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

Good day, ladies and gentlemen, and welcome to the Telkom Q3 FY 2025 Trading Update for the quarter ended 31 December 2024. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the conference over to Nondyebo Mqulwana. Please go ahead.

Thank you, Irene. Good afternoon, everyone, and welcome to our Third Quarter FY 2025 Conference Call. I am Nondyebo Mqulwana, Head of Investor Relations at Telkom. Our Group CEO, Serame Taukobong; and Group CFO, Nonkululeko Dlamini, will take you through the salient features of our performance for the third quarter and 9-month period ended 31st December 2024. Thereafter, we will take your questions. We also have Beauty Apleni on the call, our Chief of Staff of Strategy as well as the IR team. Just as a reminder, the commentary on this call is on continuing operations. That is the Telkom Group, excluding Swiftnet, our Masts and Towers business as it is disclosed as a discontinuing operation. All numbers and growth rates quoted are year-on-year and refer to the quarter ended 31st December 2024, and are compared to the quarter ended 31st December 2023. When speaking to year-to-date numbers, growth rates are year-on-year, meaning that they are being compared to the 9 months ended 31st December 2024, versus the 9 months ended 31st December 2023. Furthermore, year-to-date adjusted group EBITDA and adjusted EBITDA margin excludes restructuring costs as well as the impact of the conversion of the Telkom retirement fund. Serame will now take you through the key highlights of our performance.

Thank you kindly, madam. Good afternoon all, and thank you for joining us on the call. We are pleased to report strong operational results for the third quarter, reaffirming our position as the backbone of South Africa's digital future. Our data-led strategy continues to deliver impressive performance across key metrics, underscoring our competitive advantage in our diverse businesses working together to realize the results as OneTelkom. With strong momentum across our business units, we remain confident in achieving our medium-term objectives as we continue to invest in our infrastructure, network and digital services, delivering profitable growth. We have maintained our momentum in the third quarter with year-on-year group revenue growing in line with our medium-term guidance, while adjusted group EBITDA growth exceeded expectations at 21.4%, and increased the adjusted group EBITDA margin by 4.3 percentage points to reach 26.5% for the 9 months. Turning now to the quarter's key highlights. The 28% growth in group EBITDA for the quarter reflects operational excellence achieved across the group, driven by a commitment to enhancing efficiencies and scaling our strategic initiatives. Our mobile business continues to deliver robust growth, while Openserve's fiber data revenue also saw growth. BCX IT services revenue demonstrated positive growth for the quarter. The disposal of Swiftnet has progressed as planned. The bulk of transfers for property sales were completed during the quarter ahead of time. I will now turn to operational results for each of our business units, starting with the mobile business, which sits under Consumer. Mobile service revenue increased by 9.6% and continues to grow ahead of the South African market as demand for our reliable connectivity increases. Prepaid subscribers grew strongly, driven by the optimization of our proposition called Mo'Nice, our channel and consumer insight utilization as well as the introduction of affordable 4G devices in the past quarter. The prepaid ARPU at ZAR 61 was within our optimal range. The prepaid ARPU decrease is attributable to the non-metro regions that while they attract a lower ARPU, do drive increased volumes. The postpaid segment has started to show signs of recovery, and the ARPU of this base has improved to ZAR 185. Turning to Openserve. Openserve grew fiber service revenue by ZAR 121 million, reflecting the strength of our infrastructure investments. External revenue driven by fiber connections increased by 9.2%. Openserve will continue the growth in fiber revenue, passing and connecting homes. On BCX. BCX IT services revenue increased by 6.8%, highlighting the success of our tailored solutions in meeting evolving customer needs in a highly competitive environment. The lower-margin hardware and software sales were deliberately moderated which supported the EBITDA margin for this business. The focus is to continue to grow the high IT margin services for BCX. Overall, the data layer strategy, supported by a smart CapEx deployment, continues to yield results. Mobile data revenue increased by 10.8%, benefiting from mobile subscriber and traffic expansion. Mobile data subscribers are now almost 15 million subscribers. Fiber-related data revenue was up by 14.7% across the group. Data services grew by 5.9%, driven by growth in fiber and uplifted revenue from the converged communications business as BCX continued to manage the transition to fiber-related services. Mobile and fixed data traffic grew by 22.2% and 23.7%, respectively. In the past year to date, we have invested ZAR 3.6 billion in CapEx and our smart CapEx deployment has resulted in the following: 142 mobile sites integrated year-on-year; 155,000 additional homes passed in the past year, with a matching 100,000 homes connected; and a high connectivity rate maintained at 49.8%. We still expect our CapEx intensity at the end of the financial year to be closer to the midpoint of our guidance. That is the 12% to 15% range. Additional CapEx has been allocated to mobile for capacity expansions, given their growth and further to invest in power resilience to further strengthen our network. Our execution of cost optimization initiatives resulted in solid EBITDA growth. Mobile optimally managed to mix of their devices and improved [ costs ]. Openserve's network simplification and energy transformation programs delivered cost savings. BCX has started to see cost savings from the staff restructuring and managed debt recoveries with the work also underway for facilities consolidation, which will further add to cost savings. The team in Gyro transferred 22 properties ahead of time realizing cash of ZAR 417 million. We have concluded the sale of higher-value properties and any future property sales will be dependent on the optimization of our property portfolio. In terms of the Swiftnet transaction, that is our towers transaction. ICASA approved the Swiftnet disposal in December, and we are on track to close the transaction and receive the cash by the end of this financial year or soon thereafter. This transaction marks a key milestone in our portfolio optimization efforts. Nonku will now take you through the financial performance, and I'll come back to conclude.

