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

Good afternoon, ladies and gentlemen, and welcome to Telkom's Quarter 1 of FY '24 Trading Update for the quarter ended 30 June 2023. [Operator Instructions] Please note that this event is being recorded. I would now hand the conference over to Serame Taukobong. Please go ahead, sir.

Thank you, Kaylee. Greetings all. On the call is our Group CFO, Dirk Reyneke; and the Investor Relations team, and we should also have the CFO of Consumer, Mr. Hasnain Motlekar. This morning, we published our trading update for the first quarter of the financial year. I'm assuming that you've gone through it in detail, and I will touch on the key aspects of it to allow more time for questions. We'll be unpacking the trading update for the quarter as follows: I will begin with the business performance for the prevailing quarter. Dirk will touch on the revenue and EBITDA performance for the group as well as per BAU. I will come back and give an update on corporate action, regulatory matters and SIU judgment. I will also conclude on the commercial agreements that we're pursuing to advance the connectivity in South Africa. We started the new financial year with good momentum as the group performance was pleasing in the face of load shedding, muted economic growth, continuing inflationary pressures and consumers and intensively competitive landscape. Our performance continues to be impacted by legacy and fixed line revenue decline caused by ongoing migration to NGN technologies across our business as anticipated. Cost savings from our recent labor restructuring process offset the impact of load shedding. But the legacy revenue declines along with higher ECL provisions weighed down on our overall group profitability. I will now take you through the performance of each of the business units. In the consumer team, mobile service revenue growth driven by Telkom consumer performance. Telkom Consumer recorded an increase in revenue with the growth largely attributed to the mobile business and the expansion of fiber offerings. Consumer fiber subscriber base increased by 12.8% while legacy corporate base revenues continued the downward trajectory and now only account for 4.8% of the gross revenue. Mobile revenue advanced mid-single digits primarily driven by continued provision of value compelling propositions with stimulated data consumption. The biggest contributor to the mobile revenue growth while mobile service revenue, which also grew by 6.5%. Mobile growth was strengthened by year-on-year subscriber growth of 6.9%, bringing the total subscribers to 18.5 million with a blended ARPU of ZAR 83. The postpaid ARPU of ZAR 183 was derived off a subscriber base growth of 6.6% translating to almost 3 million subscribers. The prepaid ARPU of ZAR 63 remains within our targeted range price and the prepaid subscribers grew by 6.9% to 15.5 million. Mobile data traffic increased by 25.1% and amounted to 329 petabytes. This growth was bolstered by an 8.9% increase in mobile broadband subscribers to 11.7 million, which now comprises of 63.2% of total subscribers. We continue seeing robust growth in our non-connectivity services, with revenue increasing by 20% with a significant contributor of this being our airtime advanced product. If I look at Openserve, the Openserve overall revenue declined by low single digits as the accelerated decline in fixed voice revenue continued as expected. Fixed line NGM revenue increased by 10.6%, underpinned by growth in broadband carrier services and enterprise services, which increased 21.5%, 6.3% and 3.3%, respectively. The NGN portfolio now comprises 73.7% of total revenue. The continued increase in demand for connectivity and consumption reflected on the fixed line data traffic of increase of 13.3% to 512 petabytes. Openserve's connect-led strategy coupled with the smart deployment of our fiber infrastructure, enabled growth in its fiber connectivity base by 9.9% connections, which includes broadband and other value-added services such as VoIP, intercom and security. The homes passed grew by 24.4% to 1.1 million homes with Openserve surpassing the 0.5 million mark of the number of homes connected with fiber, rising it by 24.2% to 515,000 homes connected while maintaining the leading connectivity rate of 46.5%. Despite the sustained load shedding levels, Openserve continues to be able to maintain its core network at an availability of 99.9%. The deployment of battery primary backup solutions yielded a cost avoidance of more than ZAR 27 million in diesel costs. Looking at BCX. BCX recorded low single-digit revenue growth, mainly driven by the double-digit growth in the IT business. The IT revenue growth was attributable to the software and hardware business, which continues to show excellent performance due to the fulfilling of order backlogs and the easing off of the global chip shortage as well as successful new business deployment initiatives. The business also benefited from a strengthened cloud offerings and solutions brought about by Dotcom acquisition, while IT services declined by 3.4%. Swiftnet recorded marginal revenue growth. The revenue growth was underpinned by escalations, new tenancies, customer 5G rollouts and existing payment upgrades. Revenue from other customers increased by 11%, while a reduction in revenue from termination by MNO and Openserve decommission declined by 20.6%. Following the successful Power-as-a-Service testing in the prior financial year, Swiftnet is nearing implementation of the first phase of this rollout. I will now hand over to Dirk to talk you through the revenue and EBITDA performance on a group and BAU level. Dirk, over to you.

