Johannesburg - Telecommunications company Telkom says its profitability has been impacted by mounting competition and a weakened economic environment, highlighting the need for the company to expand into the mobile market.
On Monday Telkom released results for the six months ending September 2009 that revealed a 37.9% decline in headline earnings per share to 242.2 cents.
The group's Ebitda (earnings before interest, taxes, depreciation and amortisation) margin decreased to 27.3% from 32.3%.
The company has also been hit with an impairment of R2.1bn, after the value of Nigerian subsidiary Multi-Links was written down.
The results also reflect a R40.4bn profit from the sale of Telkom's Vodacom shares. Telkom paid out R11.2bn in dividends during the period under review and reduced net debt by R8.7bn. The company said the process of restructuring its operations into three separate centres is 85% complete.
More to come
Said CEO Reuben September: "The impact of competition and the weaker economic environment are evident in the Telkom Group's financial results. The negative effect of growing competition and fixed to mobile substitution is starkly highlighted in the 9.0% decrease in Telkom South Africa's traffic revenue.
This continuing trend justifies the imperative for our group to enter the mobile market, and particularly the mobile data market."
He said Telkom's continued efforts to move traditional traffic revenues into annuity type products and data products "exacerbates the decline".
"In addition, data revenue posted more modest revenue growth of 8.7% as a result of increased competition and pricing pressures in this segment of our business.
"Our group operating expenditure grew 12% reflecting higher than inflationary increases as a result of higher payments to international operators, salary increases, provisioning for slow moving inventory and higher operating leases in Multi-Links," said September.
He warned investors to expect further costs incurred from Telkom's ongoing restructuring and expansion plans, which would have positive effects in the medium to long term.
"We are strongly focused on reducing our costs in order to protect our profits, and we remain committed to a 10% reduction in operating expenses by the 2011/12 financial year," he said.
"While control of discretionary expenditure is showing immediate reduction, other areas under focus require careful planning and execution to ensure long-term success," explained September.
Protect and grow
MD of research and consulting firm World Wide Worx Arthur Goldstuck said Telkom must protect its fixed-line business.
"The reality is that Telkom needs both a defence and growth strategy," he said.
"They need to better defend their strong points. And the one I see them allowing to be eroded is their fixed-line subscriber base. I think they underestimate the importance of it and don't protect it adequately," said Goldstuck.
"I find it incomprehensible that they don't make a greater effort to redefine the company's fixed line strategy - and if they do you don't see it in their results."
Goldstuck said that Telkom doesn't seem to be researching market needs for fixed line solutions which include not only their landline business, but also all of the data products provided on top of that.
"Telkom has an advantage in the data space because ADSL is so much more robust than any mobile offering. ADSL is a major differentiator for Telkom, but doesn't appear to play a role as differentiator in their strategy," he said.
Goldstuck added that the telecommunications market has been turbulent for all involved over recent months. He added that companies are flailing about for a new strategy as the market changes.
"Dramatic changes are afoot and have only just begun. Everyone in the telecoms market has run into a perfect storm," he said.
"Telkom must find growth where they have expertise, but also where there is potential. Their data centre business is one area where they can grow, but it won't be large enough in absolute rand terms to make up for attrition elsewhere," said Goldstuck.
"Multi-Links' subscriber base growth of 26.9% is quite impressive and comes off of an already high base."
"It's clearly not a profitable operation, but Telkom might have inherited a big mess that it must turn around. I'd give them another six months to see what they manage to do there. Nigeria is going to be the biggest telecoms market in Africa and if this is their strategy for getting in, they must make it work" he said.
- Fin24.com