TELKOM AND VODACOM IN SOUTH AFRICA ANNOUNCE STRONG RESULTS

Mergers, Acquisitions and Financial Results

Fixed-line monopoly Telkom has achieved what CEO Papi Molotsane dubs "an impeccable performance", posting a 30% growth in operating profit to R14,6bn.

Although analysts declare that the fixed-line phone business "is dying a slow death", Molotsane said there was still a lot of value to be extracted from the business.

Results for the year to March show that Telkom clawed in revenue of R47,6bn, up 10,3% from last year. The operating profit margin reached 30,8%, up from 26,1%. This allowed the company to declare a dividend of R9 a share.

The fixed-line business boasted a 4,1% rise in revenue to R32,7bn. Fixed-line penetration dipped from 10,1% to 10% of the population, however, as cellphones ate into the customer base.

Finance director Kaushik Patel warned that the revenue from fixed-line calls would decline this year, creating a need to seek growth elsewhere. Already much of the growth in demand for fixed-line services is coming from data, rather than voice. Particularly strong demand is coming from users wanting lines converted to offer high-speed ADSL internet access.

Telkom now serves only 143509 ADSL users. This is a minuscule number for the country as a whole, and has led the Independent Communications Authority of SA (Icasa) to take Telkom to task for its high prices.

Icasa is expected to enforce price reductions soon, but Molotsane retaliated by saying that Telkom had submitted its annual tariffs to Icasa for approval yesterday, and these included a 24% price cut for ADSL. Overall, Telkom's charges will drop an average of 2,1% from August, he said. International and long distance call fees will drop 10%, in a bid to retain customers.

As well as the prospect of greater competition from the second network operator, another threat to profit is a decision by Icasa to let other operators access Telkom's network at cost-based prices rather than profit-packed prices.

This would affect the fees Telkom could charge for access to bandwidth on a planned $200m undersea cable around Africa's East Coast. Telkom may pull out of this project.

"Our involvement in any cable will take place only if we deem it to be commercially viable for our business," Molotsane warned.

In a presentation to analysts, Molotsane explained why capex will hit a whopping R30bn in the period from 2005 to 2010.

"We need to focus on what to do to achieve long-term profitability," he said. This demanded high levels of investment in next-generation networks able to offer the data services that customers are demanding. Of the planned investment, 37% will be spent on a next generation network, 24% will go to improve existing networks and 12% will be spent on customer care.

Molotsane said further growth might come from investing abroad, perhaps in partnership with Vodacom, in which it holds a 50% stake. Telkom is a preferred bidder for Nigerian state-owned operator Nitel.

This year Vodacom contributed 33% of Telkom's revenue and 19% of its attributable profit.

In a separate announcement ,mobile operator Vodacom, has posted the best results in its 12-year history, with a massive 52% rise in subscriber numbers giving it an almost unassailable dominance over the South African market.

Vodacom now boasts a 58% market share in SA after signing up 6,4-million new users in the year to March, to serve 19,2-million users. They brought in a revenue of R31bn, up from R25bn a year ago.

With its operations in four other countries added in, the overall revenue hit R34bn, its customer base touched 23,5-million and after-tax profit rose 32% to R5,1bn.

Although Vodacom dominates the local market, it is an also ran to MTN in Africa as a whole, with MTN reporting a revenue of R34,7bn in financial 2005 and 24,1-million subscribers.

Vodacom's results yesterday showed a diverging strategy between the rivals, with Vodacom concentrating on increasing its profit by offering a wider range of services, compared to MTN's quest for all-out geographic growth.

The rise in profits came despite cuts in the cost of calls, which dipped between 13% and 54% on various packages.

The cost of data services, which include text messages and data cards for high-speed internet access from a laptop, were slashed 94%.

That lays the foundation for Vodacom's future growth, which is centred on becoming an all-round communications company rather than a carrier of voice calls.

Customers would come to think of Vodacom as the provider of all their communications needs, be it voice, text messages, e-mail, video calls, television or surfing the internet, said CEO Alan Knott-Craig.

"Mobile TV is the most interesting thing on our horizon. Television on a mobile phone is going to be a real big business, and there is no reason why we shouldn't have the same penetration of low-cost TV as we have for voice," he said.

"There is no reason why companies such as ourselves shouldn't start enhancing revenues quite significantly by being part of the selling of content."

Even though mobile television is in its infancy, 13000 users watched the verdict in the Jacob Zuma trial on their cellphone handsets.

Vodacom is hoping that mobile television and other data services will help shore up the declining average revenue per user (arpu), which measures how much its customers actually spend each month.

In the past year Vodacom SA's arpu plunged from R163 to R139 a month as cellphones reached lower-spending customers.

That made it essential to invest in new technologies that could offer revenue-generating services, said Knott-Craig. In the past year Vodacom SA reinvested 11% of its revenue in improving its network.

Business Day