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

Good day, ladies and gentlemen, and welcome to the Telkom Interim Results for the 6 months ended 30 September 2024. [Operator Instructions] Please note this call is being recorded. I would now like to turn the conference over to Serame Taukobong. Please go ahead, sir.

Good afternoon, everyone. It's Nondyebo Mqulwana speaking. I'm the Head of Investor Relations at Telkom. Welcome to our Q&A session in the interim results we published earlier this morning. On the call with me, I have our group CEO, Mr. Serame Taukobong as well as our Group CFO, Mrs. Nonkululeko Dlamini as well as the Investor Relations team. Just to talk through the order of the call, Serame will take us through some key messages on our results, and then we will go to -- we will take your questions. The call is set to conclude at 5:00 p.m. depending on the interactions. Over to you, Serame.

Thank you, kindly, madam. Greetings to everyone on the call. I'll take you through the highlights of our interim results. Our strategy continues to drive the performance. Our results for the period demonstrate a robust and steady operational performance building on the progress made earlier, even in the previous year. We saw solid data revenue growth driven by compelling data propositions. Cost optimization programs yielded the results desired. We sustained positive free cash flow. The Telkom Retirement Fund was successfully converted into a defined contribution fund. Smart CapEx investment and monetization of our infrastructure continues as well as execution on disposals of noncore assets. Group revenue grew with mobile data revenue increasing by 12.7% and a 15.5% growth in fiber data revenue. Our adjusted EBITDA improved impressively to ZAR 5.6 billion, yielding EBITDA margin of 26.2%. We have a much stronger and healthier balance sheet with an improved adjusted net debt-to-EBITDA. Free cash flow improved to ZAR 768 million. Execution on disposable noncore assets, Gyro realized ZAR 204 million from property sales with 39 properties in the conveyancing process. On the Swiftnet transaction, we obtained the competition tribunal approval and we are waiting ICASA's license transfer approval. Key highlights of the performance of our business units, our mobile business delivered the performance that was ahead of the market. Growing service revenue by 10%, with total mobile subscriber growth of 24% to 22 million subscribers. Prepaid subscribers increased by 29.1%, whilst maintaining a stable ARPU of 61 drops. On the data front, mobile data subscribers increased by 19.6% surpassing the market of 14 million subscribers -- the mark of 14 million subscribers. Openserve grew total next-generation revenue by 5.6 percentage points. Next generation revenue for the business now constitutes 80.9% of operating revenue up from 74% in the previous period. Openserve's connect-led strategy continues to deliver a market-leading connectivity rate, which is at 49.7% for the period. Openserve continues to invest in the last mile with homes passed increasing by 11.9% (sic) [ 11.4% ] and homes connected by 18.1%, excuse me. BCX IT revenue is holding stable. For BCX, we continue to focus on the following: growing IT service revenue and improving margins. Cost containment and rightsizing the business, approximately 400 people have exited in this regard. Portfolio optimization and sales effectiveness, as well as protecting the converged communications revenue through phased migration. I will now hand over to the operator for Q&A.

[Operator Instructions] The first question we have is from Preshendran Odayar of Nedbank CIB. Preshendran, your line is live. You may go ahead. Since we have no response from that line at the moment, the next question we have is from Myuran Rajaratnam of MIBFA.

Thanks for the opportunity to ask some questions. The competition tribunal ruling on the CIVH deal in a bizarre sort of circumstances, it's positive either way they rule in the sense that if they rule positively and allow the deal to go ahead, there are more suitors available for Telkom, including, I mean, potentially MTN can come back. And if they rule against it, then does this not give you an opportunity to get ahead of the competition because your primary competitor in this space is sort of cash flow starved and debt burden in some sense on the fiber to the home and fiber to the base station and so on. So is this not an opportunity, especially since you are seeing some unexpected positive windfalls from things like property. I think ZAR 250 million this half and there's potentially ZAR 700 million, so let's call it ZAR 1 billion. Is it not worthwhile giving that to Althon and let him go a bit wild and build it out while the trend chaps and [indiscernible] are waiting?

