Telkom looking forward to the future
Describing the 2009 financial year as having been "both challenging and very exciting", Telkom's Chief Executive Officer, Reuben September, today announced the Group's provisional annual results for the year ended 31 March 2009.
Salient features of the Group financial performance for this year include:
- Vodacom deal successfully concluded after year-end;
- Total cash distribution to shareholders of 2,275 cents per share;
- Group operating revenue increased 6.9% to R35.9 billion;
- Group EBITDA decreased by 11.6% to R11.7 billion;
- Group EBITDA margin decreased from 39.3% to 32.5%.
- Group operating profit decreased by 29.6% to R6.4 billion
- Net debt to EBITDA, including discontinued operations, increased from 0.8 times to 1.2 times;
- Cash flows from operating activities increased by 7.8% to R11.4 billion;
- Headline earnings per share of continuing operations decreased by 45.9% to 557.0 cents;
- Net asset value per share increased by 10.1% to 7,236.2 cents; and
- Ordinary dividend declared of 115 cents per share and a special dividend of 260 cents per share was declared.
Looking back at the past financial year, September stated: "We have succeeded in concluding the Vodacom transaction at an exceptional price, given the market conditions, and returning substantial capital to shareholders through the R19.00 special dividend and unbundling of Vodacom shares to our shareholders."
Added September: "We have also concluded the sale of our 75% stake in Telkom Media to Schenzen Media (Proprietary) Limited and taken our holding in Multi-Links, Nigeria, up to 100%. Post the year end, we succeeded in acquiring the business of M-Web Africa, including AFSAT, from the Naspers Group. Our footprint in Africa now covers almost the entire continent, excluding North Africa, providing Telkom with opportunities to extend our services to a very fast growing market."
However, September indicated that, to date, Telkom's initiatives in Africa have been challenging given the high start-up costs, unknown and competitive markets, infrastructure and technology challenges, skills requirements and volatile currency and interest rate markets.
"The financial impact of this on our results is clearly visible in the impairments, foreign exchange losses and negative fair value effects we have had to recognise in the year. We believe Telkom is, however, well positioned to capitalise on these opportunities in Africa," said September.
"Telkom, unhindered by the restrictive Vodafone shareholders agreement, is ready to aggressively compete in the communications market," emphasised September.
He explained Telkom’s active move up the value-added IT services chain perfectly positioned the Company to deliver a true converged services value proposition and that Telkom is following the lead of global players such as Deutsche Telekom and British Telecom who hold third and fifth positions respectively in the European IT outsourcing market.
Operationally, September stated that Telkom's strategy continues to focus on defending and growing the Company's traditional voice base. "Our growth strategies focus on adding revenue by developing a fixed-mobile capability to give us a larger share of the voice revenue pie, aggressively building our data, broadband and converged services offering and expanding geographically into high growth markets."
However, with regard to voice revenue, Telkom's traffic revenue decreased 3.9%. This is primarily due to continuing fixed to mobile substitution. Revenue from subscription-based calling plans increased by 20.5%.
The Telkom Closer packages have performed well, increasing by 27.6%. Supreme Call packages, mainly targeted at the business segment, have increased by 14.4% and PC bundles have increased 48.3%.
"This shows that our defend and grow strategies are on track. In addition, bundled products represent an important strategy for delivering greater value to our customers. It is vital for Telkom to explore all avenues that will provide us with growth and migrate traffic back on to our network," said September.
With Telkom now having the opportunity to enter the mobile market in South Africa, September explained that the Company was in the process of conducting comprehensive mobile market research to establish exactly how Telkom can maximise the opportunity at minimal operational and build cost. Back to Top
"We believe that Telkom is able to take advantage of our Next Generation Network and that newer technologies will give us an advantage over the current mobile operators in terms of our ability to carry increased traffic, provide superior quality and to compete," September said.
Broadband and converged services continue to perform well, with ADSL subscribers up 33%. Do Broadband subscribers increased 58.1%, while Internet all-access subscribers increased 18.2%. The current Broadband line penetration rate is 15%, but Telkom's targeted penetration rate is 25% by 2013/14.
