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Telkom posts flat revenue as BCX underperforms

Paula Gilbert
By Paula Gilbert, ITWeb telecoms editor.
Johannesburg, 28 May 2018
Telkom group CEO Sipho Maseko.
Telkom group CEO Sipho Maseko.

Telkom has reported flat revenue and declining headline earnings, as subsidiary BCX struggled in a year which saw lower ICT spend in both the private and public sectors.

BCX's performance was also negatively impacted by the weak economy and a decline in voice revenue from its connectivity business.

Group operating revenue, for the year ended 31 March, was up just 0.1% to R41 billion, a disappointing result after reporting growth of 9.8% in the previous financial year.

Group earnings before interest, tax, depreciation and amortisation (EBITDA) fell 3.6% to R10.5 billion with an EBITDA margin of 25.7%. Meanwhile, headline earnings per share (HEPS) dropped by 18.4% to 597cps, despite strong growth in the mobile business.

The group blamed the results drop on "a tough economic environment, political uncertainty and intense competition" as well as the consequent low business and consumer confidence.

"We felt the impact of the weak economic environment, as the private and public sectors respectively deferred and lowered their ICT spend. This impacted Telkom's performance, particularly in BCX, which serves the business sectors," says Telkom group CEO Sipho Maseko.

He says voice impacted on the businesses across the group as customers continue to migrate from traditional circuit voice, to voice over Internet Protocol (VOIP).

"We have implemented strategies to manage the decline in voice revenue while we migrate customers to VOIP and grow our new generation revenue streams. I am pleased that the new generation revenue streams, such as mobile and data, are now compensating for the decline in the traditional business," Maseko adds.

BCX's revenue declined 4.6% to R21.2 billion mainly due to the weak economy and the decline in voice revenue. BCX's EBITDA also declined by 8.1% with an EBITDA margin of 17.7% on lower revenue. BCX, however, managed to implement effective cost management, resulting in 4.1% savings in operating expenses.

"Going forward, we expect the economy to recover but investment to lag. We have implemented strategies to manage the voice revenue decline while we migrate customers to VOIP and grow our new generation revenue streams," Telkom says.

Dividend decline

Telkom cut its annual dividend by 16.3% after a tough year saw HEPS decline by over 18%.

The group says its dividend policy remains unchanged: to pay an annual dividend of 60% of headline earnings with an interim dividend of 40% of interim headline earnings. The 18% drop in headline earnings saw the group decrease its dividend from 422cps last year to 355cps this year.

Free cash flow was up 465.7% to R501 million but the group's capex investment was down 8.6% year-on- year to R7.9 billion, making it 19% of revenue.

"Capital investment was lower than the prior year, as the group was cognisant of the revenue pressures and focused on maximising capital returns."

The telco says its core and backhaul networks are largely modernised, and the group is completing the upgrade of the access network with multiple technologies as customers are becoming technology agnostic.

"Telkom will continue to modernise the network and invest in key growth areas, particularly mobile and fibre."

"The pricing transformation journey that Openserve embarked on two years ago is starting to bear fruit with the rate of decline in their revenue slowing down. Despite the price reductions and ongoing voice revenue pressures, Openserve's overall revenue declined by only 2.9% while data traffic grew massively in the network," Maseko says.

Mobile boom

The group's mobile business was, however, a shining light for the group, with mobile service revenue growing 47.2% to almost R5.2 billion.

"Our mobile business is now a key driver of growth in the group, offsetting the decline in BCX and Openserve," says Maseko.

The group's active mobile subscribers grew by 30% to 5.2 million, up from almost four million a year ago. Of those, 3.7 million were prepaid customers and almost 1.5 million postpaid. Blended average revenue per user (ARPU) grew by 10% year-on-year to R98.19.

Postpaid subscribers increased by 20.5%, adding more than 250 000 subscribers in the year, while 30% of postpaid subscribers have adopted the FreeMe product suite as their base plan, contributing to a 5.8% increase in postpaid ARPU to R192. Prepaid subscribers increased by 34.6% and ARPU grew by 21.4% to R60.

Mobile voice and subscriptions revenue increased 26% to R1.3 billion, while mobile data revenue increased by a massive 56.3% to almost R3.7 billion, supported by 124% growth in mobile data traffic volumes. The group's mobile business capex was R2.3 billion for the year; a 19.8% increase on the previous year's spend.

Overall Telkom consumer revenue grew 5.9%, driven by the big jump in mobile service revenue, which was offset by a 6.5% decline in the fixed residential business. Fixed broadband subscribers declined by 2.2% to just 981 000.

"Our focus going forward is to increase the contribution from the new generation revenue streams. Despite their lower margin compared to traditional revenue streams, the new generation revenue streams will ensure Telkom's long-term sustainability," Maseko says.