Telkom seeks to acquire

Telkom, SA's dominant fixed-line company, is looking to make select ICT acquisitions as it seeks to diversify its revenue streams, as both voice and data growth are under pressure.

The operator this morning released its results for the six months to September, and said the first half was “challenging” as traditional revenue streams came under pressure. It says it must diversify revenue streams and will “aggressively” push broadband, full convergence and enter “select” value-added ICT service.

Telkom, which did not hold a presentation as is usual, indicated in a results booklet made available on its Web site, that it was “considering ICT acquisitions”.

However, its previous purchases have been disappointing. Its Multi-Links unit, which cost just over R3 billion to buy between 2007 and 2009, was sold last month for just R68 million.

Its foray into television through Telkom Media was also not successful, and the company eventually sold the unit to Chinese-owned Shenzen Media SA for a mere R68 million in 2009, but wrote off debt worth R471 million in 2010.

The company says a step-change in the way it executes its strategy is needed as it faces several market and regulatory challenges. In a statement to shareholders, it said the “changing domestic regulatory environment and increasing competition are forcing Telkom to re-assess its product and service offering”.

CEO Nombulelo “Pinky” Moholi notes that the first half was “challenging” as the “traditional fixed market is shrinking as fixed-line voice moves to mobile and into less profitable data revenue streams”.

Revenue from continuing operations, which excludes Multi-Links, dropped 3.2% to R16.4 billion. Earnings before interest, tax, depreciation and amortisation dropped 16.7%, to R4.4 billion, and headline earnings per share lost 35.5%, to 191.7c.

Data revenue, usually the highlight of the company's results, dropped 7.9%, to R5.1 billion, while voice, which has been steadily going backwards, declined 5.5% to R6.6 billion. “Our results paint a tough picture of current operations,” says Moholi.

While operating expenses increased 8.2%, to R15.4 billion, costs in its fixed-line segment were contained, decreasing 3.9%, to R11.7 billion, which led to an improvement in the fixed-line operating margin, from 37.5% to 39.1% as costs were contained.

The number of fixed lines continued to decline, dropping 3.8%, to four million, despite the 13.7% growth in the number of ADSL subscribers. The penetration of fixed lines is now 8.1%, down from 8.5% in the first half of 2010, although revenue per fixed-line improved 1.2% to R2 402 from R2. 374.

Telkom says lower interconnect fees will “drive a further decline in fixed revenues,” while the impending advent of local loop unbundling has the “potential” to put additional revenues at risk.

The Independent Communications Authority of SA is set to publish regulations to allow the process of unbundling the last mile to start this month.

Telkom adds it faces a series of internal challenges as its labour productivity has room to improve, and it is dealing with an ageing workforce. “We have not fully achieved our previous strategic goals, so a focus on execution is required.”

However, the company cautions that cash flow will be constrained over the next few years and capital availability is scarce.

Telkom says it “understands” that it must “make a significant step change in our strategy and approach to execution, not simply to defend our market share, but to grow our business and our revenues”.

Telkom has set out to “review and align” its strategy and implement a five-year plan that will enable it to achieve its aspirations.

Its strategy has four focus areas: growing and defending profitable consumer businesses by increasing broadband penetration and playing a strong role as a content aggregator; grow and defend profitable revenue in the business segment through entry into high-growth adjacencies focusing on convergence, value-added services and ICT offerings; achieving 12% to 15% of the mobile market's revenue by the 2015/16 financial year; and transform the network by rolling out a commercially-driven next-generation network.

Telkom's capital spend, which is expected to range between 15% and 20% of revenue moving forward, will focus on customer requirements, commercial returns and the ability to differentiate, says Moholi.

“For Telkom, full convergence, an aggressive move into the broadband arena and improving performance of the mobile business will be the hallmarks of the successful execution of our strategy.”

In the results booklet, Telkom says it is considering ICT acquisitions as ICT will be SA's biggest growth area in the next five years. It has four core focus areas: unified communication, cloud services, local area network management and Internet services outsourcing.

Moholi, in a statement to shareholders, said it is “imperative that we move into select adjacent markets to grow our revenue streams”.

She says the company is transforming its “network to allow us to move further into the mobile and select value-added ICT markets”.