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

Good day, ladies and gentlemen, and welcome to Telkom's Interim Results Analyst Conference Call. [Operator Instructions] Please note that this event is being recorded. I'd now like to hand the conference over to Serame Taukobong. Please go ahead, sir.

Thank you, Kagley. Good afternoon, everyone. Welcome to our Q&A session for the FY '24 interim results. On the line, I have with me Dirk Reyneke and the Investor Relations team. Dirk is our CFO. We published our interim results this morning. This will be a Q&A session, but I will start with giving highlights of the results. The first half of the year saw the economy struggle to grow with high inflationary environment, propelling the highest interest rates we've seen in South Africa in the past 14 years. We, however, have delivered solid results earnings despite the tough trading environment. Load shedding has been a recurrent feature for the period, load shedding days increasing by 79% and rebased our operating expenditure placing pressures on margins. We are investing in alternative backup energy to reduce diesel usage in response to recurring load shedding. Revenue perspective, gross revenue from total operations advanced by 2.5%, driven by growth in mobile traffic, the monetization of the rollout of our fiber infrastructure and growth of the IT business. Revenue from next-generation entities grew by 8.1%. Total operating revenue from Openserve declined by 2.7%, impacted by legacy revenue declines. Next-generation revenue, on the other hand, increased by 6.9% for Openserve. Telkom Consumer revenue grew by 1.4%, driven by the value-compelling propositions on our mobile business. Total external revenue for mobile operations grew by 4.1% with mobile service revenue growing 5.8%. Revenue increased marginally for BCX primarily due to the double-digit growth in the IT business but was offset by legacy declines in converged communications. Revenue from continuing customers increased by 6.8% for Swiftnet, while the total revenue was impacted by terminations and marginally reduced 1.2%. Group EBITDA increased by 1.7% as cost reduction initiatives bore fruit partially offset by inflationary increases and resulted in operating expenses increasing below inflation. EBITDA growth was limited by higher bad debt provisions. Excluding the restructuring costs, free cash flow was positive ZAR 570 million and was primarily driven by a significant increase in cash generated from operations due to efficient working capital management and increase in profit before taxation. Our capital investments had a CapEx-to-revenue ratio of 14.4%, which is below our guidance but it is strategic in terms of the cyclical nature of capital expenses. Strategy update. We are embarking on a journey to transform and reorganize Telkom as a InfraCo at its core. To this, to harness synergies across businesses while maintaining each business unit identity and disposing of non-core assets. The journey of Telkom of Tomorrow is anticipated to be in full phase by the end of 2025. As Telkom's commitment to realizing asset value, we've made progress on our value unlock strategy with Swiftnet now being in the final stages of disposal and have entered into an exclusivity agreement with the preferred bidder. Accordingly, Swiftnet has been classified as an asset held for sale. Once the InfraCo structure is in place and the disposal of Swiftnet is concluded, we will consider further opportunities to realize value in the relation to the minority partnership for Openserve and strategic partner for BCX. This concludes my remarks. I will now hand over to the operator for Q&A sessions. Thank you.

[Operator Instructions] Our first question comes from Nadim Mohamed of SBG Securities.

Two questions from my side. Firstly, if I look at SA mobile, it seems like -- if I look at the Q2, we had a slower customer acquisition, but ARPU is ticking up on a quarter-on-quarter basis. I just want to understand what could be driving that. Is it more of the airtime advances and Mo'Nice resonating in the market? Or are you seeing a very different picture when you look at it on a 30-day active subscriber basis? And then just secondly, if my calculations are right, it seems like the EBITDA margin in Q2 was 25% at group level. That seems quite substantial. I just wanted some context on that number. I mean, is it -- are there any one-offs in there that may be exaggerating it or pushing it down? Is that sort of a sustainable way to look at for the rest of the year? Thank you.

