Telkom SA SOC Ltd (TKG.JO) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Telkom Q1 FY 2026 Trading Update for the quarter ended 30 June, 2025. [Operator Instructions] Please note that this call is being recorded. I would now like to hand the conference over to the Investor Relations team. Over to you, Nondyebo.

Thank you. Good afternoon, and welcome to the Q1 conference call for the 2026 financial year. I'm Nondyebo Mqulwana, Head of Investor Relations at Telkom. We published our trading update for the third quarter earlier this morning, and we hope you've had a chance to go through it. Joining me on the call today are our Group CEO, Serame Taukobong; and Group CFO, Nonkululeko Dlamini, and they will present the key performance highlights for the quarter ended 30th of June 2025, and then, we'll move on to a Q&A session. Please note that all financial metrics and growth rates referred to during the call are on a year-on-year basis, meaning Q1 FY 2026 compared to Q1 FY 2025, unless otherwise indicated. This call on trading update may contain forward-looking statements, which are based on management's current expectations and are subject to risks and uncertainties that may cause actual results to differ materially. With that, I now hand over to our Group CEO, to take us through the key highlights for the quarter.

Thank you, Madam, and good afternoon, everyone, and thank you for joining us on the call. I hope that you could hear us loud and clear. We appreciate your continued interest in Telkom and welcome you all on this call. As we commence with the 2026 financial year, we do so with solid performance and momentum carried forward from a strong 2025 performance. This continued progress is a direct result of our data-led strategy, which underpins our performance for the quarter. Our unwavering focus on operational excellence across all business units, along with our OneTelkom ways of winning has enabled us to sustain our performance, and we remain focused on delivering results, as we build on our proposition as a backbone of South Africa's digital future. The excellent Telkom Group results were disappointingly affected by BCX performance, with BCX revenue declining by 8.3%, while its annuity-based revenue remained flat. Aligned with our focus of delivering results and maintaining our say-do ratio, a specialized team has been put in place to continue its work and to foster an effective BCX delivery, driven on people, strategy and proposition execution. The continued effective execution of our data-led strategy has cushioned group revenue as a result. Group data revenue grew by 7.1% and represented almost 60% of total revenue. Mobile data revenue increased by 9.6%. Openserve fiber data revenue grew by 11.3%. It is the performance of the data revenue that gives us the confidence that we are heading in the right direction to achieve our new medium-term guidance of mid-single-digit growth. Group EBITDA advanced 6.5 percentage points and an EBITDA margin of 26 -- 25.9%. Nonkululeko will shed more color, as she goes through the results. We received ZAR 158 million in proceeds during the quarter from 8 of the 30 properties that are in conveyancing process at the end of 2025. The remainder of the properties with sales value of about ZAR 121 million remain in the conveyancing process, and we expect to receive the cash later in the year. We would like to reiterate that we don't anticipate the disposal of noncore properties to be significant going forward. This will be reliant on the decommissioning process and exit of properties in Openserve. With that, let's take a closer look at operational results for each of our business units, starting with the Mobile business, which sits under consumer. Mobile business revenue grew by 7.8%, tapering down in line with our expectations as indicated when we last engaged with you in June due to a higher base that we're growing from a prior period, along with an intensified competitive landscape. That being said, still a very positive outlook. The business now grew to 7.2 million data subscribers, comprising 72.1% of the total subscriber base. 1.9 million data subscribers were added in Q1 alone. Prepaid subscribers continue to grow robustly. Although we saw a decline in the prepaid ARPU at ZAR 58, it does reflect the continued growth of higher volume non-mutual regions as Mobile continues to drive growth in these [indiscernible] markets. Concurrently, the share of acquisitions in the under-serviced regions improved by 5.4%. While the growth in non-metro regions may dilute the prepaid ARPU, the priority remains driving recharge activity and grow service revenue, propelled by robust data demand. Postpaid subscribers increased marginally with the ARPU on the space improving to ZAR 187. Mobile data traffic grew by 15.9%, as we remain at a high conversion rate of traffic to data revenue. Moving to Openserve. Openserve recorded an overall revenue growth of 2.8% year-on-year as fiber data revenue grew by a total of ZAR 254 million. Fiber revenue contributed 86% towards operating revenue. External revenue increased by 5.9%, driven by a 9.3% growth in fiber products and services. As always, in Openserve, customer experience continues to be world-class with Net Promoter Score improving to 80.1% from 72.3% at the end of March. As indicated, the BCX performance now touching [indiscernible] was disappointing for the period, affected by overall revenue growth. Migrations from legacy voice and data, reduced software and hardware sales, along with delayed budgeting spend from public sector customers led to revenue decline. As we've indicated, we have put in mitigations internally to ensure that we are driving a strong focus on continued execution, focusing on people, strategy and process. We expect the financial performance to strengthen over the remainder of the year, supported by the strategic innovations already underway with anticipated strong spend, particularly in public sector for the end of the year. BCX will continue to advance its transformational journey towards higher-margin recurring revenue streams driven by IT and fiber-related services. Focusing now on CapEx, at a group level overall, we invested ZAR 1.1 billion in the first quarter, and our smart CapEx deployment led to the following: 56 mobile sites being added, 36,000 homes passed and 29,000 homes finished during the quarter, resulting in a connectivity rate improving up to 51.1%. This means that we connected about 80% of the homes we passed in this quarter, driven with a significant portion from existing inventory. The CapEx was primarily invested to expand the mobile and fiber networks and to modernize the Openserve network. Although the CapEx declined by 32.8% on a year-on-year basis, this was partly due to the higher CapEx in Q4 F '25, particularly in the consumer business. We foresee CapEx largely realigning on our typical year-on-year investment trajectory as the financial year progresses. Although CapEx intensity for the first quarter was at roughly just over 10.2%, we do anticipate this CapEx being within our guided range of 12% to 15% by the end of the financial year. I'll now hand over to Nonku to take you through the financial details, and I will come back to conclude. Nonku, over to you.

