Telkom downplays revenue woes

By Candice Jones for Telkom
Johannesburg, 06 Mar 2009

Telkom this morning explained it is positioned to survive the revenue knock it will suffer from the sale of its Vodacom stake. It says it will dump the label of fixed-line operator and compete in provisioning of converged services.

The company earlier this week revealed the plan of action around the sale of 15% of its stake in SA's mobile powerhouse to Vodafone, and the unbundling of the rest of its ownership. Vodacom represented a cash-cow for Telkom, making up 42% of the company's top line revenue.

The imminent unshackling of Vodacom has had industry questioning Telkom's ability to compete in an ever aggressive African telecommunications market. However, Telkom noted this morning that its mobile strategy is well advanced and it does not intend to suffer without Vodacom.

Telkom is also free

Speaking during an exclusive interview with ITWeb, Telkom's chief of strategy, Naas Fourie, said the sale of Vodacom has formed part and parcel of the company's move into the mobile world. “We have been limited by the shareholder agreement. At the time we signed the agreement it made sense. The market conditions were right. [But] it is no longer a good option for Telkom.”

He adds that the sale of Vodacom pulls Telkom out of an “untenable situation”, which allowed Vodacom to compete in the fixed-line space, while Telkom was prohibited from competing as a mobile operator. “It is part of the reason we are getting out of the shareholding.”

We have been limited by the shareholder agreement. At the time we signed the agreement it made sense. The market conditions were right. [But] it is no longer a good option for Telkom.
Naas Fourie, chief of strategy, Telkom

In its financial results for 2008, Telkom reported Vodacom accounted for a significant 42.8% (R24 billion) of group operating revenue and 42.9% (R6.2 billion) of group operating profit. However, Fourie noted, revenue is only one aspect of the company's financials and the true reliance on Vodacom could be less than half that figure.

He adds that a significant percentage of Vodacom's income has always been divvied to Telkom shareholders as a dividend, and the reflective reliance on Vodacom will actually depend on the percentage dividend paid in any given year.

As a result, Telkom has never relied on Vodacom for its bottom line, he notes. “As a company, we are not dependent on the dividends from Vodacom. Even without that as a benefit, we are not concerned.”

Mobile horizons

Fourie explained that, while Telkom is not relying on Vodacom, it will have a loss to offset, which it intends to do through the growth of its mobile offering and expansion in Africa.

According to Fourie, the company's mobile strategy is well advanced, with the roll-out of a nomadic wireless platform that already has 5 000 customers surfing across 73 base stations. Telkom started the roll-out of its CDMA solution in October last year.

Its wireless platform is far more than a simple nomadic wireless solution, rather it is a network that functions on the same level as the mobile operators, he emphasised. “Because of the shareholder agreement, until Vodacom is completely sold, we can't activate the full mobile functionality.”

The company said all that is left to do on its mobile network is to activate cell-to-cell roaming. Cell-to-cell is the definition of mobile, which allows mobile phones (and other wireless devices) to move between signal towers without disconnecting. “Currently, our 5 000 users can access the wireless network in each cell, and the mobile functionality can be turned on with the flick of a switch,” says Fourie.

Ready to roam

Telkom understands that a full mobile network is not a viable option and, to that end, Fourie says the company is in discussions with Vodacom to allow it to roam across its networks. While Telkom intends to service critical mass areas, like the gated communities and townships, it will roam in areas where it makes financial sense.

This option is similar to Virgin Mobile's mobile solution, making Telkom's mobile strategy primarily a mobile virtual network operator. Fourie confirmed this morning that Telkom is not in discussions to buy any mobile operator either inside or outside of SA to bolster its mobile strategy.

While Telkom will base is mobile strategy on an agreement with Vodacom, Fourie explains that the deal is not exclusive. “If we feel we are not gaining favourable roaming from Vodacom, we will renegotiate, or negotiate with another operator.”

The company is also not basing its entire operation on building a mobile strategy. According to Fourie, Telkom will move away from being primarily a fixed-line or mobile operator to a converged player.

The move seems to be in response to growing competition, specifically from the second national operator, Neotel, which also runs on a converged platform.

Convergence is key

With the company needing to compete in convergence, it will accelerate the roll-out of its long-awaited next-generation network (NGN).

What Telkom does not distribute to shareholders as special dividend, it will use “in pursuit of its growth strategies”. According to Fourie, the operator will pump some financial fuel into a speedy deployment of the NGN, which will run alongside the expansion of its wireless capabilities.

The sale of Vodacom will see Telkom shareholders receive a windfall of around R19 per share, which represents about half of the company's gains from Vodafone, which will pay R22.5 billion for an additional 15% in Vodacom.

Other areas where funds will be used include the establishment of a “top tier data centre”, the funding for its agreed acquisition of MWeb Africa, the purchase of the rest of MultiLinks Nigeria (another 25%), and whatever other opportunities it spies over the next 12 to 18 months.

African footprint

MultiLinks and MWeb Africa will form a large part of the company's future. Telkom hopes to increase its revenue from outside SA to 30% over the next five years.

With MTN and Vodafone, not to mention Kuwaiti-based Zain and France's Orange strong on the continent, Telkom will have to look carefully at which opportunities it pursues outside SA. “It is not wise to enter a market as the number four or number five player; so we will look at business areas where we can come in at least at number three.”

Recent and aggressive local competition has been biting into Telkom's fixed-line revenue and Fourie points out Telkom is not blind to the tough times it could be facing over the next few years. “We will have to look critically at streamlining the business,” he says.

Analysts have noted Telkom's capability management project - which will see it slim down operations through outsourcing - is the best possible solution to allow the company to compete. Telkom has noted it plans to continue with its outsourcing project by the beginning of April.