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

Good day, ladies and gentlemen, and welcome to the Telkom Q1 FY 2027 Trading Update Call. [Operator Instructions] Please note that this event is being recorded. I will now hand the conference over to Kamohelo Selepe. Please go ahead.

Thank you, Adam. Good afternoon. Welcome to our conference call for the first quarter of our 2027 financial year. My name is Kamohelo Selepe [indiscernible] I'm from Telkom Investor Relations. Before we begin, I would like to briefly explain a change to the format of our quarterly results communications. Starting with the quarter we are reporting on today. We will no longer hold the investor group [indiscernible] that we normally host a day after the publication of our trading update. The trading update will continue to be published in the morning followed by a conference call in the afternoon and approximately this time. The timing of the call is [indiscernible] to commodate invest in countries that are on a different time zones to South Africa and to give market participants the opportunity to engage directly with management during the Q&A session. We believe this format will facilitate the timely and focused discussion of the cost performance and outlook. Any additional queries you may have subsequent to the quarterly trading update conference call should be directed to Investor Relations, and they will be attended through promptly and appropriately. The engagement format of our annual and interim results announcement remains unchanged. With that said, earlier today, our trading update for the first quarter ended 30 June 2026 was released. The trading update can be found on our Investor Relations website, and we hope you had a chance to go through it. In the home with me is our Co-CEO; Mr. Serame Taukobong; and our Coup CFO; Mrs. Nonkululeko Dlamini, they will be taking us through the performance of the first quarter. Mr. Taukobong will touch on our operational performance for the quarter. He will also briefly talk about our refreshed sustainability strategy and key targets that are contained in our inaugural Sustainability Report that was published 2 July 2026. Our group CFO will then provide the financial performance for the quarter. Our group CEO will then come back to conclude before the operator opens the lines for questions-and-answer session. After the Q&A session, Mr. Taukobong will provide closing remarks. Please note that all financial metrics and growth rates referenced during the call are year-on-year, unless otherwise indicated. This means the first quarter of the 2027 financial year has been compared to the first quarter of the previous financial year. Furthermore, the normal disclaimer in terms of the forward-looking statements applies for this call, and it is incorporated in the trading update released in the morning. I will now hand over to Mr. Serame Taukobong to take you through the operational performance for the first quarter. Over to you, sir.