DSLAMs have increased by 50.4% to 4,000 sites throughout the country. Telkom has installed 91% of ADSL lines within 21 working days where no network build is required, compared to 79% in the year ended March 31, 2008 and 74% within 21 working days where network build is required, compared to 66% in the year ended March 31, 2008. The ADSL Self Install option is expected to continue to improve the installation times. As at March 31, 2009, 57% of all ADSL installations were being done through the Self Install option.
Encouragingly, data revenue (including broadband revenue) continues to achieve double digit growth, delivering a 12.1% revenue growth. Data connectivity revenue increased 10.9%, mobile leased line revenue increased 0.5%, Internet access revenues increased 29.6% and managed network services and VPN revenue showed an impressive 22.3% increase.
"Telkom intends to continue exploiting the advantage of our high-quality unmatchable national network footprint in the corporate data market," stated September, adding that Telkom's operations in South Africa remain the Group’s core business and cash flow generator.
He emphasised that improved customer service is vital to the success of Telkom, saying that customer segmentation based on value is enabling Telkom to understand customers better in order to give additional value and services to customers.
Faced with competition eroding our revenue, base-cost management continues to be a key element in creating shareholder value. Combined with the inflationary environment affecting Telkom's operating expenses, a number of once off items impacted fixed-line expenditure, including:
- R 177 million expenses relating to the Vodacom transaction;
- R 85 million impairment of Africa Online;
- R 254 million impairment of Telkom Media; and
- R 1.8 billion impairment of Multi-Links.
Given the current global economic climate and the business imperative for Telkom to reduce its cost base, the Board has decided to delist from the New York Stock Exchange. Maintaining a listing in the United States is expensive and takes considerable management time. The methodology employed and discipline gained from compliance with the Sarbanes-Oxley reporting requirements will be retained, where appropriate, to ensure strict corporate governance compliance and transparent financial reporting.
Telkom is comfortable that the Johannesburg Stock Exchange provides sufficient access to capital from both South African and global investors. Telkom intends to maintain a level 1 American Depository Receipt programme to facilitate over-the-counter trading in the United States of America.
The aim of the Company’s geographic expansion strategy is to establish Telkom as a regional voice and data player through the provisioning of a range of hosting services, managed solutions, mobile voice and wireless broadband services. To date, Telkom has invested in Multi-Links, Africa Online and M-Web Africa. We have also signed of a memorandum of understanding with America’s AT&T. Telkom is also conducting significant market research in order to enter the mobile and Data Centre operations markets in South Africa.
Multi-Links, Telkom's 100% owned subsidiary in Nigeria, achieved a 124.9% increase in revenue, with subscribers growing 209.3% for the year ended March 31, 2009. However, operating expenses increased 157.1%, while capital expenditure increased 112.7% and bad debts increased 208.2%. Multi-Links reported a negative EBITDA margin of 11.9%, an EBITDA loss of R226 million for the year ended March 31, 2009 and a net loss of R1.76 billion after accounting for an impairment of the deferred tax asset of R301 million.
"Turning around Multi-Links's performance is vital to Telkom given the extent of the Group's investment and the enormous opportunity the Nigerian market provides. We expect Multi-links to be EBITDA positive by 2010/11 and become cash flow positive by 2011/12," said September.
Between Africa Online and M-Web Africa, the Telkom Group's footprint extends across the entire Sub-Sahara Africa region. "This provides the Group with a great opportunity to service multi-national customers and, particularly, corporate customers requiring internet access data products across Sub-Saharan Africa. The internet access market is still in its infancy in sub-Saharan Africa but is expected to deliver solid growth into the future," stated September.
Telkom is also positioning itself to serve multi-national customers in Africa through combining our presence with partners. On April 16, 2009, Telkom and AT&T entered into a strategic memorandum of understanding with AT&T which aims to extend AT&T's global networking reach to sub-Saharan Africa and boost Telkom's strategy to grow a strong Information and Communications Technology footprint on the African continent.
