Lower retail tariffs have taken their toll on MTN South Africa's margins, and the group is now contemplating a round of retrenchments as it seeks to keep a lid on costs.
MTN previously warned that lower termination rates could lead to job cuts at its local operation, and it has shed 1 200 contractors over the past year as it moves to a managed services model.
In the first half of the year, MTN SA - the group's third-largest operation - lost market share, with its share declining 2.7 percentage points, to 31.9%. Its revenue also went backwards, declining 7% - or 3.4% if currency changes are stripped out - to R19.16 billion.
Revenue challenge
However, its earnings before interest, tax, depreciation and amortisation margin dropped 1.5 percentage points to 33.3% mostly because of the lower revenue and an impairment cost of R172 million related to Telkom lines it no longer users as it has self-provisioned.
CFO Brett Goschen says the group wants to get its margin back to around the 35% range, a figure that it achievable. However, he notes, to grow the margin, MTN SA will have to significantly review its cost structure, and it still has plans in terms of its headcount.
In the first six months of the year, the local unit made "good progress in controlling costs" with operating expenses dropping 6.8%, which was driven by savings in marketing and distribution costs.
Trimming fat
Goschen notes the group is looking for more efficiencies, and it is possible it could retrench further at its local unit. He says the company will benchmark against business units in its other 21 operations to determine where savings can be made, although its first option remains to redeploy staff.
MTN will look closely at costs this year, especially given the recent drops in tariffs, says Goschen. MTN's effective rate has now dropped to 79c, although this is still higher than Vodacom's 68c a minute.
Group president and CEO Sifiso Dabengwa does not anticipate this rate dropping further, arguing that headline tariffs are less important as indicators than other aspects such as maintaining the subscriber base, and adding value-added services.
Dabengwa notes the group focused on trimming its contractor base last year, and 1 200 contractors are no longer with the group. He adds the company will continue looking for other areas where it may need to review figures or eliminate duplications.
In March, at year-end results, former MTN SA CEO Zunaid Bulbulia said the entity would have to optimise costs if termination rates went through as had been proposed by the regulator. Mobile termination rates dropped from April, and both MTN and Vodacom now charge each other 44c, while Cell C and Telkom Mobile now charge the two larger players more than double that (44c) to terminate calls on their network.
These rates are only in effect until October, after a South Gauteng High Court ruled at the end of March that the Independent Communications Authority of SA's (ICASA's) rate structure was "unlawful and invalid", but suspended the order of invalidity for a period of six months. ICASA has been reviewing the rates.
Bulbulia said a reduction could affect in the region of 400 to 500 staff members. MTN SA, which continues to face revenue pressure, currently has about 6 000 employees.
Local interconnect revenue declined 30.4%, although MTN did not give an indication of the net effect of the decline.
Share