Thank you, Kamo. And quality, good afternoon to everyone joining us on the call today. I'd like to welcome all analysts, investors and various stakeholders who have dialed in today. We appreciate your continued interest in Telkom. We start the year 2027 already delivering on what we said [indiscernible]. Global service revenue continues to lead the market, supported by unparalleled prepaid service revenue growth. We sustained the overall revenue growth trajectory in Openserve and delivered solid EBITDA growth. At BCX, the IT services, the future Cybersecurity and Cloud, which we indicated there will be a key focus area recorded robust growth. The first quarter results demonstrate the strength and quality of our data load -- data led growth strategy and reinforce our position as South Africa's digital backlog. Group data revenue grew by 8.8% and to contribute 62.4% to total revenue, up from 58.8% in quarter 1 F '26, driven by Telkom Mobile data revenues, increase of 11.4%. And fiber-related data revenue growth of 4%. Group revenue grew by 2.6% as data-led revenue that is mobile and fiber together, increased by ZAR 561 million or 9% and continued to offset traditional fixed revenue decline. This revenue growth combined with our cost discipline initiatives contributed to group EBITDA, improving by a solid 10%, resulting in group EBITDA margin expanding to 27.7%. This reflects our strong operating leverage and ongoing efficiency initiatives. Taukobong will touch on EBITDA and margins in our business units when she walks you through the financial performance. On CapEx, we invested $888 million during the quarter, mainly in Mobile and Openserve. There was also a portion of the CapEx directed towards IT solutions for the modernization of our business support systems, that's BSS, and digital platforms. In Mobile, we invested primarily to expand neutral capacity and upgrade base stations. Furthermore, Mobile invested in IT transformation and in the upgrade of the BSS and digital platforms. In Openserve, the CapEx investment was to modernize and expand its networks. Our investment program resulted in 84 Mobile sites being added during the quarter, increasing our net book footprint to 8,504 sites. Openserve passing 26,541 homes and connecting 26,023 homes during the quarter, an almost 1:1 ratio in quarter. The lower CapEx for the quarter was primarily attributed to the timing of multiyear projects in Openserve as quarter 1 included a higher level of network projects completions and associated capital recognition. CapEx intensity at group level was 8%. CapEx spend will ramp up for the remainder of our financial year as we expect CapEx intensity to be within our 12% to 15% guidance. As you know, we do not provide updates on the balance sheet or free cash flow at this time of the year. Nevertheless, safeguarding the group's financial strength and delivering strong free cash flow remain core management priorities. During the quarter, we sold 100 properties with a sales value of ZAR 200 million and 105 parties are currently in conveyancing valued at ZAR 264 million. Let me now go through the operational performance of our business units, starting with the Mobile business, which sits in Consumer. Our Mobile business continued with a consistent market-leading service revenue growth, which grew by 6.4%, underpinned by a pleasing 9.1% prepaid service revenue expansion. The continued strong prepaid growth reflects targeted customer acquisition de segmentation through our best-in-class and people-led AI capabilities, together with continued success of our customer management or CPM platforms. Our effective CPM platforms, Mo'Nice and Mo'Town accounted for 54.6% of prepaid service revenue. The disciplined execution of our regional strategy continue to increase our share of acquisition and gain market share as we achieved double-digit revenue growth in non-metro regions. The total subscriber base increased by 6.1% to 25.3 million, driven by prepaid subscriber growth of 7.1% to 22.3 million subscribers. Prepaid ARPU was stable at ZAR 59, despite adding 1.5 million subscribers year-on-year, evidence that we are onboarding customers that recharge on our network. Mobile data subscribers increased by 15.5% to 19.8 million and now represent almost 80% of the total base. Mobile data traffic grew by 19.6% to 574 petabytes as we maintained a high conversion rate of traffic to data revenue, which is leading in the South African mobile sector. Prepaid data revenue growth was even higher, increasing by 15.5%. Advanced airtime lending, which represents 24.7% of the prepaid recharges has 44.4 million active users during the quarter. We continued to manage advanced lending prudently. Our aim is not to surpass 30% of the prepaid recharges of airtime advance. Openserve overall positive revenue trajectory continued, attributable to fiber services. Fiber-related data revenue improved by 6.6% to contribute almost 90% to total operating revenue. The fiber-related data revenue growth reflects the continued transition towards high-quality recurring infrastructure revenue. At a segment level, broadband revenue grew by 9.7% and carrier services by 2.3%. External revenue grew by 18.2%, supported by increasing demand for broadband, fiber and productivity. The growth of external revenue is evidence of the execution of our strategy to grow our wholesale business and expand our external customer base. The strong performance reinforces the competitiveness of our open access model as more service providers, enterprises and carrier customers choose Openserve. Growing external revenue remains a strategic priority for Openserve as it enhances the quality of earnings and diversifies the revenue base. Openserve continues to monetize its national fiber infrastructure increasing homes connected to approximately 844,000 and expanded the fiber footprint to 1.6 million homes passed. As a result, our industry-leading connectivity rate improved to 53.9%. The resilience of our network and our ability to respond rapidly to major disruptions while maintaining high service [indiscernible] for our customers resulted in Openserve delivering network availability of 99.94% for broadband, 99.92% for aggregation network, and 99.99% for the core network. Customer satisfaction remained exceptionally strong for the business with the Net Promoter Score, NPS, of 80.6 compared to 80.1 in F1 2026. In July, Openserve launched its own Internet service provider, ISP, as an additional channel to monetize its existing infrastructure, increased fiber adoption and improve network utilization. Openserve currently has approximately 722,000 homes passed that are not connected. Therefore, the ISP will support the efforts of the business to improve the connectivity rate. as the focus will be connecting the homes that other ISPs are not willing or unable to connect. Let me emphasize, we remain fully aligned to our wholesale open-access strategy. I will repeat. We remain fully aligned to our wholesale open-access strategy. Consequently, we remain committed to providing fair, transparent and nondiscriminatory access to all service providers on the Openserve network. It is still early days to comment on the uptake and financial metrics of the ISP. Lastly, BCX has strengthened oversight of performance pipeline quality and deal execution. Overall, revenue for BCX declined by 10.9%, primarily due to the revenue decrease in Converged Communications and IT and software sales. We are encouraged by the stable IT services revenue. This is on the back of the sector continuing to be constrained and extended customer decision cycle delays. This reflects the focus on customer retention and underscore the effectiveness of our strategy to shift portfolio towards scalable, higher-margin and annuity-based offerings. Cybersecurity service revenue grew strongly by 36.6%, reflecting the sustained client demand for advanced state management, advisory and network protection services. Cloud revenue also grew strongly by 11.8% due to the increased consumption in the BCX OneCloud value proposition. IT and software revenue declined by [ 13.1% ] and was impacted by delivery and customer decision delays as input costs were significantly impacted by supply chain discussions caused by geopolitical instability. The converged comm communications revenue decline was due to the ongoing managed migration to fiber-based platforms and continuing pricing dynamic challenges. Fiber-related revenue declined by 10.4%. This decline was due to a loss of key client contracts and a transfer of a key government contract to Openserve. In Converged Communications, BCX' focus is to stabilize connectivity through disciplined renewal defense efforts targeted retention actions and improved pipeline cooperation. Nonku will now take you through the financial performance.