Thanks, Serame, and welcome to everyone to this call. Let me start with the revenue performance for the quarter. Our revenue grew by 1.1% to ZAR 10.8 billion in the first quarter, and it was driven by the data revenue growth. Total consumer revenue increased by 5.5% to approximately ZAR 7 billion. Mobile revenue grew 7.2% to ZAR 6.1 billion, and it was driven by mobile service revenue growth. Openserve overall revenue increased to ZAR 3.1 billion, while BCX revenue declined by 8.3% as indicated by Serame earlier. Group EBITDA increased to ZAR 2.8 billion, and group EBITDA margin, excluding property sales, improved to 24.7%, highlighting the strength of our underlying operations. The performance of EBITDA and EBITDA margin was as follows at a BU level. Telkom consumer EBITDA grew by 18.5% to ZAR 1.4 billion, leading to an EBITDA margin of 20.5%. Mobile EBITDA saw growth of 5.8% to ZAR 1.6 billion, attributable to service revenue growth, resulting in EBITDA margin of 26.4%. Openserve EBITDA increased marginally by 0.9% to ZAR 1 billion, while EBITDA margin contracted slightly to 32.8% year-on-year. The BCX EBITDA decreased to ZAR 189 million and the margin compression to 6.5%, and these were primarily driven by the revenue decline. The margin compression for BCX was partially offset by cost efficiencies from the financial year 2025 cost initiatives that we spoke about, which supported operational expenditure reducing by 11.9%. Mobile and Openserve delivered solid EBITDA margins in quarter 1; however, we recognize the need for continued focus and execution to enhance the margins of BCX. Our financial position remains strong following the settlement of ZAR 4.75 billion interest-bearing debt post year-end from the proceeds of ZAR 6.6 billion from the sale of Swiftnet. The remainder of proceeds have been retained to maintain financial flexibility for growth opportunities without compromising the strength of our balance sheet and its resilience. We concluded a handset sale of ZAR 300 million in the first quarter, and we continue to target the ZAR [indiscernible] billion for the financial year 2026 as previously highlighted. Thank you, and I will hand back to Serame.

Thank you, Nonku. To conclude, this is the first quarter of our financial year. And while we are encouraged with the momentum that we have carried forward from the previous year, we remain firmly committed to delivering on the targets we have set for F '26 and in the medium term. We believe our data-led strategy will remain the foundation of our performance as we reinforce our position as South Africa's digital backbone. Revenue is receiving heightened attention, and we are laser focused to deliver in line with our medium-term plans at group level. We will continue optimizing selling channels, improving customer experience on our networks and providing customer-centric value with flexible and affordable offerings. I will now hand over to the operator to open up for Q&A. Thank you.

[Operator Instructions] The first question we have is from Preshendran Odayar of 36ONE.

Congratulations on the results. I've got 3 questions, if I can, Serame and team. Firstly, just on BCX, can we expect more pain for the rest of the year? I know you guys are focusing on the higher-margin revenue opportunities, which is your cloud and your hosting. But it doesn't seem to be materializing in terms of your actual EBITDA that you achieved. So other than the cost optimization initiatives, which I know you guys are very good at doing, I mean, what else can be done to actually improve the profitability of BCX, so if you can give us some like plans on what you're going to do and what we can expect for the rest of the year? Then, on CapEx, it seemed quite low for the quarter. Is there an expected ramp-up for the rest of the year? And is there any particular reason it was relatively soft for this first quarter? And I'm going to take my chance on this one. I know you guys don't disclose balance sheet metrics, but thinking about your lower CapEx, your working capital, lower debt, your free cash flow generation looks to be quite strong. And that probably ties into your gearing, which from my numbers look like it's the lowest of all the listed telcos in SA. I mean, is that right? Could you share what your gearing is at the end of the quarter, if possible?

Thanks, Presh. Can I take one more -- 2 questions, operator?