With regard to Telkom's mobile strategy, September stated that having an integrated fixed-mobile offering will allow Telkom to leverage its customer base, marketing, logistics and distribution channels to increase the Group's share of voice revenue. In addition, Internet access demands are increasingly requiring mobility.
Telkom intends to use the strengths of its fixed-line network to differentiate its mobile service on quality and a fully converged array of products and services, while the Company’s Next Generation Network and access to the latest technologies will provide further value to our customers.
"An integrated bundled offering would offer superior speeds and quality through the fixed-line, including the advantages of mobility when required by the customer. Mobility provides cost efficiencies and the opportunity to consolidate traffic onto Telkom’s network," explained September.
Telkom has rolled out 141 W-CDMA sites in major metropolitan areas throughout South Africa. The Company's move into offering a fully fledged mobile service is dependant on the finalisation of market research and the outcome of pilot and customer trials planned for the end of 2009.
Telkom's strategic intent is designed to deliver sustainable, profitable growth going forward and is benchmarked against global best practice. The creation of sustainable shareholder value is the underlying driver of every decision made. Telkom's Board of Directors and management team believe in the cost efficiencies and cash flows of the fixed-line business and are committed to addressing this while we invest for growth in new areas of business.
The strength of Telkom's unmatchable network has been tangibly demonstrated by several clients, including FIFA. Telkom is extremely proud that our expertise in connectivity, transmission and managed networks has been recognised by FIFA who has chosen us to design and provide the underlying infrastructure for both the Confederations Cup 2009 and the 2010 FIFA World CupTM. Telkom will also provide FIFA's data centre hosting requirements and fully managed customised IT solutions. To date, Telkom has successfully beamed the Confederations Cup 2009 to billions of people across the globe.
The deployment of the infrastructure and services at the ten stadiums and International Broadcasting Centre is being funded through a contract entered into with the Department of Communications. The funding received from the Department of Communications totals R950 million over the 2009 and 2010 financial years. Telkom has spent R118 million during the year ended March 31, 2009. The Department of Communications funding does not cover certain increases in the national backbone and transmission networks, element management operating systems and network synchronisation requirements.
Revenue will be generated directly from FIFA, the media and broadcasters. We anticipate that this investment will comfortably meet our investment criteria. In the future, it is envisaged that Telkom will be able to redeploy a substantial portion of the infrastructure provided at the stadiums throughout the network, apart from the access equipment. In addition, the expansion in the core network will be utilised for South Africa's growing bandwidth demand.
The level of dividend going forward will be based on a number of factors including the consideration of the financial results, available growth opportunities, capital and operational requirements, the Group’s debt level, interest coverage, internal cash flows, prospects and resources.
September indicated that Telkom was ready for potential challenges that lie ahead and that the organisation was refocusing itself in order to meet these challenges. "The ICT market is never static. It is characterised by fluidity, change and constant innovation. The transformation of Telkom is absolutely necessary to allow us to be agile and responsive to our customer needs and to the changing environment."
The new structure consists of the Telkom Group with a corporate centre and three operating business units - Telkom South Africa, Telkom International and Data Centre Operations. Telkom South Africa is split into three distinct units - Network and Wholesale, Enterprise and Consumer.
The reorganising seeks to improve profit and loss accountability throughout the organisation and to create a distinctive focus for each business unit. It will give the business units the agility to focus on customer centricity and cost efficiency as well as to respond to the competitive environment, changing technological landscape and regulatory requirements.
September also indicated that Telkom was acutely aware of the risks associated with large investment spend and that free cash flow is a key focus throughout the Group.
"Each and every investment will be benchmarked to achieve the best returns to our shareholders. Telkom has the team and the strategy in place, the realigned organisational structure, the determination and the balance sheet to drive us into the future with the sole purpose of delivering attractive and sustainable returns to our shareholders," concluded September.