Thanks, Taukobong, and good afternoon to everyone on the call. I'll take you through our revenue and EBITDA performance. Our revenue for the quarter increased by 2.6% to ZAR 11.1 billion. This was supported by continued growth in mobile and fiber-related data revenue. Telkom Consumer revenue increased by 5.3%, contributing ZAR 7.3 billion to the quarter performance. Openserve overall revenue increased by 5.6%, also contributing ZAR 3.3 billion to the quarter performance. BCX delivered ZAR 2.6 billion for the quarter, a decline from the ZAR 2.9 billion in the previous reporting period. If I now turn to EBITDA and EBITDA margins. The group delivered ZAR 3.1 billion EBITDA, resulting in a group EBITDA margin expansion to 27.7%, as total expenses decreased by 1.9%. The main contributors to the lower expenses are roaming costs, maintenance costs and impairment of receivables. This is testament to our disciplined strategy of continuing to drive cost efficiencies across the group. Now looking at EBITDA and EBITDA margin of each business unit. Telkom Consumer EBITDA improved by 17.9% to ZAR 1.7 billion, resulting in EBITDA margin expanding to 22.9%. Mobile EBITDA increased by 17.6% to ZAR 1.9 billion, driven by service revenue growth and a decline in roaming costs and impairment of receivables. The EBITDA margin of Mobile remained strong at 29.1%. Openserve EBITDA grew by 6.7% to ZAR 1.1 billion due to revenue growth, disciplined cost management and continued operational efficiencies, resulting in an EBITDA in of 33.2%. This is despite Openserve absorbing additional costs related to network restoration from severe weather conditions and interest in fuel prices. The fuel prices were substantially mitigated through lithium battery and solar backup solutions. EBITDA margin of increased by 2.6%, supported by improved margin in IT services, lower impairment of receivables and disciplined cost management. This was partially offset by the margin impact emanating from the decline in Converged Communications. Ladies and gentlemen, that concludes the review of our financial performance for this quarter. I'll hand back to Serame to take you through our refreshed Sustainability Strategy and our key targets. Thanks, Serame. .

