Vox Telecom has written down its least-cost routing (LCR) business Orion by R809 million on the back of lower mobile termination rates.
The once-off write-down has turned the company's previous profit into a loss of millions.
The company yesterday evening published its results for the year to August. It said revenue was flat at R2 billion, but impairing its largest business unit was a big contributor to the net loss of R678 million. Last year, Vox made a R60.8 million profit.
Vox wrote down both @lantic and Orion, taking a once-off charge of R842 million on the income statement. However, the once-off write-downs at Orion and @lantic are accounting changes, and do not affect headline earnings.
Stripping out the impairments, Vox posted headline earnings of R71.7 million, a gain on last year's R68 million. This translates into headline earnings per share of 6.45c.
Orion was impaired by R809 million after interconnect rates were voluntarily cut from R1.25 to 89c by the mobile operators from March. The unit's revenue also declined from R1.3 billion to R1.2 billion due to the rate cuts.
Least-cost routers have been hard hit by the cut in mobile termination rates and the business model is dead as more cuts will trim margins to unacceptable levels. Several players in the sector, including Altech Autopage, Vox and Nashua Mobile, have been migrating LCR customers onto voice over IP (VOIP) networks to claw back lost margins.
Future pain
The Independent Communications Authority of SA (ICASA) has decreed mobile termination rates will drop from March next year to 73c at peak and 65c during off-peak times. The following year, rates will drop to 56c and 52c. By March 2013, wholesale mobile terminations rates will drop to 40c, regardless of the time the call is made.
Interconnect costs for local fixed-line calls will drop to 20c for peak and 12c for non-peak next March. Termination rates for nationwide calls will drop to 28c during peak times, and 19c off-peak. In 2012, termination of local calls will drop to 15c and 12c, respectively, while national calls will see a drop to 25c and 19c.
At the end of the glide path period, from March 2013, termination for local fixed calls will drop to 12c during peak times and off-peak times. The rate for national calls will be 19c.
The authority's decision has seen several players move to a VOIP solution, where they expect to see higher margins. Nashua Mobile, a Reunert subsidiary, has signed a non-exclusive deal with Vox to move its LCR customers over to Vox's network as a short-term solution for the expected future pain of lower interconnect fees.
Reunert CEO Nick Wentzel said during the company's recent results presentation that Nashua Mobile is looking for a longer term plan. The company did not specify the exact financial impact of lower termination rates, but said it had seen a medium-term reduction in interconnect rates.
Altech Autopage has also been hit by lower interconnection fees, which impacted its LCR unit as expected during the first half of its year to August. Autopage is collaborating with sister company Altech Technology Concepts to implement a VOIP solution to move a large proportion of existing LCR customers to the new VOIP platform, Altech CEO Craig Venter said in September.
Making plans
Vox, which is cash-positive company, is implementing a new strategy to migrate LCR customers onto its Cristal Vox solution. Cristal Vox allows the listed telco to offer a range of voice communications services instead of only competing on outbound calls, which accounts for a third of all voice traffic.
CEO Tony van Marken says Vox is on track to achieve its strategic goals, particularly around the migration of customers to its Cristal Vox voice and data network.
“Revenues have been affected by the drop in mobile termination rates, as well as the loss of connection incentive bonuses as our Vox Orion subsidiary moves customers away from SIM-based LCR.”
Van Marken says Vox's “initiative to move customers to Cristal Vox, which we announced at our interim results in April, is gathering pace”. He expects the migration to be wrapped up within the next 12 to 18 months.
Vox's gross profit and margins remained unchanged at R521 million and 25%. Cash on hand increased by 78% to R164 million, while at the same time the group reduced its long-term debt obligations by R84 million.
“We're in a deflationary environment in terms of voice and data, and we are facing intense competition,” says Van Marken. “Under these circumstances, we believe our ability to maintain margins and profits is a real achievement.”
Vox's results saw its share price move up 3c, or 7.69%, to close at 42c yesterday.
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