Telkom board to question September

By Paul Vecchiatto for Telkom

Cape Town, 10 Feb 2009

The Telkom board is reportedly preparing to question CEO Reuben September on his heavy focus on one measure of the company's performance at the expense of other factors, such as service provision, ITWeb has learned.

Service provision, which includes the installation of fixed-lines, data services and service level agreements with large customers, has reportedly been declining over several years. This was cited by Telkom as a reason for its sudden dismissal last week of chief of operations Motlatsi Nzeku.

“Although Nzeku was supposed to implement service provision, it is also the mandate of the CEO. One cannot have one take the fall without the other feeling some of the heat,” a source says.

Telkom has refused to confirm or deny the board would meet today, or what the agenda would be. However, a meeting is scheduled to discuss the allocation of the Vodacom shares and last week's dismissal.

Telkom is going through a difficult period of change as it has to restructure following the sale of its 50% stake in cellular network operator Vodacom - the company that generated most of its profits. It also has to manage its R30 billion capital expenditure programme, while entering the mobile space and finding new markets in the rest of Africa.

Bonus linked

Sources within Telkom say September has been highly focused on ensuring one accounting measure of the company's overall performance continues to rise. This is earnings before income tax, depreciation and amortisation (EBITDA).

They say company bonuses are closely linked to the performance of EBITDA, with little in the way of service and delivery taken into account in the calculation of the bonuses.

EBITDA is generally used to evaluate a company's ability to earn a profit and it is often used in the analysis of the share price. It is not a defined measure under the Generally Accepted Accounting Principles, as a number of other accounting standards are, and so can be calculated as a company chooses.

In the 2006/7 financial year, Telkom's EBITDA fell by 3.7%, to R19.785 million, but then rose by 4.2%, to R20.612 million the next year. For those periods, the company's revenue climbed by 8.4%, to R51.619 million, and by 9%, to R56.285 million, respectively.

For those two years, Telkom's operating expenses surged by 12.3% and 12.8%, to R37.533 million and R42.337 million. However, its operating profit dipped by 1.4%, to R14.470 million in the 2006/7 year, and rose by a marginal 1% in the 2007/8 year, to R14.482 million.

However, Telkom's profit margins have shown a strong decline by tumbling 9.1%, to 28%, in 2006/7 and then a further 8.2%, to 25.7%, in 2007/8.

Fixed-line access, a key measure of service provision, declined 1.4% in 2006/7, to 4 642 lines, and then dropped by 2.4%, to 4 532 lines, in 2007/8.

Wise management

Daniel Malan, an analyst at asset management firm Regarding: Capital Management, says EBITDA makes sense when a company is rolling out a large capital expenditure programme. However, it is not the only measure that should be taken into account, he adds.

“There are so many things happening around Telkom and it would be wise to manage EBITDA for the longer term,” he says.

Rob Forsythe, an analyst with Investec Asset Management, notes: “It would be very unusual to focus on only one measure of performance for a company.”