Thank you, Myuran. I'm sure, Althon would love to hear your words. So on a serious note, I think with or without the ruling, we -- our strategy is clear. I think we've set our blue path. And you're absolutely right. I think the key focus for us is we continue on our path. And especially if you look at what has been published in terms of the competition slowing down on the rate of acceleration, we have continued with our connect-led and responsible rate of acquisition, which will continue to do so. I think the key focus, as we've always said, is we drive Openserve on balancing homes passed with homes connected to ensure that it is a more efficient way of deploying our CapEx making sure that where we're passing the homes, it is capturing the right audience that will ensure that we connect those homes that we pass and drive the right return on our investment. So yes, Myuran, we will certainly continue on the strategy that we are on.

The next question we have is from Preshendran Odayar of Nedbank CIB.

Okay. Sorry about that. So yes, congrats on the results. A few questions from me. Staff costs in Gyro was very low in this period, showed ZAR 19 million in the results release. Is that right? And why was it so low? Any is there any -- what are you -- sorry, what is the run rate we can expect for the rest of the year? And also, there was an amount in Gyro of ZAR 163 million in other income. If you can just please unpack that. And last question, just on the Google agreement because I've got a few clients asking me questions about this because I remember it being a bit of a prepayment that they had made to you and you had also prepaid for the right to use the -- 2 of those cable strands. And I think Google is paying for the landing site and services that once it hit South African shores. I don't know -- I mean, without diverging any of the commercially sensitive information. Can you just talk us through the mechanics and the numbers around that? Because I think a lot of guys are getting confused with what you disclosed about the ZAR 1 billion effect on this. Yes, that's it for me.

Thank you, Preshendran. Maybe let me start with the Google transaction. Indeed, this is coming from as far back as 2023, which was H1 2024. Where between ourselves as Telkom and Google, we entered into, call it, back-to-back where they were going to -- there was going to be some arrangements for them to utilize the landing station and we would have their fiber repair arrangement on their side as well. What that meant then was that there was a back-to-back contract where they would make payments to Telkom, but we would also main payments to them. The difference that you see of ZAR 1 billion is really a timing difference, if you like, because in the total contractual arrangement, net-net, we were going to be almost neutral. It's just that when the payment process started, which was in H1 2024, there was a payment in coming from Google as a portion of what their portion would be of the upfront payments that we were to make. And Telkom's one was a big lagging, which is why you are seeing ZAR 1 billion from Telkom now. So if you look at net to net from the portion that Google would have paid us in the 2024 financial year, and the outflow from Telkom, it is basically then covering all the upfront payments that we agreed. And the unwinding process, which is in relation to this long-term contract, which is about 15 years, is then going to be unwinding of those upfront payments. So yes, there is a ZAR 1 billion outflow, but it's netting off a payment from Google last year and the portion that they've paid now. So it's not a significantly new thing. It's netting off what has already started a year ago. So that is the Google transaction story.

The staff costs, the lower stock costs that you see in Gyro, Presh, Regions. As part of the Swiftnet transaction, the trigger was to divisionalize Gyro. So the staff in Gyro then have been absorbed in group and some have then been moved across various divisions. So the lower staff cost then reflects the members of staff that are pertaining to the Swiftnet transactions. So those are the guys that are still running the towers operation. So that's why you see the lower number of staff that remain in Gyro. And the ZAR 160 million other income is from property sales. Got that Presh?

Yes, yes. Thanks very much for both those explanations as well on I think a lot of investors are just getting worried about this ZAR 1 billion outflow. But I think I also got the just of it. I also remember it being a timing issue. So well done keeping your gearing strong even though you had to check.

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

I have 2 questions. The first question is on your plans around dividends. Given such a strong performance, I think this is -- if you could share what is your current thinking? And by when do you think you can start paying dividends again as well as in terms of magnitude, how should we think about that? And the second question is a very short follow-up. I think I missed that in the morning, but if you could share, what is your current network capacity the utilization on average on your mobile network -- data network?