Thank you, Serame, and good afternoon to everyone on the call. Our revenue increased by 0.9% in the third quarter to ZAR 11 billion, and 1.6% to ZAR 32.4 billion for the 9 months. For the third quarter ended 31st December 2024, Telkom Consumer revenue increased by 4% to ZAR 7.2 billion. Mobile revenue was up 6.5% to ZAR 6.3 billion. This was driven by a steady mobile service revenue growth. Openserve revenue declined marginally by 0.4% to ZAR 3.1 billion. However, fiber data revenue increased by 5.4%. Although BCX revenue declined overall, IT service revenue grew by 6.8% and converged communication revenue increased by 1.7% to ZAR 1.4 billion. Group EBITDA was up 28% in the third quarter to ZAR 3 billion, and the group EBITDA margin improved to 27.2%. Excluding property sales, Group EBITDA margin was 25.1%. The main contributors to the improved profitability are the following. Telkom Consumer EBITDA increased by 51.4%, supported by the robust mobile service revenue, mobile service revenue growth and cost optimization initiatives, leading to a 6.5 percentage point uplift in its EBITDA margin to 20.8%. Mobile EBITDA grew by 46.9% to ZAR 1.8 billion, resulting in an EBITDA margin of 27.6%. The reduced cost of handsets and equipment and the decline in the impairment of receivables, amongst others, contributed to the improved mobile EBITDA margin. Openserve EBITDA increased by 5.4% to ZAR 1.1 billion, and the EBITDA margin improved to 34.4%. This was driven by the efficiencies emanating from the network simplification and energy transformation program. BCX grew EBITDA by 36% in the quarter to ZAR 438 million, and EBITDA margin was at 15% of this third quarter. As a result of the strategic focus on higher-margin IT services and the proactive management of receivables, with a shift of the product mix towards the service -- towards IT service supporting the margin. However, BCX EBITDA year-to-date remained lower by 6.1% at ZAR 991 million, with the EBITDA margin stable at 11% compared to the prior 9 months in the prior year. Adjusted group EBITDA year-to-date amounted to ZAR 6.8 billion, with the adjusted group EBITDA margin at 26.5%. The group financial position remained resilient, and we further reduced interest-bearing debt by 2.7% to ZAR 12.6 billion. We repaid maturing bonds amounting to ZAR 400 million in November without a need to refinance in the bond market. As a result, our net debt to adjusted EBITDA improved from what we had reported at the half year level. On the free cash flow front, although we don't report on this -- on the quarterlies, we are pleased that it remains positive and it is on track in line with our expectations. We concluded another handset sale during the quarter, bringing the total cash flow received from handsets to over ZAR 715 million for the 9 months to December 2024. I now hand back to Serame to conclude.