Thank you, Nonkululeko. As [indiscernible] mentioned earlier, we published our inaugural Sustainability Report in July this year, which contains our Sustainability Strategy and the targets for 2030. We introduced our refreshed Sustainability Strategy with our F '26 integrated report. At the core of our strategy is to enable digital infrastructure to foster growth or key economic sectors based on our 4 interconnected pillars, namely, Prosperity, Planet, People and Practice. The development of the new strategy was necessitated by reaching almost all of our 2025 ESG goals. Let me now highlight the key targets of our Sustainability Strategy. . Under prosperity, we have committed to supporting 100 [indiscernible] and rural [indiscernible] and enabling 25,000 jobs. In terms of the planet pillar, we remain committed to our ambition of becoming carbon neutral by 2035 and achieving net 0 emissions by 2040. Under people, we have set a target of achieving 50% women representation in leadership positions. And lastly, in the practice pillar, our commitment is 0 tolerance for data breaches, consumer data privacy, incidents and data security risks. Going back then to our business and looking ahead and to conclude, we remain committed to our medium-term guidance. Our data-led strategy as the primary growth engine for the group will continue to drive expansion supported by disciplined cost management and the OneTelkom approach. In Mobile, our focus remains on prepaid growth and increasing market share in under-indexed and underserved regions. As a result, we expect service revenue to grow mid-single digits and potentially above the upper end of this range. Openserve will continue to focus on growing external wholesale revenue expanding partnerships and improving network utilization. Furthermore, Openserve will drive greater operational efficiency through network simplification, energy transformation, and digital automation. At BCX, the new leadership has commenced in repositioning and reassessing the IT product portfolio to ensure the focus remains on scalable, high-margin offerings. There is further repositioning of connectivity as a foundation of digital services. We expect hardware and software to recover as the year progresses with the pace dependent on the extent to which global supply chain disruptions associated with the geopolitical conflict moderate. The BCX team will continue the focus on disciplined cost management and cash collections to improve EBITDA margin. Overall, we remain confident in the strategy being implemented while recognizing that the BCX turnaround will take time to deliver its full benefits. I'll now hand over back to the operator and open the line for Q&A.

[Operator Instructions] The first question we have is from Maddy Singh of HSBC.

Two questions from my side. The first question is on the postpaid revenue performance. I think revenues were slightly soft this quarter. So wondering what is happening there? For other operators, it seems they are doing better at postpaid and weaker at prepaid, but for you, it seems like prepaid is very strong, but postpaid is somewhat soft. So what's driving that, if you could discuss that? And then second question is on BCX. Another, I would say, quite a weak quarter for BCX. So how long do you wait before you take any decisive action on this segment.

Thank you. We'll take another question.

The next question we have is from Jonathan Bradley of Apsa.

And congrats on a great set of results. Just 3 questions from me, please. Firstly, on your prepaid and data customer trends in the quarter, net adds in both were negative. Can you maybe give some color on the customer behavior trends. I think typically, it's your fourth quarter that is a bit weaker from a seasonality perspective, just trying to understand why that's shifted a bit. And then secondly, on the property sales, you sold 100 properties this quarter for ZAR 200 million, and I think you flagged another ZAR 105 million in the process of ZAR 264 million. Can you tell us what the EBITDA uplift from these sales in this quarter was. So in other words, in other words, what the gain on sale of these properties was and how many more properties you think you might sell this year? And then lastly, on your margin guidance, you've kept that 25% to 27%, but you've now been above that range for the past 4 consecutive quarters. So just trying to understand what is keeping you cautious around your expectations for margins going forward?

