Despite presenting a set of annual results that appeared more optimistic last week, Telkom, the South African telecommunications giant, is still grappling with significant financial challenges. The company’s net debt has continued its upward trajectory, now surpassing the R16.9 billion mark. In a bid to manage its financial situation, Telkom has made a considerable reduction in its capital expenditure (capex) budget.
The increase in net debt by 0.9% over the past year might seem modest, but it follows a substantial 19.3% surge from the previous year. Looking back to 2015, the contrast becomes even starker; Telkom’s net debt at that time was a mere R123 million. Over the span of eight years, the company’s debt has escalated dramatically, resulting in the net debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio soaring from a negligible 0.02 to a concerning 1.7.
Despite these financial woes, Telkom’s latest results did offer some rays of hope. The company significantly improved its free cash flow, turning around a negative R2.7 billion into a positive R424 million, marking an impressive 115.6% increase. This turnaround was achieved despite incurring substantial one-time expenses, including R1.1 billion in restructuring costs and a R972 million bill for spectrum acquisition.
The restructuring efforts undertaken by Telkom have led to a 15% reduction in its workforce over the financial year, bringing the total number of employees down from 11,624 to 9,877. This downsizing is part of the company’s broader strategy to streamline operations and reduce costs.
Another positive development was the remarkable 444% surge in the company’s net income, which leaped from R346 million to nearly R1.9 billion. Additionally, Telkom reported encouraging growth in its subscriber base for both its fibre and mobile services.
However, when it comes to the expansion of its fibre network, Telkom’s Openserve division reported a 17% increase in homes passed, reaching 1.2 million, with a 19.8% increase in homes connected, totaling 590,527. Despite these gains, Openserve still trails behind its competitor Vumatel, which reported nearly 2 million homes passed and almost 650,000 connected as of September last year.
The disparity in scale between Telkom and Vumatel is exacerbated by Telkom’s decision to slash its capex by 17% as a cost-cutting measure, which could hinder its ability to close the gap with its rival. Specifically, Telkom’s mobile capex was reduced by 30% to R2.6 billion, and its fibre investment was cut by 11% to R1.6 billion. In total, Telkom’s capex for the year amounted to R6.1 billion, reflecting the company’s cautious approach in the face of its ongoing financial difficulties.
In an internal memo last year, Dirk Reyneke, who was serving as Telkom’s chief financial officer at the time, communicated to the staff that the company had decided to postpone 20% of the capital expenditure (capex) originally budgeted for the 2024 financial year to 2025. This decision was part of a broader strategy to address the company’s financial challenges.
Reyneke highlighted the alarming rate at which Telkom was depleting its cash reserves, describing it as unsustainable. To curb this trend and contain costs, he announced a series of stringent measures. These included restrictions on travel, an indefinite suspension of international conferences and seminars, and limitations on overtime work for employees.
Beyond the deferral of capex, Telkom’s financial situation was further strained by a significant increase in debt servicing costs. These costs surged by 58%, rising from R1.5 billion to R2.3 billion, a spike attributed to the prevailing higher interest rates.
Despite these challenges, Telkom has expressed a commitment to addressing its debt and capital expenditure issues as a priority. The company has outlined its short- to medium-term goals, which focus on strengthening its balance sheet through the reduction of debt and strategic investment in capex to stimulate future growth.
A key component of Telkom’s strategy involves the divestment of some of its assets. One such move is the sale of Swiftnet, Telkom’s masts and towers business. The transaction, valued at R6.75 billion, involves selling Swiftnet to Actis, a UK-based investment firm. This deal has recently won the approval of Telkom’s shareholders.
The proceeds from the sale of Swiftnet are earmarked for debt repayment, as Telkom aims to alleviate some of the financial burdens it currently faces. This is part of the company’s broader efforts to recalibrate its financial strategy and ensure long-term sustainability.
Telkom’s operational data has cast a spotlight on the company’s struggle to expand its fibre business at a pace that would offset the decline in its legacy revenue streams.
During a results presentation, Telkom revealed that Openserve, its wholesale and networks division, has seen a significant drop in legacy and voice revenues over the past two years. The overall legacy and voice revenue experienced a sharp decline of nearly 31% in the past year, falling from R3.4 billion to R2.4 billion. Voice revenue alone saw a decrease of 26.5%, from R2.8 billion to R2.1 billion.
The decline in traditional revenue sources is further reflected in the number of fixed broadband subscribers, which continued to decrease, showing a 2.2% drop from 567,289 to 554,953. The number of fixed access lines saw an even more dramatic fall, plummeting by 23% during the year from 793,000 to 609,000.
Although there was a modest increase of 2.5% in Internet subscribers, this growth comes after a significant 20% reduction in the previous year, indicating a challenging trend for the company.
The following table, not provided here, would typically summarize the key financial and operational data that illustrate the issues Telkom faces with increasing net debt and the decline in fixed lines. This data is crucial for understanding the financial health of the company and the challenges it must overcome to stabilize and grow its business in the face of rapidly changing industry dynamics.
| Telkom financial and operational data | March 2024 | March 2023 | Change |
|---|---|---|---|
| Revenue | R43,230 | R42,534 | 1.6% |
| Net income | R1,881 | R346 | 443.6% |
| Net debt | -R16,919 | -R16,776 | -0.9% |
| Financing costs | -R2,304 | -R1,456 | -58.2% |
| Capex | R6,134 | R7,401 | -17.1% |
| Fibre homes passed | 1,217,110 | 1,040,565 | 17.0% |
| Fibre homes connected | 590,527 | 492,812 | 19.8% |
| Fixed broadband subscribers | 554,953 | 567,289 | -2.2% |
| Fixed access lines | 609,000 | 793,000 | -23.2% |
