JSE-listed telecoms provider TeleMasters reported a large slump in net profit for the year to September as revenue from its least-cost routing (LCR) base continue to dwindle.
TeleMasters is in the process of moving its customers onto its own network - Digital Direct - as it moves away from LCR. Several LCR providers were hard hit when mobile termination rates started dropping after the Independent Communications Authority of SA (ICASA) introduced a glide path.
In 2010, ICASA decreed that cellular interconnect costs had to drop to 73c at peak and 65c during off-peak times, from March 2011. This year, rates dropped to 56c and 52c, respectively. By March 2013, wholesale mobile termination rates will drop to 40c, regardless of the time the call is made.
TeleMasters has said that the LCR model no longer makes sense. Lower termination rates means that some players in this sector have seen erosion of their margins.
For the year to September, revenue dropped from R268 million in 2011 to R171.3 million and net profit plummeted to R22 707 from R10 million a year ago. The group recorded an operating loss of R5.5 million compared with a gain of R14.4 million last year, but scored R5.4 million on the derecognition of a liability.
A subsidiary, Skycall Networks, had a potential claim against it by a supplier which existed when TeleMasters bought the company and was provided for at the time of acquisition. The liability has now prescribed.
As expected
TeleMasters says the results are in line with expectations. Revenue from the dwindling fixed cellular base (using LCR technology) declined 36%, partially because tenders expired, it explains.
The decline in revenue impacted its gross profit and margin and the company went through a cost-cutting exercise to counter the effect. This included retrenchments and voluntary cuts in directors' salaries. It did not say how many people were affected by the retrenchments.
"The business has been re-aligned for a change in how it operates as many skills needed to embrace the Digital Direct communications solution are different from those applied in the past. The down side of Digital Direct is that it requires a far higher capital installation cost," TeleMasters says in a statement.
The company invested R7.3 million in equipment and software over the past year when compared with the R2.7 million in the 2011 financial year as a result of the conversion. It says, during the past year, it tested and amended the new technology to the point that it is now satisfied that this technological offering is of the highest quality for voice communications.
"The coming year is expected to see the fruits of the past year's innovation and testing. Not only is the company able to bring a higher quality solution to clients but the margins to the group utilising this technology are far higher than what was earned in the past using LCR."
In October, the company said it was experiencing delays in converting its 600 long-standing clients to its new telecoms platform. The group's share closed flat at 60c.
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