Storm doesn`t understand how to measure profitability and its analysis contains serious errors, says Telkom, which blames the media for erroneous reporting and a lack of understanding of its business.
Late this morning, ITWeb received a Telkom statement responding to Storm`s contention that the partially state-owned utility could not justify any increase in domestic call rates.
Telkom says its profitability is not excessive and the profitability should be measured by comparing return on assets to its cost of capital.
According to the Telkom statement, the group, which includes Vodacom, generated R4.5 billion in revenue last financial year. Telkom Company, the landline business, generated revenue of R3.8 billion.
"Storm fails to understand how profitability should be measured. The measure of profitability is what return is made on its investment, and whether that return is in excess of its cost of capital. After several years of poor profitability, Telkom`s current level of profitability has attracted media and public attention," Telkom says.
It blames erroneous media reporting for stirring up the debate.
"In most cases, the media comment is not based on actual facts or an understanding of the period of Telkom`s investment and the required returns in order to sustain such ongoing investment," the statement says.
Telkom`s operating profit and net profit for the year ended 31 March 2004 was R6.2 billion and R3.8 billion, respectively. The company says that while this may sound excessive, it has to be seen within the context of an asset base of R43.7 billion and equity of R18.1 billion, and cannot be considered so.
"In fact, for any company to ensure sustainability, they are required to earn a return in excess of their cost of capital. During the period 1997 to 2002, Telkom invested R41.7 billion and has yet to make a return on such capital invested," says the Telkom statement.
It adds that the appropriate measure for profitability is to compare the company`s return on assets to its cost of capital. Telkom`s cost of capital over the past several years has been between 12% and 14%. Last year is the first year in many that the company actually managed to generate a return in excess of its cost of capital, albeit small, it says.
Telkom made a loss in 2002 and 2003 as its return on its assets were well below its cost of capital.
Comparing tariffs with tariffs
Telkom has also rejected the comparison of tariffs as cited by Storm.
"So often benchmarking is abused, and little attention is paid to the extent of rebalancing done in each country. While local call tariffs in developing African countries may be low, their international and long-distance tariffs are significantly higher and the extent of rebalancing is fairly limited," says Telkom.
It notes that it is more appropriate to compare tariffs to countries that have made significant progress in rebalancing. Telkom has benchmarked its January 2005 tariffs with the average of 24 OECD countries, which includes emerging market countries. Benchmarking was based on the latest publicly available tariffs from Tarifica.
Telkom says that according to Tarifica, installation costs were 59% lower than average. Telkom`s residential monthly rental tariff of R76.36 per month is 19% below the average of OECD countries. Telkom`s business monthly rental is 3% below the average. Telkom`s three-minute local peak call is 16% above average and its three-minute local off-peak call is 30% below average.
"There is a common belief that our international calls are expensive. But let`s look at the facts. Telkom`s three-minute call to the US is 23% lower than average. Telkom`s three-minute call to a neighbouring country peak tariff is 7% below the average of the OECD countries," it states.
Telkom adds that its 64Kb/50km data tariff is 24% below the OECD average.
The company notes that as far as tariff increases are concerned, it has not announced that it plans to increase local call charges, nor has it filed to increase local tariffs since it filed for such an increase in January.
"Such confusion arises over erroneous journalist commentary confusing the January increase already filed for and implemented as another increase. In addition, local calls increased 5.5% in January 2005 and not 10% as Storm stated," the statement concludes.
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