[By Duncan McLeod] Is it all going pear-shaped for Telkom? For many years, SA’s fixed-line operator was able to generate billions of rand in profits for its shareholders. But now it appears to be facing a perfect storm of competition, regulation and market change.
Things are looking bad for Telkom. In its interim results to September 30, it reported headline EPS had slumped by 37%. Its profit margins, based on earnings before interest, tax, depreciation & amortisation, fell by 15,5%, from 32,3% to 27,3%.
A closer examination of Telkom’s key operational metrics paints a picture of a business in steady decline. The recession has obviously contributed to the group’s problems, but the decline in its fixed-line business has been under way for some time.
In the six months to September, local traffic volumes carried on the SA network fell by an extraordinary 21,7% from the same period a year ago, to 3,7bn minutes. Even fixed-to-mobile traffic is under pressure, with volumes declining 9,7%. The only area of growth in traffic was from Telkom’s residential calling plans.
To offset the declines, Telkom plans to spend as much as R6bn in the next five years building a mobile network.
The group isn’t providing details about its strategy or roll-out plans, much to the chagrin of analysts, some of whom have questioned whether the operator is simply repeating the same mistake it made with its aborted investment in pay-TV operator Telkom Media.
Another worry is that the new focus on mobile could reduce Telkom’s commitment to its fixed-line business. This is concerning given that fixed lines are still the superior way of delivering advanced broadband services.
There’s little doubt Telkom needs some sort of mobile strategy, but it ought also to be investing heavily in providing high-speed fibre infrastructure to businesses and to homes in wealthier parts of the country, such as Johannesburg’s northern suburbs. These super-fast connections are needed to stimulate economic growth.
Things are looking even worse for Telkom in Nigeria, where its Multi-Links subsidiary continues to bleed.
The group has hired former Cell C CEO Jeffrey Hedberg, a renowned turnaround specialist, to try to sort out Multi-Links. If he can do it, analysts say Telkom’s share price could be worth a punt. But it’s a big ask.
Perhaps Telkom’s biggest challenge, even bigger than Multi-Links, is regulatory in nature. Though the Independent Communications Authority of SA (Icasa) has shown itself to be toothless in the past, new communications minister Siphiwe Nyanda looks willing to apply pressure on the authority to bring down prices.
That may mean an acceleration in local-loop unbundling (LLU), allowing broadband operators to serve customers directly over the so-called last mile of copper cables between Telkom’s telephone exchanges and people’s homes and businesses.
LLU, coupled with carrier preselect regulations, allowing people to route their calls via a network operator of their choice, will have a detrimental impact on Telkom’s revenues and profits.
Then there’s the small matter of the competition authorities.
Telkom has managed to dodge a number of fines for alleged anticompetitive behaviour. But it looks as if its time is up. On Friday, the supreme court of appeal in Bloemfontein found in favour of the commission in a landmark case that could pave the way for Telkom to be fined billions of rand for past abuses.
Whichever way one looks at it, the problems are piling up for Telkom. The only question now is whether they’ll prove insurmountable.
- McLeod is editor of TechCentral. Follow him on Twitter
- This column is also published in the Financial Mail