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A challenging year for Telkom

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Telkom has spent much of the last year aligning strategy and consolidating operations – but there’s a lot still to be done.

Presenting Telkom’s annual results in Johannesburg on Friday, group CEO Nombulelo Moholi said: “Telkom faces many challenges at the moment, but we will stay calm, determined and focused on delivering on the promise of our business and our strategy going forward.

“Group financial results for the year under review were not good. We have taken several significant steps towards securing a successful future for Telkom. We began casting the foundation that will allow the group to compete well and build value,” says Moholi.

The Group’s financial results reflect the many challenges it faces. In the year under review, operating revenue decreased by 0,7% to R33,1-billion, operating expenses increased by 6,1% to R31,3-billion, and EBITDA was down 8,8% to R8,5-billion. Profit before tax was R774-0million and profit for the year was R179-million.

The results include a R896-million loss due to the disposal of Multi-Links and a R569-million impairment loss of iWayAfrica’s goodwill and assets.

Headline earnings per share declined 33% from the previous year, mainly as a result of the investment made in the Group’s mobile business, 8.ta, and R605m additional depreciation following a review of the useful life of existing network equipment as investment to transform to a commercially led next generation network continues.

Other significant figures include:

* ADSL subscribers increased 10% to 827,091;

* Calling plan subscribers increased 4,6% to 819 019;

*  Managed data network sites increased 13,9% to 38 902;

* Active mobile subscribers increased 213,2% to 1,48-million with a blended ARPU of R68.86;

* Fixed-line employee expenses decreased 15% to R6,6-billion;

* Mobile EBITDA loss of R2,2-billion after elimination;

* Group EBITDA margin decreased to 25,8% from 28,1%;

* Fixed-line EBITDA margin increased from 36,8% to 38,6%;

* Free cash flow generated of R2,1-billion (2011: R2,2-billion).

“Over the past year we have focussed extensively on aligning and streamlining the group’s strategies and operations in order to better deliver value going forward,” says Moholi. “It has been a difficult year, but one that was necessary for the future stability of the group.”

The group faced continued erosion of the traditional fixed-line business, with fixed-line traffic revenue decreasing by 8%. Despite the decline in traffic volumes and pricing pressure, the decline in fixed-line revenue was held at 2,8%. Demand for faster products at lower prices continued to put data revenue under pressure.

In October, Telkom sold Multi-Links.

“We believe that the negative financial and legal impacts associated with retaining Multi-Links would have had a far more negative impact on the group than divesting as quickly and proficiently as we did,” says Moholi.

“While the process faced more challenges than we anticipated, management is satisfied that Telkom is now better positioned to focus on delivering better results in its core business, without further distraction from non-aligned operations.”

Moholi says she had spent her first year at the helm of Telkom crafting a strategy that focuses on the group’s core competency, its role in society, and on future growth opportunities. Other areas of focus included building a competent and stable management team and building relationships of trust with unions and employees. At the same time, efforts to reduce the error rate which has plagued Telkom recently were intensified, and the group’s capability for execution is improving, to the benefit of customers.

Telkom faces many challenges, including declining voice revenue, asymmetry in termination rates, legacy regulatory obligations and the allocation of spectrum. The company is operating in a highly competitive fixed and mobile market, and extensive capital investment is required to renew and expand its network. Self-provisioning by other mobile operators is also expected to impact on Telkom’s revenue streams in the future.

However, several significant opportunities have emerged. Among them are the prospects of growth in data communication, and the growing proliferation of affordable smart phones which are changing the game. The need for ICT products and services in the enterprise environment is expanding, and the superior quality of fixed-line broadband will continue to unlock commercial potential.

Going forward, Telkom’s strategic imperatives will be to:

* Lead in data and broadband, and in fixed mobile convergence;

* Grow Telkom Business revenues by diversifying the service portfolio;

* Regain market competitiveness in the consumer market;

* Consolidate Telkom’s position as wholesaler of choice;

* Focus on profitable market segments and services; and

* Enhance operational efficiency.

These were informed by renewing and refining Telkom’s tactical initiates across key business areas. These are:

* Growing and defending profitable Telkom Business revenues – Telkom Business aims to be the market leader in Converged ICT. Telkom will retain market leadership in fixed communication services, and become the industry leader in converged communications and cloud services. The group will achieve this by leveraging its two biggest assets: its unmatched business customer base and the unique combination of fixed network, mobile network and data centre operations.

* Delivering on the investment in Telkom Mobile – The group is committed to the mobile business, although tactics may change from time to time. A key priority is to defend erosion in the fixed-line business while growing converged delivery channels to customers. A core feature of the mobile strategy is to meet the growing data demand in South Africa in a manner that does not lead to cannibalisation of other services. Instead, Telkom will offer services that reward the customer for using Telkom’s products with varying levels of incentives, depending on the customers’ level of loyalty.

* Growing and defending profitable revenues in Telkom Consumer Services & Retail – The group is positioned to meet the future demand for converged communications and increased broadband needs by integrating Telkom’s extensive network with consumer related products such as mobile. The group intends to work more closely with partners to offer value-added broadband services and bandwidth intensive products. Telkom recently signed an agreement with electronics manufacturer Samsung to provide entry-level Smart TV services to consumers and further innovations are expected.

* Transforming and upgrading the Telkom network – Telkom’s network transformation programme is bound to change the face of broadband capability in South Africa and is a key enabler of the strategy. Major traction has been achieved against these plans as the Company progresses towards delivering an all-IP (Internet Protocol) network, designed to enable efficiency, fixed-mobile convergence and truly differentiated high speed broadband.  The network transformation will take fibre deeper into the network and smartly leverage a mix of high speed broadband access technologies. The aggregation network is increasingly able to support super-fast transmission and enable a superior browsing experience. The national and regional transmission networks have evolved from carrying Gbps to Tbps throughput with great resilience and manageability. International connectivity has received a major boost to ensure worldwide reach with superb capacity and resilience.

“Acceptable financial performance will be driven by the successful execution of our strategy in the next two to three years and productive collaboration with our stakeholders,” says Moholi. “We are committed to a journey of significant and deliberate steps to build value for all our stakeholders. We are focused on working to secure our future.”