Thank you, Nonku. In closing, Telkom's strong financial results reflect our relentless commitment to executing our InfraCo strategy as OneTelkom. These results provide clear evidence that we are on track, delivering profitable growth while reinforcing our role as the backbone of Africa's digital future. By leveraging our unique capabilities, we continue to meet the growing demand for data lead services while driving improved operational efficiencies across all our businesses. We remain confident in our strategic direction and our ability to create sustainable value for our stakeholders. Thank you for your time and continued support. I will now hand over to the operator for Q&A.

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

Congratulations on another consistent set of good results. I've got 3 questions, if I can. The first one is on the mobile side, what percentage of your mobile recharges actually comes from airtime advance? I know you mentioned it grew by 35%, but I just want to know, overall, what percentage is actually coming through the advance book as opposed to the cash book? And then 2 for Nonku. I know you mentioned that your gearing level has improved. Are you able to share with us what it is at the end of this quarter? And then the second one for Nonku, as well is the -- I'm just trying to work out what is your expected net cash that you will receive from the Swiftnet sale. Because I remember that there's a loan balance of around ZAR 200 million there. There's also some taxes. So I just want to know what would be the amount that you'd see in your bank account when you get that SMS where the money flows in?

Thanks, Presh. To your first, it's -- Hasnain has given me a multiple decimal here. It's, to the accurate last decimal, 51.59%. Did you get that?

Yes. Perfect.

All right. Thank you. So on your first question on the gearing, yes, we've seen an improvement. And at this point in time, you would recall at H1, we had reported around 1.5x and we are trending at about 1.3x at this point in time on net debt-to-EBITDA. Then on the cash that we expect from the Swiftnet sale, you would recall, we have indicated that the price is ZAR 6.75 billion. And the minor adjustments would really relate to little things like where the working capital is at the point of closing the transaction. So we're not necessarily expecting very significantly different set of numbers from the price on the table. But obviously, it will be determined by, at that point in time, minor movement in some of the working capital amongst others.

You covered, Presh?

Yes. Yes, Serame. Happy with the answers from both you and from Nonku.

The next question we have is from Nadim Mohamed of SBG Securities.

So just 2 from my side. Just on the prepaid net adds of another 1.2 million. I mean that's really impressive and no sign of churn from the strong quarter -- in the last quarter. I just want to understand, I mean, what should we expect here? And should we expect some deceleration in growth, that you've now passed the 20 million mark? Just want to understand what kind of strategy you're leveraging to keep that momentum going. And then secondly, could you give us some color on what you're seeing on the ground in the December quarter? You're obviously seeing the Red team push higher prepaid data growth and higher data volumes. But it seems like Telkom has been quite -- the capture of volumes versus revenue has been quite good, like [ 22% ] versus 11%. I would like to get a sense of what kind of promotional and other items you're seeing on the ground and where you think you're gaining or losing share. I would appreciate that.

Thanks, Nadim. I think not everybody has obviously released their results. But I think from a market activity, if I look at -- and this is my personal push with the team. I think, overall, the market was far more responsible, for lack of a better word, in the prepaid drive. I mean if you look at December last year, I think everybody went quite crazy in prepaid acquisition. I think the total gross acquisitions across all 3 networks, the big ones, were almost over 5 million. It looked far more tempered this year in terms of gross acquisitions. I think everybody went for more responsible acquisition, which is good in the market. So yes, you are right. The Red, they came back fighting, but we had also quite solid propositions in the market. The big focus area is in that 2G acquisition where those customers are migrating to data. These propositions that the team have put in place, really talk to our strength. So amongst other things, making sure that some of the packages they have built-in have, for instance, WhatsApp and Facebook built into some of the devices, which is quite attractive for the customer base moving in. The balance in terms of your third question is with the guys having now crossed 20 million. It is a key focus on maintaining acquisition with retention. So we're going for a spray and cook. We have to make sure that it is a cost-effective acquisition because if you're go into a washing machine, you really are just putting money down the drain. So Lunga and his team have a big focus on ensuring that as they bring the base in, they move them quickly into a recharging mode, which is why they're focusing quite a high attention on the amount of recharges and their recharge activity, and we've seen that continuing quite good. So it's a strong balance between acquisition with more and more focus on retention to hold that base as we bring them in. I hope I've covered you there, Nadim.

