Telkom takes a hit as its fixed-line business drags
Telecommunications group Telkom has published its interim results for the six months ending 30 September 2022, showing a big hit to headline earnings over the period.
The group reported gross operating revenue down 0.7% to R21.15 billion for the period, with earnings before interest, taxes, depreciation, and amortisation (EBITDA) down 17.3% at R4.9 billion.
Basic earnings were 52.5% lower at 131.6 cents per share (1H21: 276.8 cps), with headline earnings down 51.9% at 137.2 cents per share (1H21: 285.5 cps).
No dividend was declared, in line with the group’s three-year suspension strategy.
Telkom noted that its group revenue was under pressure, driven by a decrease in fixed, mobile and IT service spend. This was due to strained economic conditions for consumers as well as a decline in its legacy fixed business as customers migrate to fibre and LTE.
“This was offset by an increase in mobile handset and IT hardware and software sales,” it said. “These sales are at lower margins and in line with the movie strategy to drive post-paid annuity revenue.”
The lower group EBITDA – and the constrained EBITDA margin at 23.4% – was attributable to a 31.4% increase in the cost of handsets, equipment, software and directories, following higher mobile handset sales of 19.7% and the increase of 73.1% in IT hardware and software revenue, it said.
Group chief executive officer, Serame Taukobong, said that the period was characterised by strained economic conditions placing consumers under pressure and an intensely competitive landscape.
“Group performance suffered under a sluggish economy, the increasing electricity and fuel prices, rising interest rates cycle, and high unemployment, which constrained and impacted levels of consumer spending,” he said.
“As competition intensified in the mobile sector, we continued to innovate to protect Telkom’s value proposition in the market. We saw good growth in our mobile subscriber base, sustained the growth trajectory in the fibre market, and corporates revived spending on their IT infrastructure.
“However, growth was impacted by customer recharges returning to pre-Covid-19 levels. We continued to pursue our migration strategy and continued to manage the transition from old to new technologies. However, this migration impacted our revenue growth and overall profitability.”
Sector performance
The mobile business continued to drive growth in Telkom Consumer. Total mobile revenue grew marginally by 0.5% as the product mix evolved towards longer post-paid contracts.
This was achieved against the backdrop of intensely competitive markets in a challenging economic environment, Telkom said.
“As the overall macroeconomic constraints materialise, the pre-paid surge has slowed as the share of wallet has reduced,” it said.
Telkom’s pre-paid subscriber base grew by 10.7% to 15.2 million. In the post-paid market, the postpaid base increased by 11.7% to 2.9 million while the average revenue per user (ARPU) reduced
to R206.
However, this growth came at the expense of Telkom’s legacy fixed-line business, which remains under pressure due to migration from traditional fixed voice to newer technologies.
Openserve struggled, with revenue declining 4.3% over the period, despite 10.8% growth in its ‘next generation’ revenue which comprises high-capacity links and fibre.
Overall fixed broadband subscribers were down marginally to 562,080 (-0.1%); however, Telkom’s fixed internal all-access subscribers dropped significantly, shrinking by 13.6% to 274,206 subscribers from 317,337 in the prior period.
Fixed voice ARPU reduced by 2.6% to R307 – however, fixed broadband ARPU was up 5.7% to R288.
“A pricing and margin gap remains between the new business and legacy businesses. The accelerated decline in legacy fixed business during the period limited overall performance,” Telkom said.
Openserve continued with its growth trajectory in the fibre market, increasing homes passed with fibre by 35.8% and homes connected with fibre by 33.7%.
In the business services sector, BCX saw a recovery over the period, resulting in 13.7% revenue growth in the IT business for hardware and software solutions as corporates began investing in IT again, following a muted two-and-a-half-year period since the beginning of the pandemic.
“Overall revenue grew marginally by 0.8%, mainly boosted by the IT segment. This improvement in performance signals a positive outlook for the remainder of the financial year,” the group said.
Outlook
Looking ahead, Taukobong said that the group expects to grow at low- to mid-single-digit percentages in the medium term, given the challenges it faces in its legacy operations.
“Given the material increases in the cost of sales for Telkom Mobile, the accelerated decline of the legacy business at Openserve, BCX and Consumer, plus the impact of load shedding, we are revising our guidance to the market. In the medium term, we expect revenue and EBITDA to grow at low- to mid-single-digit percentages,” he said.
He added that Telkom is in the final year of the three-year dividend policy suspension period, and the board remains committed to reinstating the dividend policy at the end of FY2023 and is reviewing the policy.
Despite headwinds, the CEO said that the mobile business has shown good growth and is expected to continue with this momentum, while Openserve will focus on monetising new products and managing costs.
“BCX continues to gain traction in its IT business but remains challenged by increased competition in its Converged Communications. It will continue managing its costs closely to maintain its margin for the year,” he said.
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