Thank you, Serame, and good afternoon, everybody. Good morning to those in the West. If you look at the impact of what Serame has just covered on revenue and EBITDA, group revenue grew by 3.8% to ZAR 10.7 billion, mainly driven by the satisfactory growth in the new generation technologies. Having said that group EBITDA rate of decline decelerated decreasing by 4.2% to ZAR 2.2 billion, with EBITDA margin contracting by 1.7 percentage points to 21%. Mostly its affected by legacy revenue decline, together with higher direct cost and operating cost. The cost emanating -- the benefit emanating from the staff restructuring was partly negotiated by additional spend in diesel due to load sheddings during the quarter and then a slight increase in direct costs as a result of product mix. We also witnessed an increase in impairment of receivables and specifically the provision for impairment and increased ECLs in our BCX business and our mobile segments. If we unpack the revenue per business unit, Telkom Consumer saw an 1.8% increase in revenue to ZAR 6.4 billion, driven largely by mobile revenue advanced by 5.2%, reaching ZAR 5.4 billion with a significant contribution to this growth coming from mobile service revenue, which increased 6.5% to ZAR 4.6 billion. The surge in mobile data traffic that was bolstered by an increase in mobile broadband subscribers resulted in the mobile data revenue increasing by 9.9%. Revenue in Openserve declined marginally 2.7% to ZAR 3.1 billion, as the revenue growth from NGN was offset by a 29% decline in fixed voice legacy revenue. BCX saw revenue rise by 2.9% to ZAR 3.5 billion. The IT business revenue increased by 17.5% to ZAR 2.1 billion due to hardware and software business growing by 62.9%. Converged Communications revenue declined by 12.8% to ZAR 1.4 billion as they are reaching the back end of the legacy decline. Revenue from Swiftnet increased marginally 1.2% up to ZAR 326 million, with revenue from other customers increasing by 11% to ZAR 249 million. If we then look at the EBITDAs of the different business units, Telkom Consumer EBITDA increased by 10.8% to reach ZAR 931 million of solid revenue growth and a prudent cost containment resolve. The mobile EBITDA, however, declined by 5.6% to ZAR 1.1 billion, marking the end of double-digit declines attributable to an increase in provisioning for bad debts as consumers continue to take strain and the ECLs increased in line with the growth of accounts receivable. Load shedding costs amounting to ZAR 54 million also impacted mobile's profitability. In Openserve, the impact was -- the EBITDA was impacted by an increase of ZAR 88 million in diesel spend, resulting in EBITDA margin of 28%, a reduction of 1.9 percentage points with EBITDA declining to ZAR 876 million. BCX EBITDA declined by 38.2% to ZAR 275 million, as overall profitability continues to unfavorably be impacted by revenue product mix, which was skewed towards lower-margin product business for the quarter as well as significantly higher impairments of receivables plus slow collections, particularly in the public sector. This was partially offset by cost savings, largely employee expenses and third-party costs as the BCX continues to drive efficiencies. Swiftnet EBITDA increased by 1.7% to ZAR 234 million, in line with the marginal revenue growth, and the EBITDA in Swiftnet remains strong at 71.8%, translating to a 0.4 percentage point improvement. Serame will now take you through an update on corporate actions to realize value, regulatory matters, the SIU judgment and the structure of the commercial collaboration with broadband InfraCo as well as Sentech. Thanks, Serame.

