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Mobile data drives Telkom gains

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Telkom continued to stabilise net revenue and achieved growth of 1,2% year-on-year for the six months ended 30 September 2015.

Continuing growth in the mobile business resulted in a service and subscription revenue increase of 40,5% year-on-year. This included growth in mobile data revenue of 68,5%.

The decline in fixed-line usage continues with fixed voice revenue decreasing by 2,8% year-on year and data connectivity showing a year-on-year decrease of 5,1% once again impacted by the self-provisioning of infrastructure by competitors and the intentional migration of customers from leased lines to next-generation service offerings.

Excluding revenue from leased lines fixed data revenue is up by 4,1%; while the company also achieved good growth in its consumer business with revenue from ADSL growing 5,5%.

“During the first six months of the 2016 financial year we continued with our efforts to transform Telkom and stabilise revenue, while at the same time addressing the fixed and inefficient nature of our operating cost base,” says Telkom group CEO Sipho Maseko. “The challenges we faced during the period included increasing competition and a soft economy.”

Debt levels increased during the period as a result of significant cash outflows and an increase in capital expenditure. The cash outflows included the:

* Purchase of Business Connexion Group (BCX) for R2,7-billion;

* Payment of a R1,3-billion dividend;

* Repayment of our maturing TL 15 bond of R1,16-billion; and

* Payment of voluntary early retirement and severance packages of R1,5-billion.

Despite these cash outflows Telkom’s current net debt to EBITDA ratio is 0.4:1 and gearing remains low, with a comfortable maturity profile.

Capital expenditure increased to R2 335-million, an increase of 20,4% year-on-year, driven by the company’s strategic objective of becoming a leading provider of converged solutions.

“This objective requires that we expand our mobile network and accelerate the building of our next generation network (NGN) by rapidly increasing our fibre and LTE footprints,” says Maseko. “We have intensified the funding for fibre to the home to maintain our competitive advantage and retain our existing customers.

“The introduction of new technology and the acceleration of our fibre to the home initiative has affected the value of certain assets, which have been identified for decommissioning and reassessment of their useful lives. This has resulted in accelerated depreciation to the value of R97-million, which has affected our operating profit.”

He adds that the progress we made towards transforming our future cost base by achieving a reduction in our workforce has resulted in a normalised employee cost decrease of R351-million, or 7,5% when compared to the comparative period.

The early termination of Telkom’s head office lease extinguished a lease liability of R590-million. “The move of our head office activities to our new campus in Centurion, which has been successfully completed, is another initiative intended to ensure the extraction of cost and operational efficiencies across our business,” Maseko says.

Operating costs decreased by 2,3% year-on-year, significantly affected by:

* The financial impact of the delay in our transformation initiatives emanating from the interdict against our Section 189 workforce restructuring process;

* A contractual dispute arising from the transition of the vehicle lease supply contract from the existing supplier to a new supplier; and

* Unforeseen significant weakening in foreign exchange rates.

“In line with optimising our operating model,we launched Openserve, our redesigned wholesale and networks division,” Maseko adds. “Openserve is a distinct business unit within the Telkom group, which was formed as part of the company’s ongoing efforts to strengthen our customer focus through a more flexible and agile operating model.In September 2015, we announced our ` objective, through Openserve,to provide one million homes with access to Telkom fibre by 2018.

“We are rolling out the biggest fibre open access suburb to date in Bryanston, Johannesburg, where more than 12 000 homes will have access to fibre technology by March 2016. During the period under review, we also announced we would be rolling out fibre in multiple additional suburbs in Johannesburg, Pretoria, Cape Town, Durban, Bloemfontein, Kimberley and Port Elizabeth.

“Telkom has been reducing wholesale prices to reduce the cost to communicate and has launched a 1Mbps DSL service to bring down the barriers to broadband access. We also previously stated that we will open copper access at 200 exchanges on a trial basis, thus effectively paving the way for a more open access approach, depending on the outcome of the trial,” he adds.

“In addition to achieving excellent growth in our mobile business and in particular in mobile data usage during this period, we also achieved good growth in our ADSL revenue supported by a 4,2% increase in our ADSL subscribers. Our new summer campaign was launched in September 2015 and we continue to drive convergence products and pricing in generous data bundles which have assisted us in improving our monthly sales.”

Efforts to migrate customers off legacy services to bundled, converged and next generation services is showing early signs of success, which is reflected in the growth in subscriptions, Metro Ethernet and Megaline services. “This growth is not yet sufficient to offset the decline in our traditional revenue streams, mainly due to the lower pricing and smaller margins required to remain competitive given the aggressive pricing of our competitors,” Maseko says.

During the six months under review, Telkom acquired the entire issued share capital of Business Connexion Group (BCX). “The comprehensive post-merger integration plan was developed, validated and is currently being implemented,” Maseko says. “BCX will focus on growing market leadership in integrated IT solutions, through vertical industry insights and client-relevant value-added offerings, specifically within the Enterprise customer space. Within the SMB segment, the focus is on cross-selling tiered and fit-for-purpose IT solutions to an established Telkom customer base.”

Telkom has also made progress of aligning its workforce to the new operating model, and during the six months approved voluntary severance and retirement packages to 3 108 employees.

“While it is essential that we realign our workforce and work more efficiently if we are to successfully reduce our cost base, it is also essential that we retain talent and attract new talent, especially scarce and business critical skills,” Maseko says. “We also need a friendly, reliable and competent team focused on providing our customers with the best possible service.

“Our efforts to right size our workforce have, of course, not been conducive to building a strong brand internally. The move to our new campus has provided us with an opportunity to reconnect with our employees. The campus offers our employees a modern environment with a variety of spaces where they can interact with one another.

“The next phase in managing our human capital will be to ensure that we have the correct culture, skills, processes and systems to enable Telkom to thrive.”

Telkom reduced its incident frequency rate (number of incidents per 100 employees calculated over a specified period of time) from 1,97 to 1,67 during the period under review.