Yes. Thank you. We touched on this a bit earlier. So we are looking at dividend policy that would have been approved and announced by the Board in March 2024. And I think it's very clear and crisp in terms of how the dividend will be calculated, which we said would be 30% to 40% of the free cash flow. And I think what is to be noted on the dividend policy is that at the time of getting to that point, the dividend policy as it stands, the Board will have to reflect on the free cash flow at that point in time and take a decision. With regards to the available cash facilities and basically how we are looking at the process we're going to close out on the Swiftnet transaction. You may recall that when we issued the circular, we were clearly saying our priority is to reduce debt and the gearing on the balance sheet, and we are still steadfast on basically making sure that we continue on that journey to reduce the debt on the balance sheet. The second element, we did think that we would like to ensure that where there's capital requirements, we prioritize that as well after we are comfortable that the balance sheet is well resilient and leveraged in the level that is comfortable. So we have not changed that position and the dividend policy will be applied depending on the position when we get to the financial year end. And I think just to also indicate, we do not have an interim dividend position in terms of our policy. We've committed to the dividend at year-end once all the assessments have been made with the priorities, as I've indicated of reducing debt. CapEx as a priority, and the board would then have to decide at that point.

Thanks. And in terms of your network capacity question, maybe I should actually answer it more extensively. So I think we should look at the network in 3 elements. So from a rand perspective, we'll take you back to pre-auction, especially with the temporary spectrum that we were allocated. So we gave the mobile team then additional CapEx with a pre-invested in the rand capacity. And we then got the auction and the spectrum in the right investment that we did, which means that not only do we build up for the sub-1 gig, which we never had plus also capacity for the 2,300 that we had. And we have successfully deployed that sub-1 gig to build the capacity on the rand. Equally, we've always mentioned to the market that over 75% of our rand has fiber in terms of backlog, which is quite key for carrying that data capacity that we have. And we are also continually investing in our core upgrades to manage the data demand. So that is the 3 key elements to ensure that we got the capacity required to carry the data. I hope that answers you.

It does. It helps understand the context, but I was still wondering if you think about your own site and given the combination of your fiber to those sites, would you say 50% of the capacity still free on the radio or 30%? Or is there a number you could share on that on average?

We generally -- no, we don't disclose the utilization of that. But we have made the right investments to ensure that. Remember that Telkom Mobile was one of the first networks, for example, to deploy massive MIMO on our networks, and we continue to deploy such technologies.

[Operator Instructions] The next question we have is from Nadim Mohamed of SBG Securities.

Congrats on the great set of results. Just 3 questions from my side. Just firstly, in terms of mobile data volume, it definitely seems to be a step-up in Q1 and Q2 to about a 26% growth year-on-year compared to roughly 20% prior to that. Just wanted to understand if you can give us some clarity as to what's driving that. I would like to understand that. Secondly, just on beyond connectivity revenue seems to have ticked up quite quickly the 7% of operating revenue for mobile. Just want to understand what are your propositions going forward that you're looking to introduce to your base? And what -- and you see that picking up further from here on? And then lastly, I recall in previous conversations that you mentioned there's a difference in how backhaul is accounting for within your mobile sort of reporting and then if you were to sort of capitalize that, you'd have much higher EBITDA margins. Now given the expansion of your margins, I assume that on a normalized basis, that market is now in the mid-30s or even upper 30s more in line with your peers. And that will be a fantastic achievement given your scale. I just want to understand, does your data-led model lend you towards higher efficiencies once you scale up. I would like to understand that if you can add any color, that would be appreciated.

Thanks, Nadim. I did miss your second question. Can you just repeat that for me, please?

Second question, just on your beyond connectivity revenue. I believe it's 7% of operating revenue. I wanted to understand what are the next set of propositions that you're looking at, how are you planning to grow on it going forward?