Thank you, Dirk. So just on the commercial actions to realize value, we have received offers to acquire Swiftnet in its entirety during the last quarter of F '23. We're currently engaged in discussions with 2 bidders for the disposal of 100% of Swiftnet, and we hope to be making these announcements shortly. We've encouraged by the incredible interest shown in Openserve following our market sounding exercise earlier this year. As we position ourselves as an infrastructure business at its core and once this transition has been concluded, Telkom will consider its further options to realize value, including in relation to the expressions of interest received for Openserve. We're also continuing investigating the introduction of a strategic equity partner for BCX to enhance scale, growth and capabilities in various growth areas, including cloud services, cybersecurity, healthcare. Work on this is ongoing. In terms of the regulatory matters, the Minister of Communication and Digital Technologies confirmed that the final analogue television switch-off date in the frequency bands above 694 megahertz is 31 July 2023. If this has successfully implemented, the sub 1 gigahertz spectrum obtained in the auction in March 2022 will become available nationally from the 1st of August 2023. The outstanding ZAR 1 billion that is for the payment of the spectrum will have to be settled. We're also equally preparing comprehensive response to the Electronic Communication Amendment Bill which deals with several critical issues such as spectrum trading and sharing, roaming, MVNOs, passive infrastructure and facilities access and competition. In terms of the SIU judgment, the High Court handed down a judgment setting aside the proclamation that gave the Special Investigation Unit, SIU, authority to investigate various matters, including Telkom's contracting for work or network and advisory services and the disposal of former Telkom subsidiaries. The proclamation was declared unconstitutional, invalid and of no or effect and the respondents were offered -- were ordered to pay Telkom's legal costs. We also want to set clarity on the media issues that talks to the broadband InfraCo and Sentech collaborations. What I need to state clearly to the audience is that these are based purely on commercial agreements. They'll be predicated on commercial agreements where we will utilize our current essence base like fiber and data centers to offer our services to these entities. We actually do have commercial agreements with these entities. These agreements will benefit the goals of both entities in advancing connectivity in the country. We will also support advanced government policy objectives together with achievement of our own corporate ambitions. These partnerships will not require any capital addition nor are the early discussions of any merger with these parties. I'd like to state again, these are collaborations based on sound commercial principles. We've come to the conclusion of the call. I'll now hand over to the operator for Q&A. Thank you.

[Operator Instructions] Our first question comes from Madhi Singh of HSBC.

Yes. Can you hear me okay?

Yes. We can hear you, Madhi.

So just 2 quick questions. First question is on the corporate action plans. So I think the previous target was to announce the winners actually a bit earlier. So if you could talk about why there's a bit of delay in announcing the winners for the Swiftnet kind of things? And then secondly, on BCX, you're saying that you're going to explore options around that as well. So would you consider exiting it completely as well? Or at this point, you're only thinking about a minority stake for them?

Madhi, If I look at the -- I think with the towers transaction, we're in the loss for those. And as one appreciates this process, part of the delay has been bidders requesting extensions to do more detailed evaluation of these entities which we feel is important and prudent to do. So we have given the bidders extension because it's quite a massive portfolio for them to evaluate. But we feel quite confident that we're close to that. In BCX, the process has started, as I've indicated, we would obviously be shaped by what type of partnerships come through. We're open to even a point where Telkom has a minority stake in that entity, if it gives us the right scale and capability. But it's early times for that. I hope I've covered you there, Madhi.

Yes. And a basic question on the operational performance as well. So on the legacy fixed business, in your view, how many more periods you think before the impact of the decline in this segment would be very minimal for the group performance?

So Madhi, it differs by the various segments. So I'll say, overall, between 18 and 24 months. Some entities have exited much faster. So if you see, for instance, BCX is coming out, as I highlighted in consumer, it now only accounts for 4.8% of the revenue. So I'd say conservatively, if I average across the entire group between 18 to 24 months, from the use will drop off sooner in that period timeline that I've given you.

That's sounds very interesting.

