South African telecommunications utility Telkom on Monday reported a sparkling set of interim results, with headline earnings per share up 171,1% to 335,9 cents for the six months ended September 30 from 123,9 cents a year ago. The group declared a one-off interim dividend of 90 cents per share.
The group’s operating revenue grew 9,8% to R20,11-billion from R18,316-billion before and operating profit increased 51,2% to R4,25-billion for the period.
Ebitda margins during the same period expanded to 37,8% compared to 32,3% in the prior period primarily as a result of the strict cost discipline in the fixed-line business.
Strong earnings growth was delivered despite the net losses of R561-million arising from measuring derivatives at fair value and the relative volatility of the currency during the period.
Net cash from operating activities was R5,771-billion, which fully covered cash requirements for group capital expenditure of R1,763-billion and facilitated the repayment of R3,458-billion in net debt. The balance sheet was strengthened with net debt to equity of 85,1% at September 30 2003.
Telkom said the appreciation of the rand is positive for the group in the long term as a significant portion of capital and operating expenditure is denominated in foreign currency. The value of the rand against the dollar appreciated 27,6% in the six month period ended September 30 to an average of R7,57 from R10,45 in the prior year’s six-month period.
“While such appreciation negatively impacted Telkom’s international interconnection revenues and the translation of Vodacom’s revenues from international operations, the appreciation of the rand resulted in savings in foreign denominated operating and capital expenditure and contributed to the improvement in operating margins.
“Although the strong rand positively contributed to operating profit, it negatively impacted net reported earnings as a result of the R561-million loss on the net fair value and exchange losses of financial instruments.”
Fixed-line operating revenue, after intersegmental eliminations, increased 5,5% primarily due to solid growth in data services and increased traffic revenue. Mobile operating revenue, after intersegmental eliminations, increased 25,2% primarily due to customer growth.
Group operating expenses increased 2,3% to R15,860-billion due to increased operating expenses in the mobile segment. This was partially offset by a 2,5% decrease in fixed-line operating expenses primarily due to reduced payments to operators, employee expenses and operating leases, partially offset by an increase in depreciation.
The increase in mobile operating expenses of 16,4% was primarily due to increased competition resulting in increased incentive costs and expenses to support customer growth. Mobile payments to other operators also increased as a result of the increased outgoing traffic and the higher volume growth of more expensive outgoing traffic terminating on other mobile networks relative to traffic terminating on the lower-cost fixed-line network.
Finance charges increased 5,2% to R1,871-billion from R1,779-billion due to a 52,9% increase in group net fair value and exchange losses on financial instruments of R561-million. Net profit increased 158,2% to R1,663-billion.
Cash flows from operating activities increased 66,7% to R5,771-billion primarily due to increased operational cash flows and decreased interest paid.
The balance sheet at September 30 2003 strengthened, resulting in a net debt to equity ratio of 85,1% from 123,4% at September 30 2002.
Sizwe Nxasana, CEO, said: “The group has delivered an excellent performance across all areas of our business with financial results exceeding our expectations. We continue to benefit from the exceptional customer growth in our mobile business and the margin expansion and strong growth of cash generation in the fixed-line business.
“In the period under review, we have successfully grown our revenue in selected markets by expanding our integrated product and service offerings; we have increased profitability and cash flows through strict cost discipline. Telkom has significantly reduced indebtedness and are pleased to be reinstating our dividend policy.”
He added that the six months under review saw the continued delivery on group financial targets, yielding results ahead of expectations. Significant progress has been made in improving the competitiveness of the fixed-line business by streamlining the cost structures and increasing employee efficiencies, with resultant improvements to the customer experience.
The group has continued to benefit from the strong growth in the mobile business in South Africa and other African countries.
The fixed-line segment delivered solid revenue growth, driven largely by data volume growth. Margin expansion was achieved through a strong focus on cost cutting, improving productivity, and enhancing the segment’s competitiveness.
Capital expenditure has been further reduced, with future investment focused in areas that drive revenue growth and efficiencies.
In the period under review, good growth was achieved in value-added services, with these services penetrating 58% of the residential customer base.
In particular, there has been a strong take-up of products such as ADSL, residential ISDN and basic voicemail.
Prepaid revenue growth remained strong, although growth in prepaid customers slowed to 4% due to a clean-up of all inactive customers. Prepaid distribution was further improved through signing contracts with groups such as Standard Bank, First National Bank and Vodacom.
The group continued to make great strides in its strategy of becoming the data service provider of choice, with several new product launches such as VPN Supreme, a dedicated IP service, CyberTradeMall and TelkomInternet powered by satellite.
Telkom has started an intensive wi-fi feasibility study, having commissioned the first few hotspots in a pilot programme that will include 100 sites around South Africa. The data business was further improved through additional business sales force training, system upgrades and improved key account management.
Fixed-line reduced costs, excluding depreciation and amortisation, by R536-million mainly through reductions in payments to other operators, materials and maintenance, property management costs, operating leases and employee expenses.
Fixed-line employees were reduced by 11% through a controlled and responsible retrenchment programme and increased employee productivity was reflected in growth to 142 lines per employee from 129.
Vodacom again delivered excellent results and maintained its market leadership position despite increased competition. Vodacom achieved 20% growth in customers in South Africa, record gross connections of R2,2-million and contract churn of 11%.
Vodacom made good progress in the realisation of its African strategy, reflecting a 98% increase in customers to more than one million and remains strongly positioned for further African expansion.
Having cleared several regulatory hurdles, Vodacom is planning to launch as the second licensed mobile operator in Mozambique in December 2003. Vodacom is also currently considering a proposed investment in Nigeria’s second-largest mobile operator, which may see it entering this rapidly expanding market.
Vodacom repaid its shareholder loans of R920-million (Telkom share: R460-million) in June 2003, and paid an interim dividend of R600-million (Telkom share: R300-million) in September 2003.
Looking ahead, the Telkom group believes it is well-positioned to deliver shareholder returns by focusing on remaining competitive and ensuring increased operational efficiencies and productivity. Customer retention and growth will remain a key priority for the group.
The strength of the group’s integrated business ensures that “we can respond effectively to volatile macro-economic conditions and tap into exciting opportunities that exist in all markets, especially the rest of the African continent”, it said. — I-Net Bridge