Thank you. So let me tackle some of those. First, I'll start with Maddy's questions. I think, Maddy, if we look at postpaid, relative to the market, it is a bit soft, and we're not too particularly panicked about that. I think we will look at where the postpaid backfill has [indiscernible], that has historically been the stronghold of both MT and Vodacom. And in terms of where we've been focusing on, it is predominantly in the prepaid sector. What the team has been doing is [indiscernible] significantly on the SIM-only propulsions. And I think if you look at recent months, in fact, in last week, the team have gone back with enhanced propositions for postpaid. So I think we're quite comfortable with our journey, and they will maintain our relative share and mix of prepaid to postpaid. And I think we're quite steady and comfortable where that's going to. In terms of BCX, I think we've signaled Maddy, yourselves in the market that this is an 18-month journey. So we're not going to be looking at a quarter-to-quarter transition. But what we are happy with is the short-term indications where we are seeing the focus on your Cloud Services, your -- as we've indicated there in terms of Cybersecurity. So the shape of where the focus is where we want it to be, it's showing the right size. We've also indicated that the migration from your legacy copper connectivity is intentional. And as we signaled to the market that this year is going to be flat. And the first quarter and H1 is showing that. Second half, I think we are anticipating the reversal of that. Of course, then the elements that we talked about in terms of the IT supply, which is impacting everybody else, we will hopefully see the moderation of that as the supply of clinical components becomes available. But that is affecting the industry as a whole. So it's not a quarter-to-quarter call, it's an 18-month journey as we've indicated. I hope that's covered you, Maddy,. Jonathan, you talked of the net adds movement. Yes, the tail, I think if you see the lag. The comparison, really, if you look at that compared to Vodacom, the numbers are the same. Our prepaid base, I think, was on quarter-to-quarter negative by IT 325,000-odd subscribers compared to Vodacom 355,000. So it's a similar movement in terms of the basis feeling up. We've seen that seasonality come through on a quarter-to-quarter basis across overall. Interestingly, though, if you look at the overall revenue growth on a quarter-to-quarter basis, and compare that to our peers, top line revenue, our peers have actually declined on a quarter-to-quarter revenue perspective. whereas we have increased both in prepaid data and also overall top line of [indiscernible]. So we're encouraged with that cleanup. I think that's the tail end of the cleanup you're seeing, and that number continues. If we look at your property, I think I'll leave Nonkulu to give you more color on that. The margin in terms of why we've held that. Remember what we've always said, Jono, is that, that top line guidance is made up of all 3 engines coming in. So it is Mobile, it is Openserve and equally BCX coming into the guideline that we've set ourselves for the medium-term guidance. So yes, Mobile is shooting the lights out, but also Openserve has to come in at the 35% margin guideline, and BCX remember, was sitting at the high end of that margin guideline that I think we've said when this medium-term guidance was given, BCX was in the high end of the margin, I think it was just about. So it's a composition of all those then that give the medium-term guidance. So at this point in time, that's the call, that's given us the more print approach. So it's not that we're anticipating anything negative, certainly in Mobile. We want to courage them to shoot towards the 30% line. Openserve, we certainly want them to get to the 35%, but it's obviously BCX then coming through and has been indicated that this year, is flat for BCX. I hope that covers you Jono. Nonkulu, do you want to cover the properties?

Yes. Thank you Serame. So Jono, on the properties, as you can see, it's quite a big number of properties, but in value, it's not so significant. It's a footprint across the country. And therefore, in terms of the property sale margin, it really was negligible because our focus was to release the cost -- the holding costs in relation to those properties because we were not efficient in keeping them as part of our footprint. . So the margin itself from selling the properties was totally negligible, maybe ZAR 6 million, very, very little. But critically for us is the fact that now going forward, there will be no related costs in terms of rates and taxes, security and everything that would go with those properties. And it's part of our long-term strategy in the cost efficiency program. I hope that helps.

The next question we have is from Jonathan Kennedy-Good of [ Persian Securities ].

Just two from me. On your Mobile business with regard to the roaming cost reduction that you mentioned contributed to margin expansion. Could you give us a sense of what that was, whether it was pricing declines or reduction in volume over roaming or a combination of both? And how much that benefited margin? And then also, you referenced lower impairments across the business, I think most notably in Mobile and BCX. Could you give us a sense of what those lower impairments contributed to EBITDA?

The next question we have is from Thando Skosana of UBS.