Telkom SA reports flat revenue

Telkom South Africa recorded slight revenue growth of 0.9% to 43.1 billion South African rand (US$2.32 billion) for the year ended March 31, 2023, as high costs from group restructuring and load shedding expenses bit into profits.

"The year was characterized by unprecedented levels of load shedding, constrained consumer spending, and dynamic competition against the backdrop of a sluggish economy with persistent inflationary pressures," said Telkom Group CEO Serame Taukobong.

Some of the reasons for the flat revenue include ongoing power supply issues in South Africa and declines in Telkom's traditional copper-based voice services, which now represent a reduced 5.8% of total external revenues.

Scheduled power cuts – known as load shedding – by state-owned power utility Eskom have become increasingly regular and have forced local operators to spend large sums of money on backup batteries and generators to keep towers and other connectivity infrastructure powered during blackouts.

In Telkom's case it spent R655 million ($35.2 million) on diesel during the year in addition to costs of backup batteries.

It said total load shedding increased by over five-times during the financial year, to 5,585 hours with "96% higher diesel usage at record-high prices."

Despite this, mobile network average availability was around 89%.

Normalized earnings before interest, tax, depreciation and amortization (EBITDA) fell by 19.8% year-over-year (YoY), excluding R1.1 billion ($59 million) in restructuring costs. Normalized headline earnings per share (HEPS) fell by 76.6% to R1.35 ($0.073).

In February 2023, Telkom confirmed it would lay off up to 15% of its workforce as part of a new restructuring program to cut costs.

EBITDA was also impacted by a 25.5% increase in the cost of handset and equipment – higher mobile handset sales of 14.8% and increase in IT hardware and software revenue of 65.8%.

Technology evolution, market changes and economic factors adversely affected the group, resulting in an impairment of R13 billion ($699 million) – excluding tax effects – in two of the group's cash-generating units, Openserve and Telkom Consumer.

"From where I'm sitting, I think we are going through a transition period as Telkom, it's going to be an 18-to-24-month transition period. But I think in terms of the structures and the strategies that the board has approved; we certainly do see a big opportunity of creating value. I think we've set out ourselves to unlock the various entities. The big challenge now is in how we flip that to value creation, which is what our shareholders are looking for," said Taukobong.

Takeover talks continue

Taukobong addressed recent media speculation that Telkom had received yet another offer to sell part of the business.

On Monday, the group issued a cautionary announcement to shareholders confirming it had received an "unsolicited non-binding indicative letter" from a consortium led by former Telkom CEO Sipho Maseko for the acquisition of a controlling stake in Telkom.

The consortium led by Maseko's Afrifund Investments also includes pan-African group Axian Telecom and South Africa's Government Employees Pension Fund, managed by the Public Investment Corporation (PIC).

The group told the Telkom Board of Directors it was assessing the merits of the acquisition in accordance with its fiduciary duties.

"In this regard, the Company has requested the Consortium to provide further clarity on several matters, including the proposed offer price and certainty of funding. As such, discussions remain of an exploratory and non-consensual nature, there being no certainty that the outcome of these discussions will result in a transaction," it said.

However, at the group's results presentation on Tuesday, Taukobong did not sound too upbeat about the offer and assured shareholders that the business has the right levels of liquidity.

"The board has equally supported us that we do not need a knight in shining armor. Be it my former employee or my former employer. The board remains firm, that the journey that we are taking for the business will deliver the true results for Telkom," the CEO said.

Taukobong likened a merger deal to a traditional African wedding using an analogy of Telkom as the bride, having many suitors to choose from, but said until all parties agree on the terms there won't be a wedding.

"Let me be cultural and philosophic. It's like a process of lobola. When you go to a lobola, you send people up front with a letter to show intent. You also leave something with the family to show that you can take care of their daughter. So, until somebody comes to our chair with a strong letter and also proof that they can deliver on their proposition, then all approaches will not be considered," Taukobong said.

Lobola is an African custom by which a bridegroom's family makes a payment in cattle or cash to the bride's family shortly before the marriage to show intent and as a type of dowry.

Telkom is certainly not lacking suitors. In January 2023, it called off discussions over a possible merger with local operator Rain.

MTN had also shown interest in buying Telkom in 2022, but discussions ended.

Mobile and fiber businesses grow

Telkom SA's mobile business continued to be a strong growth driver with mobile service revenue growth of 1.8% YoY – supported by a 7.8% expansion in the total mobile customer base to 18.3 million customers.

The group's strategy to focus more on the post-paid market paid off, as the postpaid base grew by 11% to reach 3 million customers while prepaid customers grew by 7.2% to 15.3 million.

Telkom SA grew mobile customers by 7.8% year-over-year to 18.3 million subscribers. (Source: Freepik)

Telkom's wholesale infrastructure connectivity provider, Openserve, continued growth in providing open access connectivity across South Africa with fixed-data next-generation (NGN) revenue growing by 10.2%, driven by increased rollout of fiber and healthy growth in carrier and enterprise services.

According to Taukobong, NGN data-led products now represent close to 70% of the revenue base.

"We expanded the fiber footprint across all channels, increasing the number of homes passed with fiber by 23.9% and surpassing the 1 million homes mark," he continued.

Homes connected grew by 26.7% YoY to reach 492,812 and Telkom said Openserve maintained its industry leading connectivity rate of 47.4%.

"We extended our network footprint, using the newly acquired spectrum to enhance LTE coverage and launch 5G services. This benefited the mobile broadband subscriber base, which grew 9.2% to 11.6 million currently, 63.7% of our total mobile base uses wireless broadband," the CEO added.

Other units have mixed results

Telkom's ICT solutions provider, BCX, has seen muted growth over the past few years but managed to maintain stable revenue levels at R14.3 billion ($767 million). Performance was driven by 9.1% growth in the IT business, which was offset by declines in the converged communications business which was impacted by migration to next-generation technologies and robust competition in the market.

Telkom's masts and towers business, Swiftnet, also reported flat revenue as it constructed additional towers and new in-building coverage solutions (IBS) sites over the period.

Modernization by mobile network operators, new basestations and 5G deployments resulted in a 10.3% increase in revenue from continuing customers.

"Swiftnet successfully tested the technical capability of its power-as-a-service (PaaS) solution. This will help curb the impact of load shedding in our operations and enable us to offer PaaS solutions as a value-added commercial offering making alternative power available to customers struggling with power outages," Taukobong said.

Telkom is also in the process of selling Swiftnet. It said the disposal is now at an advanced stage with a decision on the offers received expected during the first half of the current financial year.

"While we are committed to returning cash to shareholders in the medium term, the board has resolved to postpone the dividend for another year, to first strengthen our cash position, as we navigate the cost transformation journey," concluded Taukobong.

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*Top image is of Telkom Group CEO, Serame Taukobong. (Source: Telkom Group)

— Paula Gilbert, Editor, Connecting Africa