Thank you. So, if you look at the data volumes, Nadim, thank you for your questions. Data volumes, really, if you look at where the growth is coming from, it mirrors the growth that we see in prepaid. So in prepaid, that's where a significant portion of that growth is coming from. So your prepaid growth is also showing growth in prepaid data. And as we've said, it is the migration in 2G to 4G subscribers. As subscribers are moving from 2G to 3G from other competitors, they come into -- they're finding attractive propositions in what we have in Telkom Mobile. As I indicated also in my presentation, our data packages go into quite deep segmented propositions from your low kind of like daily, hourly bundles all the way up to your high-value data bundles. So we just don't focus on your high LTE data bundles, but also your smaller denomination, weekly, daily, monthly propositions. And what's been quite attractive, for instance, is your bundle offering that include even WhatsApp calling, which is what the market uses. So it is that attractiveness of that -- those price points that drive the growth. Beyond connectivity revenue, as we had indicated, the team has, for instance, employed people like Randall into Lunga's team, who brings in the skill set of having that intrinsic knowledge of dealing with that rich media space, we have also indicated that we're not going to open up a media company, but rather how do we partner with that rich media space, driving the right propositions because it's not just about offering more free data, but the relevant content for those subscribers. What you're finding is those short-type media content. I call it top talk. I'm always corrected TikTok and book face and Instagram, all these things that I get wrong. But that's where you're finding the high attractiveness for our customers, and it's having those right packages in that space. And that is where -- I mean, they deem the focus is going to be in that regard. So if you look, you're absolutely right that in the treatment of that backhaul and the work that Lunga and the team have done in the efficiencies at the current rate of EBITDA of 27%, yes, if you normalize and treat that backhaul then in the same level as its peers, it will get it closer than to the mid-30s in terms of the implied EBITDA margin for mobile. So your calculation is right, Nadim.

And just a comment on that. I mean, your data-led model, I mean, do you think that lends you to better efficiencies than, let's say, the kind of models that your peers are deploying over their own infrastructure? Do you think, for example, I am just trying to get -- do you think there's room to improve on those margins? Or do you think they look pretty tough given the relative difference narrowing quite substantially?

I think it's the mix. I certainly -- I must be realistic. If you look at the current levels of the EBITDA margins of our peers, it is still enjoying the benefits of the high margins of 2G voice. Now that is almost like legacy copper was to us. And as that base starts eroding, I think it will come to the realistic levels of where data kind of margins are. So I think that's where the market evolution is going to be.

We have a follow-up question from Myuran Rajaratnam of MIBFA.

A couple of clarifications and then a couple of questions. Just a quick clarification. For Nonku, when you said 40% free cash flow, I might have missed it. Is that operating free cash flow in the sense that it's from your operations rather than any windfall like property transactions included in there or not?

So the free cash flow that we look at is inclusive of things like your sale of property because it's a continuous journey we are on. If I just look at the property part of our business, we will continue to consolidate for quite an extended time. But if you look at other elements like your investing activities, if you like, or cash flow from as selling the likes of, let's assume the Swiftnet transaction, that is not part of our free cash flow calculation.

Sure. Then a question to Serame. You mentioned massive MIMO being switched on. You've given us that 75% of your rands have connection to fiber what percentage of your sites are switched on to massive MIMO at the moment? Can you give us a sense? Is it 50%, is it 30%?

No, what I'll say, Myuran, that we were one of the first operators to switch on to deploy massive MIMO. So we have been deploying massive MIMO for -- since it was launched in the market.

Right. And is it across the network? Is it part of the network? Is it only in like built-up areas? Just want to get a sense of that.

It's across the network. So it will be deployed where Lunga and the team see the high concentration and the need for it. I can't give you an exact number of size rollout, but I'll make it available for you, [indiscernible].

And the last one is a question. Your big peers are growing service revenue at 1% to 2% in South Africa and you're growing it at 10%. I mean, is it fair to say you're winning market share? And my question is specifically, do you think you're winning market share across the board or from 1 particular player? Or is it just -- your propositions are just appealing across the board and -- because you seem to be winning good quality customers. I mean, is that also a fair statement to make, given your ARPUs are not diluting like we saw with Vodacom, I think, last year when they put on a lot of subscribers and washed it up again?

