Future investments hurt Telkom as fixed-line dwindles

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Telkom group chief executive Sipho Maseko.
Telkom group chief executive Sipho Maseko.

Although Telkom has delivered a strong set of financial results, buoyed by its mobile segment, it says profitability was affected by deep investments in future growth.

The JSE-listed company this morning released its interim results for the six months ended 30 September, showing revenue increasing by 4.7% to R21.5 billion.

The results come after Telkom last week issued a trading update saying headline earnings per share and reported basic earnings per share were expected to decrease by 30% to 40% compared to the corresponding period in the prior year.

However, this morning the operator said it posted positive results despite the weak economic environment, where SA escaped a technical recession in the first half of the year.

It says performance was driven by strong growth in the mobile business, and masts and towers in its subsidiary, Gyro.

According to Telkom, mobile service revenue continues to be the main driver of revenue growth, increasing by 56.6% to R5.6 billion.

In the period, Telkom’s mobile business increased coverage by growing its portfolio of mobile base stations by 24.9% to 5 476, and by implementing the new roaming agreement to supplement its own network.

The telco says the accelerated investment was to support growth in the mobile business and prepare for the accelerated upgrade of customers to LTE and fibre.

“The investment in fibre-to-the-home (FTTH) was rationalised as we focus on areas showing a propensity for higher connectivity rates.

“Our FTTH connectivity rate improved to 42.6%. We increased our investment in the packet optical transport network, which will future-proof the core network. This is the foundation for software-defined networks and network function virtualisation capability,” says the company.

Copper migration

However, Telkom’s fixed-line broadband subscribers declined from 974 181 in September 2018 to 781 255 in September 2019.

At the same time, it says, over 300 000 customers have been migrated from copper-based services to fibre and LTE over the past 18 months.

“Profitability was affected by deep investments in future growth, particularly in the mobile business – which is building critical mass and continues to gain market share as consumers search for value,” says Telkom group chief executive Sipho Maseko.

“With consumers under immense pressure as the economy struggles to gain traction, this was an important period for the group. We have made progress on our strategy and laid the foundation for growth, particularly as the economy starts to turn, and if government licenses spectrum in a way that stimulates competition,” he adds.

Telkom notes group profitability was affected by capital investments, higher hedging costs, higher finance charges and fair value movements linked to foreign exchange adjustments.

Capital investments totalled R4.3 billion in the period – representing 19.7% of revenue. More than half of the capital invested was in the mobile business, where capital expenditure rose 66% to R2.2 billion to support that division’s growth.

The group also invested in accelerating the migration of customers to LTE and fibre.

Group earnings before interest, tax, depreciation and amortisation (EBITDA) increased 12.4% to R5.6 billion.

Excluding the impact of IFRS 16 accounting, group EBITDA decreased 4.4%. The company notes earnings and free cash flow were impacted by a one-off cost related to the use of two roaming partners in the period.

Reported headline earnings per share decreased 35.2% to 188.9c per share, mainly due to lower profit before tax, Telkom explains.

“Ongoing investments in new revenue streams continue to drive the overall growth of the group, although our deliberate strategy to accelerate the migration to new technologies has affected profitability in the short-term,” Maseko says.

Property portfolio

Telkom notes its strategy to separate the real estate property portfolio to increase management focus yielded good results.

This as Gyro contributed positively to the group through an 11.7% growth in masts and towers revenue.

It adds that despite the pressure from enterprise customers deferring spend, IT revenue from BCX was flat compared to prior year.

“Changing technology remains a key challenge in our business. Our strategy to accelerate the upgrade of customers to next-generation technologies led to a 19.1% decline in fixed voice and interconnection revenue across the group,” says the company.

“Despite this, Openserve’s and BCX’s overall revenue decline was contained at 8.5% and 3.3% respectively, due to growth generated by next-generation revenue.”

Telkom notes its sustainable cost-management programme delivered positive results, with underlying group operating expenses held flat compared to the prior period in an inflationary environment.

This was pronounced in BCX, where EBITDA grew 26.1% on a standalone basis following organisational restructuring in the prior period, it adds.

Net debt

Owing to its investments in the future, the group’s net debt to EBITDA ratio increased to 1.4 times.

The company notes the growth in borrowings is in line with Telkom’s strategy to fund capital expenditure through long-term debt as the group moves to an optimal capital structure.

The board declared an interim gross ordinary dividend of 73.17c per share.

“The operating environment remains challenging, but the imminent licensing of new spectrum, coupled with macro-economic reforms and the investments we continue to make in our own business, means we are optimistic about the years ahead,” says Maseko.

“We have shown our commitment to South Africa by investing into the economy at a time when the country needs it most. We are confident these investments will pay off.”

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