Neotel is determined to turn a profit in the near future, a target the market expects it to meet as it scales down on capital expenditure.
However, its ambitions will cost the local consumer, as lower infrastructure investment will mean it will never become a fully-fledged second national operator, or achieve its 15% market share target that was set when it launched four years ago, note analysts.
Neotel's new CEO and MD, Sunil Joshi, yesterday said the company would be profitable at an earnings before interest, depreciation, tax and amortisation line this financial year. That means Neotel will be profitable on a cash basis by next March.
The operator also has plans to get to the next two levels of profitability, and eventually make money at a net level. However, Tata Communications MD and CEO Vinod Kumar would not disclose Neotel's timelines to get to these targets.
According to its latest annual report, it made a R1.1 billion loss in the 2010 financial year, almost 50% higher than the R739 million it lost in 2009. In 2008, it lost R320 million.
Fully supportive
Joshi says Neotel came into SA as a challenger and has grown from a zero base to turning over R2 billion in revenue. However, to get there from scratch meant significant investment in its network.
Neotel has spent R3.5 billion in four years to lay down thousands of kilometres of fibre. However, its fibre rings and connections are largely limited to the major metropolitan areas. The operator will invest around R500 million a year, over the next few years, says Joshi.
Neotel wants to add 25 000 consumers to its base this year, and grow revenue from the corporate segment by 30%, says Joshi. He adds it will also launch new products.
Kumar says Tata Communications, Neotel's largest shareholder, is fully behind Neotel. “We haven't questioned Neotel's ability to execute on the market opportunities in SA.” He notes there are “significant opportunities” for Neotel in SA, and Tata will back the company financially if needed.
Tata's strategy is to target emerging markets, where it has been investing for the last four to five years, says Kumar. “Neotel is at the heart of our strategy.”
The second national operator received its licence in December 2005, 44 months behind government's initial schedule. Neotel finally launched almost a year later, in September 2006, and set itself the target of taking 15% of Telkom's market share.
Neotel currently has 50 000 consumer customers, and about a 100 corporate clients, a far cry from the 15% market share it aimed to achieve within five years. Telkom has around four million fixed-lines in SA, and dominates the corporate space.
At what cost?
WWW Strategy MD Steven Ambrose says Neotel can meet its aims of becoming profitable if it manages its costs. He says the company's business plans have focused on areas in which it could make faster returns.
Neotel was mandated to be a second national operator, but is not behaving like one, comments Ambrose. He says to take away 15% market share from Telkom, Neotel would have to invest at least R30 billion in infrastructure, delaying profitability by years.
Ambrose says, with its capital investment down “significantly”, Neotel can start turning a profit. “They've decided to make money at the expense of the South African public.” He believes Neotel will never truly compete against Telkom.
Neotel is not doing anything significant in the consumer space, although it is making all the right noises, argues Ambrose. The company hasn't opened many retail stores, or launched a range of products for the consumer segment as this would cost “huge money” and Neotel is not spending at that level, he adds.
Imara SP Reid analyst Warwick Lucas says Neotel would have to seriously outspend and undercut Telkom in pricing to take market share away from Telkom. He says Neotel's profitability hinges on slowing down its capital investment.
Warwick says Neotel has spent a large amount on infrastructure, but has yet to expand outside the major metropolitan areas.
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