The next question comes from Nadim Mohamed of SBG Securities.

Just 3 quick ones from my side, if I may. Just firstly, on mobile data, we saw that traffic goes up 25% year-on-year and revenue goes up about 10% year-on-year. And were there differences between prepaid and postpaid? And are you seeing more demand or consumption due to load shedding? Then secondly, just on airtime advance, I see that it's increased to 33% of recharges. Just would like to understand how quickly that is scaled up over the last year and what connectivity rate you're seeing there? And lastly, I'm intrigued by the concept of positioning Telkom within InfraCo at its core, I just like to understand what exactly you mean by that in terms of your strategic direction. You just do seem like prioritizing open access, longer-term contracts with a lower risk profile. I just like to understand exactly what this long-term vision?

Nadim. Those are actually 4, not 3. But I'll tell you what. I'll start with the last one. So when we talk of it, InfraCo, Nadim, we say, okay, when we sat down and did our strategic directions like, who are we? What actually lies in Telkom? And what is our core strength? So our core strength has been infrastructure, underpinned by 170,000 kilometers of fiber. If we take a little step further, you then have about what 10 of the data centers, of which 3 of them are Tier 4. So that's the strength that we've built as Telkom over the past. And it's us to say, how do we focus on that? Now somebody might ask the question it's, okay, but then why would you sell towers? Once again, it's about saying, where can we lead indeed successfully. We've got 2,900 commercially active towers. The tower market is 221,000. You are not going to lead in that. If we have to split ZAR 1 of CapEx where is our best bet. Our base bet certainly sits in the InfraCo. Now when you look at in the mobile business in that InfraCo, it means that once you start to making the homes, you then start offering your fixed mobile conversions, where you can actually not just come in with data, but you can come in with data and offer customers 3 or 4 mobile services with that. So that's how we look at the InfraCo. In terms of the mobile data and the prepaid and postpaid growth and airtime allowance, I have invited Hasnain into the call. Maybe Hasnain, you want to share some color there? Maybe you know, Hasnain, right?

Thanks, Serame. Just a question around prepaid postpaid. The growth has been sort of equally spread across the 2. The one is an over-index of the other. Obviously, subscriber volume is on the prepaid, just pushing more data volumes through that segment. But as a percentage growth, it's roughly the same. In terms of load shedding, so obviously, load shedding is spread across the country at different times. But when you look at it cumulatively over a month, we've not seen actually data consumption going down. We've seen slight increases as the load shedding kicks in. But then it normalizes once load shedding is gone within a particular area. But if you look at it across nationally across a sustained period of about 30 days, we've not seen data consumption go down. In fact, we've seen it actually gone up within the footprint group currently has. So there hasn't really been an impact. Obviously, we've introduced more value compelling proposition from a data perspective, which pushed us through. But it's not impacted us significantly apart from the upside on the network. So the question will be asked, if once load shedding subsides, can we see even more throughput on the network. That will -- time will tell, basically, once we stay sustainably below Stage 4, above 4 begins hard to keep the availability up. But if you stay sustainably below 4, we should see data consumption continue to grow as well. In terms of the second question around airtime. So airtime advance is now account for about 30% of our prepaid business. We're comfortable from a risk management perspective, even though we have contracted for the risk that we don't carry the risk around default. The default is actually quite low. It's pleasingly slow, where you can actually manage the default. We've not seen big black holes, and that was always the concern when once you step into this line of business. But the customer behavior has indicated actually a good prediction to actually settle almost immediately within the time frames we forecasted. So 30% is probably at where we're very comfortable. We might stretch it maybe another 5, 10 percentage points, but we'll take it. We'll be very conservative around this airtime lending business because it has the potential to go wrong very quickly. But the way we've managed to date is very conservative, and it's grown actually very nice with us. I hope it answered, Nadim.

[Operator Instructions] The next question comes from Nomandla Duma of PSG Asset Management.

Can you hear me?

Yes, Nomandla.

Dirk, can you please indicate the total cost savings that Telkom basically got from the restructuring? It's just not clear from the numbers.