Interim Results Show Telkom South Africa in Decline

Mergers, Acquisitions and Financial Results

A convoluted 21-page report covering Telkom's interim results boils down to one essential fact -- its fortunes are in decline. The results issued last week slice and dice figures every which way, but inescapably lead to a picture of falling profit and pared profit margins.

Telkom lost 150c in basic earnings per share, down 141% from a profit of 364c a year ago, while headline earnings per share from continuing operations slumped 37,9% to 242c. The operating margin fell from 32,3% to 27,3%, mainly due to higher running costs. This comes on an operating revenue up 4% to R18,7bn.

Results for the six months to September 30 are distorted by Telkom's sale of its 50% stake in Vodacom, selling its ill-conceived Telkom Media division and impairing goodwill of R2.1bn for its struggling Multi-Links operation in Nigeria. Headline earnings per share exclude those items.

Selling Vodacom brought in a profit of R40.4bn, but analysts are still waiting to see how it will use the money to fill the gap in its services from having no mobile offerings. The effect of people switching from fixed-line to cellphones was starkly highlighted in a 9% dip in traffic revenue.

CEO Reuben September said Telkom clearly needed to develop a mobile service to win back traffic, and because offering both mobile and fixed products would help it fend off competition.

Telkom had earmarked R6bn over five years for its mobile business and a plan had been approved. But information on its network roll-out and go-to-market strategy "cannot be disclosed due to competitive sensitivities".

One analyst said it was a concern that Telkom was not clarifying its mobile strategy despite budgeting R6bn for the task. Overall the results were "a mess", she said. The fixed-line business was under pressure with its margins shrinking, and losses at Multi-Links were considerable.

Another analyst said: "I wasn't impressed. Multi-Links isn't exactly a roaring success yet and one key concern is that it never will be. Telkom is talking about a lot of initiatives but they are going to take time."

September said Multi-Links remained Telkom's major challenge, with an interim operating loss of R164m. Subscribers rose by 30% to 2-million, yet the average amount they spent each month decreased. Turnaround plans included shedding staff, and Multi-Links was beginning to show slight improvements with growing revenue and declining running costs, he said.

Telkom as a whole saw its operating expenses grow 12% from factors including salary increases and higher payments to international operators. A restructuring process to create leaner business units that will chase new revenue streams to compensate for the dip in fixed voice profits has been dubbed the Telkom Renaissance .

"We are expanding into other geographic markets and other domestic markets," September said, but he warned that earning new revenues from mobile services and data centres would take time and incur up-front costs.

Business Day