The next question we have is from Maddy Singh of HSBC.

Can you hear me?

Yes, we can.

Great. I have 2 quick ones, hopefully. The first one is on BCX as well. As we see some stabilization in BCX performance, then we have like another weak quarter. I know that you had said in the past -- recent past that you are not looking to monetize it as such, you're focusing on changing the business structurally, fixing it. I wonder whether that still is the view and you are not looking to, let's say, monetize the asset at all because I think from a market perspective, this remains probably one of the last underperforming units within the business. So wondering if there is any change in the view there on BCX? And then secondly, just wanted to hear your views on the prepaid market. I think the quarter itself, you again outperformed the peers, but your growth run rate seems to be coming down somewhat from a double-digit run rate to now high single. So just wondering whether that means do you need to change any strategy here or you're happy with the high-single-digit growth here and you will continue with the current strategy of making the -- keeping the price differential with the competition? These 2 questions.

Okay. So let me talk to then BCX overall. I think you and Presh asked the same question in terms of the BCX. As I said, we have put a team in place. We are looking at BCX on [indiscernible] overall context in terms of people, strategy, execution. And as the part of the ongoing work of this, we will make the right calls that are in line with our strategy accordingly based on those principles. So that is the key for us that it is important that as a one Telkom proposition, we own the program wholeheartedly, and we are driving that focus to make sure. So fresh, to your point, Presh, yes, it has been not the best part of the quarter, but we do foresee that in the principles that we put forward along the lines of people, strategy and process, particularly and strategy execution, the big focus is on making sure that we deliver what is required in that. I will talk to CapEx, which is also a point that you raised. The CapEx ramp-up will certainly -- as I indicated, will be in line for the year-end to the 12% to 13% guidance that we've given. It is a function of seasonality in Q1. So we're comfortable with that CapEx growth. I will take Maddy Singh in your principle, you talked of prepaid. I think the key thing for us is, yes, as we've indicated to the market that as the base gets bigger, we will see that revenue run rate is coming down some. But I think still at that high levels we're seeing right now, it is still quite ahead of market growth. What's important for us is a couple of things. One, it's the type of acquisition that we are getting, which is important to ensuring that we do maintain our data share of revenue at the highest levels, and that's a big focus for us. We continue to monitor, for instance, our daily recharges, which actually have been consistent and hedging to the levels that we want. So as the rate is going bigger, we are obviously experiencing the tempered growth that we see. It is still at high single digits, far higher than the market growth. And the key thing for us is to maintain that prudent growth without us diluting significantly that ARPU. If you look at the fact that we've grown our subscriber numbers by almost close to 2 million, yet maintaining the ARPU and an ARPU drop of just under ZAR 2 quarter-on-quarter and 6% year-on-year. That still shows the fact that the guys are continuing to make sure that we mine those new subscribers as they come in and get that data usage up to the right levels. Nonku, I think there was a questioning on balance sheet [indiscernible] that both Presh and Maddy [indiscernible].

Yes. Thank you, Serame. So, Presh, on the balance sheet, and if we just go back to the year-end, movement in the quarter would have been on the receipt of the proceeds at the last 3 days of the financial year end last year. We would have then in the financial year in the quarter paid ZAR 4.75 billion of the proceeds to the debt that we had identified to be prepaid. And significantly, we had maturities by the way, largely, in the first quarter, and we then settled those, which then resulted in us not having to raise any new debt. So from the debt perspective, fairly stable, and we have paid back and even prepaid from the proceeds. And then from the EBITDA level, as we have indicated here, the 6.5% growth in EBITDA. So it has not really changed much in our net debt-to-EBITDA level to any worse position. We are fairly stable there. So the free cash flow impact from where we are is largely going to align to what we said at the year-end, where we indicated that we are driving towards a free cash flow position that will be stable and continue in the positive trajectory and largely driven by the performance that we are driving for the financial year. The CapEx element is both in the -- as Serame as indicated, for the full year, and therefore, there isn't any significant big numbers we would expect from there to change the free cash flow position as indicated. So net debt to EBITDA is fairly stable as reported at year-end. Free cash flow, as we indicated, the expectation from year-end is a fairly stable trajectory. And the one-off elements we have built in, as an example, we spoke about the Google transaction, which was last year, and we indicated that it was not repeating and that is indeed not repeating, and there were one-off BCX costs. And [indiscernible] was to build in the cash outflow expectation from [indiscernible] as an external entity.

The next question we have is from Jonathan Kennedy-Good of Prescient Securities.

I just wanted to check in with you on your mobile data subscriber numbers. Those were up almost 2 million quarter-on-quarter, which seem to outpace the general subscriber growth by some margin. Just wondering what's driving that uptake? It must be within your base, I would think, and whether there are specific products that are driving that trend? And then just a question on -- I noticed there were some price increases on the mobile side that got passed not too long ago. How have those been received by the market? And are they accelerating revenue growth at the moment? Can you comment on that or provide any color on that?