects and ensure the asset is properly structured for future viability.

The integration of Africa Online and MWeb Africa is expected to be completed by the end of September and the units will be re-branded iWay Africa.

“The goal of the integration is to drive the ISP business in Africa up the ICT value chain by developing Pan-African major city-to-city backbone infrastructure, as well as Sub-Sahara hub-to-international cable access infrastructure,” says September.

Telkom declared a normal dividend of 125c, an 8.7% increase, as well as a special dividend from the sale of its Vodacom stake of 175c a share. The company's shares moved up 4.88% during early morning trade to R38.70.