Within the past six months, Telkom finally reached tipping point. Despite adding 55 000 fibre connections, it lost a shocking 20% of its total fixed broadband base (including both DSL and fibre).

The plan all along was to migrate customers away from its legacy copper network to fibre and fixed LTE (mobile), but one gets the sense that in its newfound rush to switch off its copper network, it is happy to lose customers at any cost.

In 2017, this author noted here that “this situation has been entirely predictable for years now and Telkom is simply not doing a good enough job at migrating DSL customers to fibre. It should do this for free to any customer who wants to move.” Back then the company was still optimistic, stating that “the decline … exhibited over the past few years has moderated with the base stabilising in the last two months.” Look how that’s turned out.

Between September 2018 and September 2019, it lost 186 141 copper broadband lines, but only gained 55 577 fibre connections. This has caused tremendous pressure on its revenue line. Fixed data revenue from “traditional products” (DSL) is down R400-million to R3.2-billion, while revenue from “new data products” is up R200-million to R1.5-billion.

It’s going backwards, and quickly.

Worryingly, it says investment in fibre to the home has been “rationalised” (down 36% year on year) as it focuses on areas “showing a propensity for higher connectivity rates”. An alternate interpretation is that, because of strong competition from other providers, it has simply run out of viable areas to roll out fibre to.

This is not just a problem in the consumer segment. Enterprise voice and data revenue from legacy products (fixed lines and DSL) is also in sharp decline, down 15% and 7% respectively.

Mobile rocketing ahead

Of course, the mobile business is rocketing ahead and helping keep overall revenue stable. At this rate, however, Telkom is going to have very little fixed-line business left (in a year, it has lost 591 000 fixed-line customers (23%), nearly 50 000 a month).

It’s difficult to compare numbers against last year, due to the implementation of IFRS16 accounting rules, but there are four red flags in the results to end-September:

Telkom burnt through R426-million in cash during the six months. Net cash at the interim stage totalled R1-billion, less than half of the R2.1-billion it had a year ago.
In the six months, Telkom reported negative free cash flow of R1.3-billion. This is an “adjusted” figure, though. Add back costs paid as part of the group’s various employee restructuring programmes (R162-million), and negative free cash flow was R1.4-billion. Of concern is the fact that operating free cash flow before capex was down 17% to R2.8-billion. It wants to improve free cash flow by between R700-million and R1-billion in the second half, through supply chain financing, handsets receivables financing, and the disposal of non-core assets.
Telkom is increasingly relying on debt to fund capex. Net debt (excluding the impact of IFRS16) at the end of September was R11.8-billion. It raised a net R2.4-billion in new debt in the period, significantly more than the R702-million it did in the comparative period last year. More than R3.5-billion is repayable this financial year, so expect that number to increase as it refinances much of this. The group contends it has a “healthy balance sheet”. Net debt to Ebitda is at 1.2 times (pre-IFRS16), which is higher than its previous guidance of 1x. Post IFRS16, net debt/Ebitda is 1.4x. It has updated its guidance over FY2020/FY2021 to equal to or below 1.5x.
Given the sharp increase in debt, cash flow is being impacted by soaring finance charges. These have nearly doubled to R646-million in the six months and it is difficult to see this scenario changing.

All of this has meant a 35.7% cut to its interim dividend (to 71.5c).

Who is Telkom’s target?

A separate cautionary announcement on Tuesday revealed that the group is in negotiations regarding a potential acquisition.

Some have speculated that it may finally try buy Cell C, with Bloomberg reporting an offer as fact. The absence of a similar cautionary announcement from Blue Label Telecoms can be explained by the latter’s investment in Cell C being written to zero.

Also, Telkom’s mobile business is in a much stronger position than Cell C, which simply wasn’t the case a few years ago.