Yes. I think if you may allow me to, Myuran, I'd like to change an answer to say, we like to look at revenue share. And I actually want to move us from the washing machine of some market share to revenue share because I mean your basis is right. It's about the 10% growth in revenue share. And that's the key thing for us and where I'd like us to be constantly measured in terms of our growth in service revenue, particularly driven by data revenue growth because I think that's where the long-term view of this market is going to be. It's about share of data revenue, and we are growing equally from both segments. And the opportunity that lies for us is there is still quite a significant 2G, 3G base across both operators, whereas we have almost a negligible 2G base and where the market is evolving as naturally would, is customers as they grow from 2G to 4G, they are looking for a proposition that makes sense for them. And I think Telkom Mobile has built such a proposition. Now those of you like yourself, who have been in the industry for a long time, know that when a customer moves from 2G to 3G, empirically the ARPU almost doubles or triples because customers start using WhatsApp and Facebook and social media, et cetera. And we've built that proposition that attractive for those 2G subscribers. So that's where we are growing.

Right. And last question. Are you seeing competition in the fixed wireless access space because some of your peers are monetizing the spectrum they want and starting to show some propositions in the market. So how are you thinking about it? How -- what's the market dynamics there? That's it.

Well, there is competition. And I will also remind the audience that when spectrum was released, there was market expectation that we would see fierce competition in that regard. And we've always maintained that one had a look at the context of the fact that we were complementing the spectrum that we acquired with sub-1 gig, whereas our competition over and above the rather large amounts of money they spend to acquire spectrum had to further then invest in the infrastructure to support that spectrum, number one. Number two, if you look at the price points, where they were charging in data, it was a significant drop for them to come to match us. So where there's been fierce competition in that regard, we have not followed in price, we followed in value. That to match the price points, we've made sure that we keep the same nominal price point but offer our customers more value, which is where they've not able to compete. So that's how we managed to, one, keep the price differential and maintain our customers.

Next question we have is a follow-up question from Preshendran Odayar of Nedbank.

Just a follow-up from the Nadim's question on the margins. I mean you guys did well to achieve your 25% margin before the end of FY '25. So -- and I know you did allude to the fact that you don't have much 2G subscribers. I think all your 2G subscribers roam on your -- on the other networks. But where is there -- should I rather ask, is there still room for margin expansion beyond the 20%? Does it normalize back to 25%? I don't know some sort of medium-term guidance for this? Because you're right, your competitors, I mean, they're not really growing much on their top line, but they're still holding firm to the mid- to high 30% margin range. If you can just share some color on what you guys are targeting now beyond the 25x25 margin?

Yes. I think, Presh, if Hasnain was in the room, he must probably be putting his lightweight quite on my chest. But if I look at the guidance, I mean, 25% to 25% was a firm target for them. And I think what's important is in the second half of the year, obviously, we know how the seasonality of the market proceeds. And we've got to cut the guys on slack in terms of them making sure that they do the right intrinsics and investments in their business. I think in the range of where the ambitions are to be in the mark of between, I'd say, 26% to 28% would be a good benchmark for them to aim to in the next 2 to 3 years and really making sure that we've got the right efficiencies in the market and the right expansion. I think if you look at where they want to go, particularly in expanding their digital ambitions in there, we need to invest in the brand. A key thing for us is balancing acquisition with retention and how they actually continue to make sure that growing that ARPU and maintaining that prepaid ARPU above that 61 level is going to require them to be investing more in retention as well to get them within that ballpark.

At this moment, we have no further questions on the conference call, and I would like to hand back to Serame for any closing remarks.

Thanks, kindly. I think as we mentioned in our presentation, we are on a journey. We don't claim that we have landed. This is an early update of where we need to go. Not all the intrinsics are in plus, but we firmly believe that we've got a strong team operating and believing in the spirit of One Telkom. We are certainly focused on execution. We are certainly focused on ensuring that our say-do ratio is significantly improved. And we look forward and have quite appreciative of your continued support. And we will talk to you in our next call. Thank you, and have a wonderful day onwards.

Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.