Dirk, I will take the first question. I think if you look at -- thank you very much for that, Nadim. On the mobile perspective, we did do a significant clean-out of our base. What we have seen is certainly a far bigger uptick of Mo'Nice. So over 40% of our prepaid purchase is done through Mo'Nice. We've also seen a good uptick in our airtime advance proposition, which now sits at 30% of revenue. I think the EBITDA I'll leave to Dirk, but it is pretty much in line with what we've seen in the growth of our business. Dirk, do you want to add more color?

Yes. I think in terms of the EBITDA, 21% to just over 25% quarter-on-quarter, you're correct. I think firstly, driven by the restructuring costs, employee costs which you'll recall that we said that most of those people exited early by June. So that benefit is now starting to come through for the quarter. Secondly, we saw a slightly lower impairment on assets half-on-half and then slightly lower service fees and the service fee is mostly relating to the emergency power initiatives moving from diesel to batteries. So those are the main reasons. It's cost initiatives in quarter 2 versus quarter 1. Yes, I think those are the main reasons. So if you say to me, what is your model going forward, I think quarter 2 is closer to reality. I don't think we're going to maintain 25.5%, 26% yet. But certainly, I think we've increased from 21%. The biggest kicker there will be -- or the biggest influencer of sustainable margin will be revenue mix in BCX, certainly get the product-to-services revenue mix [ sorted ]. Hope that helps.

Our next question comes from Myuran Rajaratnam of MIBFA.

Congratulations. You seem to be close to some sort of closure on the tower deal, so well done on that. And secondly, also, as Nadim pointed out, operationally you seem to be doing better than certainly what I expected at this stage of the year. So maybe just on the power saving and diesel side of things, there's a double whammy, for example, in the mobile side, your network availability goes down. So your revenue goes down and there's additional cost to keep the network alive like load-shedding diesel or roaming more. Have you quantified what might be the impact in Q1 and Q2 from load shedding just in aggregating the revenue and the cost impact?

In fact -- sorry, I'm just looking at my notes. Yes, we have quantified it.

You do provide details on what the diesel extra cost is, but I mean, it's hard to -- for us to, from outside, to know what the revenue impact might be.

No, what I'm saying is you're right. We provide a number for diesel because that's direct. It's ZAR 160-odd million. I think in terms of roaming, we work on trends, and I'll have to come back with the actual number, I don't have that in hand.

Sure. I do have it close by. So in terms of the load shedding impact, the split between diesel and roaming costs. So in terms of losses, we are quoting a number of ZAR 15 million; batteries, ZAR 15 million. Site repairs in terms of damage to sites is about ZAR 30 million odd. And then roaming itself is ZAR 103 million. So total cost is about ZAR 163 million. Did you get that?

And that's for the full 2 quarters, right? That's for the full half.

Yes.

Okay. Okay. That's very helpful. Just following second part. The second question is sort of following on from Nadim's question. The second quarter EBITDA definitely picked up quite a bit. But I also noticed Q2 last year was also a bit of a peak of 24%. I'm just wondering if there's any seasonality in the numbers? Or is it just what you pointed out, which is the bad debt, the load shedding, the mix effects and the fact that the employees who have been -- the restructuring of the employee costs, they have all left the building, so to speak, by June.

Yes. I think that would be the significant contributor to all of that. And obviously, if we look at Q1, Q2, we do see seasonality in the market which is traditional. But the big chunk of it -- of those costs has been the impact of the restructuring.

I think in Q2, of the comparators in Q2 of '23, we also still had the back end -- we still have the back end of restructuring drives in BCX specifically. It was small in the bigger scheme of things, but that was in BCX for that quarter, we still had some drive, which probably inflated the pie in your Q2 number slightly. But that wasn't the main reason for the 24% EBITDA.

[Operator Instructions] Ladies and gentlemen, it appears we have no further questions in the queue. And this concludes today's event. Thank you for joining us. And you may now disconnect your lines.

Thanks, everybody. Have a good evening.

Thank you.