SA’s Telkom crawls out of the doldrums

“I am currently using Telkom Internet connection at my house and also a customer of 8ta (Telkom’s mobile phone unit),” said Karabo Moeng, a software developer shopping at the telco’s Mall of the South store in Johannesburg South. “I am really pleased with Telkom services and don’t trust the other unreliable service providers.” By Gugu Lourie

No so long ago, obituaries were being drafted for the oldest South African telco before Sipho Maseko took over the hot seat at the fixed-line telephone behemoth in 2013. But investors are starting to show similar zeal as revenue, headline earnings per share and mobile phone unit starting to show a turnaround, and Maseko’s management team taking relevant steps to create more shareholder value.

A drastic restructuring of the business and focusing on extracting value has enabled the South African telco to complete its three-year turnaround, despite lingering unfavourable market conditions in South Africa and opposition from its unions.

Telkom is now readying the business for growth.

On Monday Telkom reported that operating revenue rose by 14% to R37 billion in the year to end-March 2016.

For the full-year, Telkom reported that normalised headline earnings per share  – South Africa’s main profit gauge – climbed by 15.5% to 658 cents, while earnings before interest, tax, depreciation and amortisation (EBITDA) was up 16% to R11 billion.

Telkom said that its mobile business has delivered a star performance during this phase, reducing its EBITDA loss from more than R2 billion three years ago to R43 million this year. Since the fourth quarter, the mobile business has been breaking even on a monthly basis.

The company also rewarded investors with second dividend to thank them for their patience while the business was being fixed. Telkom declared a 270 cents dividend, up by 10% compared to 2015.

“Our strong performance demonstrates the sound execution capability we have developed over this turnaround journey and lays a solid foundation for future growth,”  CEO Maseko informed investors on Monday.

Maseko took over Telkom in 2013, when the company was on the verge of being irrelevant to the market, suffering from bad customer services, cash guzzling assets, mounting debt, bloated staff members and interference from its biggest shareholder – South African Government.

But his turnaround plan, which was executed with the support of the Telkom board led by Jabu Mabuza, has been one of the most interesting the industry has ever seen as the biggest shareholder, the South African Government, hasn’t interfered with the strategy.

During the three-year turnaround plan, Telkom successfully de-risking its mobile business, managed traditional revenue decline, focussed on operational and capital efficiencies and improving customer experience.

During the year, 3 878 Telkom employees accepted voluntary severance packages (VSPs) and voluntary early retirement packages (VERPs) and a further 437 employees were affected by outsourcing. As a result, Telkom company employee expenses reduced by 10%.

Telkom has also managed to stabilise the decline in leased line revenue in the second half of the year, indicating that its migration of customers to next generation products and services and pricing strategies are proving to be successful. Its data revenue grew 29.2 percent mainly driven by IT services as a result of consolidating Business Connexion.

With the increasing demand for high speed broadband in mind, Telkom aims to grow its broadband penetration through its fixed-line lookalike LTE services. “We will continue to invest in this service by re-farming our 1800 MHz spectrum to offer a fully mobile LTE service to our smartphone customers,” the company said.

During the year, Telkom increased capital expenditure by 16.8 percent to R6.1 billion with capex to revenue of 16.3 percent in line with its guidance. The company explains, “We invested in our key priority areas which include Fibre, LTE and Mobile, IT systems, maintenance and rehabilitation as well as service on demand.”

Telkom’s turnaround over the past three years is an impressive accomplishment as the telecommunications firm continues to seek customers in a market that is underperforming, due to customers being hard hit by tough economic conditions and in an increasingly competitive marketplace.

Having restructured its business and now seeking new revenue streams such as deployment of fibre is in a much more sustainable position than it was three years ago.

It still has more firepower to compete as its cash balances and other money market instruments reduced from R4.7 billion to R4.2 billion in the year to end-March 2016. Telkom and its executives under the leadership of Maseko now needs to remain nimble and avoid any temptation to accelerate expansion similar to the one that created its mobile phone unit, which was losing cash faster than a telephone call.

The telco must make sure its current practical commercial strategy and approach to expansion is kept intact and must focus on customers experience and delivery of fibre services to its users.

“In conclusion, having completed the turnaround phase of our strategy, we are embarking on the next phase, where our bias is to growth as we focus on implementing our new operating model. Customer service will continue to be part of our strategy, as will implementing the right processes and systems to enable and empower our employees to contribute towards improved customer centricity,” says Maseko.

That said, Telkom now has a better outlook but still sits in a relatively precarious position of competing with aggressive rivals Vodacom, MTN and other fibre service providers.

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