Loadshedding, constrained consumer spending and dynamic competition, against the backdrop of a sluggish economy with persistent inflationary pressures, have weighed on Telkom’s annual results for the year ended 31 March 2023.
As it transitions to next-generation technologies, group performance was under pressure from a pronounced reduction in legacy revenues for the year.
Although revenue grew marginally, the incremental costs of loadshedding reduced overall profitability.
With competition intensifying in the mobile, fibre and IT services businesses, Telkom has embarked on a group-wide cost transformation journey to return its profitability to above 25% in the medium term while driving revenue growth in ever-evolving markets.
For the year, revenue was marginally up by 0,9% to R43 138-million as the mobile and broadband strategies continued to shine.
The migration of revenues from legacy to newer technologies, Telkom’s investment in the mobile post-paid base to drive higher annuity revenue, and the impact of sustained loadshedding put pressure on operating costs. Normalised Group EBITDA decreased by 19,8% excluding a R1 065-million provision for restructuring costs. Normalised HEPS and BEPS dropped by 76,6% to 134.6 cents and by 86,8% to 71.0 cents, respectively.
Openserve saw growth across its next-generation data-led products, now representing close to 70% of its revenue base, as it continued the journey to transform its revenue mix. Fixed-data next-generation revenue grew by 10,2% driven by increased rollout of fibre and healthy growth in carrier services and enterprise services.
However, performance was limited by pricing gaps between new-generation business and legacy business, as declines in fixed-voice and legacy revenues accelerated during the year. Revenue declined by 4% to R12 897-million. Although costs were well managed and grew by less than inflation, significant increases in backup power due to unreliable energy supply put pressure on profitability.
Openserve continued to expand its fibre footprint across all channels and increased the number of homes passed with fibre by 23,9%, surpassing the 1-million homes mark. Homes connected advanced by 26,7% to 47,4% and high-capacity carrier connectivity to base stations increased by 5.1% while enterprise market connectivity grew by 2,5%.
Openserve’s investment in upgrading its existing fibre nodes, and an undersea cable partnership with Google that gives it access to 12Tbps of capacity, will further enhance Openserve’s position as the leading provider of high-speed connectivity in South Africa.
Overall revenue for Telkom Consumer was stable at R25 673-million. Revenue growth of 4% for mobile operations and a 14,8% upswing in handset and equipment sales revenue were offset by the planned decline in traditional copper-based voice services, which now represent a reduced 5,8% of total external revenues.
Mobile service revenue growth of 1,8% resulted from the expansion of our total customer base, which grew by 7,8% to 18,3-million customers at a blended average revenue per user (ARPU) of R86, driven by competitive customer value propositions.
In the post-paid space, the customer base advanced by 11% to reach the 3-million mark at an ARPU of R201. The pre-paid base also continued growing by 7,2% to reach 15,3-million at an ARPU of R64.
Telkom continued to extend its network footprint, launching our 5G services and effectively utilising the newly procured spectrum, with a particular emphasis on the low-frequency band (800 MHz), to enhance coverage of LTE services. This benefited the mobile broadband subscriber base, which grew 9,2% to 11,6-million, representing 63,7% of the group’s total mobile base now using wireless broadband.
BCX had a challenging year but maintained stable revenue levels at R14 252-million.
Performance was driven by 9,1% growth in the IT business, which was offset by declines in the Converged Communications business. The IT business growth was largely due to double-digit revenue growth in the hardware and software business, albeit at lower margins.
The Converged Communications business continued to be impacted by migration to next-generation technologies and robust competition in the market. B
The group’s masts and towers business, Swiftnet, continued commercialising its productive portfolio and saw marginal revenue growth of 0,9% to R1 304-million, driven by the construction of 66 additional towers and eight new in-building coverage solutions (IBS) sites.
Continued modernisation by mobile network operators (MNOs) on our sites, coupled with new base station sites and the deployment of 5G by our clients, grew revenue from continuing customers by 10,3%, mitigating the impact of terminations and decommissioning by two customers.
After launching its first 5G outdoor Distribution Antenna System (oDAS) small cell sites, for future site deployments in support of customers’ 5G rollout plans, Swiftnet successfully tested the technical capability of our power-as-a-service (PaaS) solution. Swiftnet’s EBITDA margin remains healthy at 68,8%.
Gyro advanced property development planning activity for select development opportunities. This attracted interest which resulted in Gyro concluding non-binding memoranda with property development investment partners for the execution of the development projects. The intent is to commence construction for some projects during the new financial year.
The group announced an impairment of R13 017-million (excluding tax effects) in respect of two of its cash-generating units, Openserve and Telkom Consumer. The impairment is a non-cash adjustment and does not impact the group’s EBITDA, has no impact on Telkom’s cash position, and affects neither the Group’s compliance with debt covenants nor its ability to fund its capital expenditure programme.
Group performance
Group revenue increased marginally by 0,9% to R43 138-million, driven by a decrease in fixed and IT service revenue due to the challenging operating environment and the decline in the legacy fixed business as customers migrated to modern technologies such as fibre and LTE. This was offset by an increase in mobile handset and IT hardware and software sales, which are at lower margins, and a 1,8% increase in mobile service revenue.
EBITDA impacted by higher handset costs and operational expenses
Group EBITDA was down 19,8% at R9 552-million, and the EBITDA margin contracted by 5,8 percentage points (ppts) to 22,1%. This was mainly attributable to a 25,5% increase in our cost of handset and equipment, mainly due to higher mobile handset sales of 14,8% and the increase in IT hardware and software revenue of 65,8%.
Operating expenditure (opex) increased by 7,3% largely impacted by accelerated loadshedding and an average group-wide salary increase of 6%, which was effective from 1 April 2022. Tough economic conditions further contributed to the 56,3% increase in impairment of receivables.
Mobile cost to serve deteriorated slightly by 0,7 ppts to 28,4% compared to the prior year, impacted by accelerated loadshedding and the increase in costs associated with the post-paid market, such as distribution channel costs. This was mitigated by optimising roaming costs as we maintained stringent roaming traffic thresholds and migrated traffic to our network, supported by ongoing network investment.
Although improved in the second half, Free cash flow (FCF) was under pressure mainly due to the impact of mobile post-paid sales on working capital.
FFS weakened to negative R2 722-million (FY2022: negative R2 080-million), primarily as a result of the 45% decrease in cash generated from operations before dividend paid, impacted by the R3 218-million decline in profit before tax compared to the prior year. This was partially offset by a 17,6% decrease in cash paid for capex.
Regulatory developments
The Independent Communications Authority of South Africa (ICASA) started the second spectrum licensing process (auction) by publishing an Information Memorandum (IM) in August 2022 soliciting comments on potential frequency bands to be included in the licensing process.
The IM containing all necessary auction-related information (spectrum bands, caps, reserve prices, obligations, etc) has not yet been published. It is anticipated that more than 200 MHz of new spectrum will be on offer in the second auction, including the unsold 800 MHz spectrum lot.
In terms of the settlement agreement between ICASA and Telkom reached in April 2022, ICASA will consider the spectrum holdings emanating from the previous auction, including the imbalances in the sub 1 GHz band, and the impact of the auction on competition in designing the next auction.
ICASA further stated that it would conduct an inquiry into a secondary market for spectrum.