And just quickly, if you could give a sense of how significant those smartphones sales are that you mentioned in the report. I mean, are they in terms of the push to 4G smartphones?

I mean in terms of -- it's not extremely massive volumes, not to the quantum of our peers because it really is very focused and targeted. The guys were trialing some new devices in the market. It's 4G devices below ZAR 1,000. They were piloting a specific device, which they did through PEP. So it's early days. And once again, it is cost-effective as opposed to just going quite crazy in that market. So we're not talking millions here, Nadim.

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

Congrats on the results. I just wanted to -- I've been dropped off the call a few times, sorry about if I'm covering old ground here. But I just wanted to ask you on the mobile margin expansion was quite strong. And I think you mentioned that this is partially due to lower handset pricing and I think it was lower impairments as well. Should we expect a retracement in the margin? Is this -- how should we think about mobile margin going into next year -- fourth quarter next year? If you could help with that, that would be great.

Thanks, Jonathan. We can certainly send the team from Openserve to deal with that connectivity for you. On the mobile, so it's a mix of 2 things in this quarter. You're absolutely right. The mix of devices, it was looking at a lower range of devices. That was the one contributor. The second part, obviously, the roaming agreements have also kicked in. So we've seen the roaming costs also come down to match that. Obviously, we pushed Hasnain on a mobile EBITDA to get to 25% by '25. I think in terms of where they're heading in the year-end, they will get there. I think what's key for us is we did have that horrible scale on the 31st of January where load shedding came in. Now that does have an impact in many senses, both from recharges and also the impact of roaming. So we're not sure how that is going to go on in the remainder of the quarter. So I think for a year-end perspective, there will be most probably on the other side of '25. We are still pushing the guys in terms of the long-term ambitions that their next milestone is 27% by '27, as I indicated. And I think that the team is pretty much holding steady towards that. I hope that covers you, Jonathan?

Yes. Great. And if I just may follow up on Nadim's question regarding your strategy on the 2G customers. I presume you're targeting 2G customers from the other networks with these offers, given my understanding was that your 2G base would be quite small. And if so, is it really a price-driven strategy? Or is it -- do you find that the handset strategy is the driver of what you -- how are you trying to take market share there?

So definitely not our 2G base. You're right. We don't have much of that. It is a combination of both. So if you look at what is attractive to those customers, it is the price proposition and the strong offer, predominantly of WhatsApp and Facebook, which is built into that specific device which is a quite attractive thing for these customers as they're moving from 2G to your 4G. So it's a holistic proposition. And because those packages are standard to us, we've not had to significantly drop pricing. I think all of you have seen Louise's latest price report. We remain quite confident in there. We've not had to significantly drop pricing. It's really been making sure that those devices are affordable and available. As I'd indicated to Nadim, the guys were also pricing devices at below ZAR 1,000 and during a perfect pilot with PEP on a unique specifically designed proposition for Telkom, where the guys did put a bit of a subsidy in it, I think, at about ZAR 299 to get it to a price point closer to ZAR 799 for those customers. But we feel that the base introduction proposition is at the right spot for those customers.

[Operator Instructions] It seems like we have no further questions at this time. And I would like to hand back to Serame for any closing remarks.

Thank you very much. I'm sure we'll be engaging with you more details in the next few days. Once again, thank you for joining the call and your continued interest in Telkom. As we mentioned, we are pleasantly and solidly on the path of executing our InfraCo strategy as OneTelkom. And we wish you a stunning afternoon [ further ]. Thank you.

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