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Telkom creates order out of financial 'chaos'

Nicola Mawson
By Nicola Mawson, Contributor.
Johannesburg, 08 Jun 2015
Telkom is reviewing its business model and pondering the creation of an infrastructure unit, says CEO Sipho Maseko.
Telkom is reviewing its business model and pondering the creation of an infrastructure unit, says CEO Sipho Maseko.

Telkom has finally restored dividends - the first time the company has paid shareholders in four years - and has made strides in cleaning up its financials. However, the company's core operations - with a few bright spots - continue to lag.

Telkom's results, for the year to March, show it is making financial headway, as it has paid down 93% of its debt, declared a total per share dividend of R2.45, and improved all its key financial metrics. However, these gains come from aspects such as lower mobile termination rates, a smaller headcount, and removing once-off payments such as post-retirement benefits.

Ovum analyst Richard Hurst says the numbers are a "case of wise management paying dividends" as Telkom's books have been tidied up and it now has a "semblance of order in the chaos".

Improving figures

For the full year, Telkom increased group net revenue 3.1% to R26 billion, and cut operating expenses 1.2% to R17.7 billion. Earnings before interest, tax, depreciation and amortisation - an indicator of operational performance - gained 15.1% to R9 billion, which translated into headline earnings per share of 532.5c; a 60% improvement.

However, Telkom notes its operating gains were driven by lower mobile termination payments, thanks to the regulator's interventions late last year, as well as lower employee expenses after it cut out its post-retirement medical aid liability, and realised higher investment income.

Telkom Mobile also trimmed its operating loss, but has yet to break even, Telkom's results show. Data revenue continued to gain and is now 35.9% of overall revenue thanks to increases in mobile data income and IT business services revenue. However, fixed-line voice revenue continued its downward spiral, and fixed-line data income was flat year-on-year.

The fixed-line operator notes it trimmed operating costs by 1.2% due to recent staff cuts, as well as more effective marketing, and lower security and vehicle lease costs. Increased bad debts and property management costs partly offset these savings, it says.

During the year, Telkom also cut its debt by 92.8%, leaving it owing just R151 million, and generated free cash flow of R3.9 billion, a 240% gain. However, its cash from operations declined 2.2% to R6.4 billion, showing it has yet to get its operations right, note analysts.

Operational stagnation

Hurst says Telkom's operating performance is a concern, as fixed-line penetration continues to fall, fixed-voice revenue continues to decline, and mobile operators continue to self-provision, which places pressure on Telkom's leased line rentals. In addition, Telkom mobile has yet to break even.

Telkom needs a "drastic rethink" on its operational side, notes Hurst. He says the numbers are a good short-term story, but now require follow-through. "They need to look at how to drive revenue in the future...and need to be a lot more nimble."

CEO Sipho Maseko notes the company, which will continue to face challenges, "is now preparing to embark on the next phase of the turnaround" to position itself for commercial sustainability. The telco has been undergoing a phased turnaround for some time, which has seen it cut jobs, outsource several operations, and mull closing several of its Telkom Direct stores.

Maseko adds the turnaround has delivered results. "But we will work to achieve greater efficiency and are reviewing our current operating model.

"A major part of this review is concerned with a deep functional separation between the wholesale and retail businesses, and the establishment of an infrastructure business unit which will be accountable for network deployment and network efficiency. We believe the separation will remove complexities, allowing for faster solution delivery and encouraging the right business behaviours."

Vestact analyst Sasha Naryshkine adds Telkom's results contain lots of positives, but if revenue continues to go sideways, there is only so much cost-cutting the company can do. He adds it is "nice to see" Telkom return to paying dividends, but it faces bigger challenges, such as how to grow the business.

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