Tick Tock

The company has now restructured into three different units and is focused on growing each, but faces challenges in protecting its South African market share and growing revenue, and Multi-Links in Nigeria has not turned out to be the great saviour it expected, yet.

But, if the company can get its fixed-mobile offering off the ground in SA, it could bundle this with other offerings, and tie up a nice, secure revenue stream. Telkom says there has been a "continued decrease in our voice revenue" as people use cellphones rather than landlines. Fixed-line traffic declined 3.9% during the year. One area of growth that it seeks to use to mitigate this is to enter the mobile market.

Telkom CEO Reuben September says the company`s focus will be to defend and grow over the next year, with a particular focus on increasing network traffic and harnessing interconnect revenue. "We are clear about winning profitable traffic back to our networks."

He says Telkom`s new mantra is: "Free sustainable cash flow and a reduction in capital expenditure." Globally, large telecoms businesses are facing declining margins and struggling to increase network traffic. Many are trying to streamline and cut costs.

NEEDING WORK

Irnest Kaplan, MD of Kaplan Equity Analysts, says the company has two main areas that require work. He says its Nigerian unit, Multi-Links, is currently Telkom`s major concern. Kaplan says, "it will take a lot of effort to get it working nicely".

The other area of concern is in defending its share of the South African market. Kaplan says Telkom needs to be well positioned for when Seacom lands, as this will change the broadband landscape dramatically.

Frost & Sullivan senior ICT industry analyst Lindsey Mc Donald says Telkom, which is vital to SA`s economy, faces the challenge of convincing the market that it can deliver. She says it has the services available, and its three new business units will aid it in more effectively addressing the market. After the sale of Vodacom and Telkom Media, the company`s operating structure comprises three segments, fixed-line, Multi-Links and other. The fixed-line segment provides fixed-line voice and data communications services through Telkom.

The Multi-Links segment provides fixed, mobile, data, long distance and international telecommunications services throughout Nigeria, through the wholly owned subsidiary.

Telkom`s other segment provides directory services through its 64.9%-owned subsidiary, Trudon, and internet services in Cote d`Ivoire, Ghana, Kenya, Namibia, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe, through its wholly-owned subsidiary Africa Online.

Another challenge Mc Donald cites is that Telkom needs to bed down acquisitions made in the past two to three years so that these offerings can be expanded across the group.

"Telkom needs to reposition itself as a matter of urgency," says Frost & Sullivan ICT industry analyst Spiwe Chireka. "The sale of Vodacom has cast doubt on the future performance of the company, as it continues to be viewed as a fixed-line operator. Given that fixed-line services are losing ground to new technologies, it is important that it takes a page out of the books of mobile operators like Vodacom and MTN."

She says, "converged service offerings to businesses are also seeing growth in the South African telecoms market. With the vast investments Telkom has made in its Next Generation Network, it is likely to be well positioned to take advantage of this."

Imara SP Reid analyst Steve Meintjes says, to cope with declining revenue, losses at Multi-Links and entry of new competition, has a host of "defend and grow strategies" both in SA and elsewhere in Africa.

BIG GUNS

Telkom`s results for the year to March took a R1.7 billion beating from the poor performance of its Nigerian operation, Multi-Links. This is the third report in which Multi-Links has produced a net loss for Telkom, and investors and analysts expressed doubt that the company could be turned around.

Meintjes says Multi-Links is a private telecommunications operator with a unified access licence allowing fixed, mobile, data, long-distance and international telecoms services focused primarily on corporate clients, wholesale and mass-markets in Nigeria.

Telkom bought 75% in May 2007 for nearly R2 billion and the remaining 25% in January 2009 for around R1.36 billion. He says the company spent R2.8 billion on the network and set up 340 base stations with another 100 being completed. Another $100 million is planned for capital expenditure this year.

Meintjies says management has good intentions and strategies but, given ongoing attrition in fixed-line revenue and the need to see some signs of a turnaround in Multi-Links, Imara is taking a "seeing is believing" stance for the time being.

However, Telkom has since brought in the big guns and appointed former Cell C boss Jeffrey Hedberg as CEO of Multi-Links.

Telkom CEO Reuben September says he is "elated" to have Hedberg join the company, especially considering his turnaround track record. "Turning around Multi-Links` performance is vital to Telkom given the extent of the group`s investment and the enormous opportunity the Nigerian market provides."

September says the company expects Multi-Links to be report positive operating profit by 2010/11 and become cash flow positive by 2011/12. The Nigerian company made an operating loss of R226 million in the year to March.

Telkom has big plans for the Nigerian operation and is hoping it will fill part of the revenue gaps left by the sale of Vodacom. Speaking at the company`s results presentation recently, Telkom CFO Peter Nelson explained Telkom`s concerns around the business. "It has been a hard year and Multi-Links has been a particularly difficult situation."

He added that Telkom would now turn its full attention to making the Nigerian business profitable. Confirming its strategy detailed last year, Telkom explained it hopes to make Multi-Links profitable in the next three years.

September said in an interview after the presentation that Nigeria has been one of the countries hardest hit by the global economic downturn, specifically because it`s an oil producing nation. He added that the company has also been hit by hefty handset subsidies. Multi-Links plays in the CDMA space for mobile telephony, rather than in the GSM space, which is the technology used by MTN in Nigeria. Handsets have to have a certain specification and the marketing of the products are left to the vendors. Companies like Huawei produce handsets under the CDMA standard.

GSM phones are generally marketed by vendors, such as Nokia, or Apple, with its popular iPhone.

Kaplan says Telkom faces a technological uphill because it is using CDMA, which is not dominant in Nigeria. "Being a CDMA operator is problematic for them, but even if it were a GSM operator, it would be tough."

QUALITY CUSTOMERS WANTED

The company says it will increase its focus on wholesale and the corporate markets, rather than gaining subscribers in the lower scale markets. "There is nothing wrong with targeting the low-end customer; volume drives up revenues. But if the goals are not correct, then it won`t work," said September.

Telkom`s Multi-Links has also signed a deal with SA`s Blue Label Communications to open distribution channels around the country.

Kaplan says the company has spent heavily in acquiring customers, but as it is now rethinking its strategy with plans to move more into wholesale, Kaplan is mildly cautious about the unit. He says making the business profitable over the next three years is going to be an "incredibly difficult task".

September has admitted that Telkom has been on the wrong path with Multi-Links; however, as a Nigerian CDMA operator, the company is not alone in its troubles. Two other players in the market are Starcomms and Visafone.

Starcomms` financials also took a hefty knock over the year, largely prompted by a price war sparked by Visafone. As a new entrant to the market, Visafone embarked on an aggressive campaign to bring in customers, promoted through extensive handset subsidies. Multi-Links dropped average revenue per user from $32 to $9, in an attempt to compete with Visafone`s aggressive campaign, trying to attract the lower-end customer.

PROTECT SA MARKET SHARE

Kaplan says Telkom will have a "tough time" growing revenue in SA, especially in the fixed-line segment, as the number of fixed-line users has been declining.

In addition, the company is facing increasing competition from companies such as Neotel, which has invested heavily in its network, and Vox, which is increasingly offering voice and data solutions to companies and consumers.

As a result of the changing landscape, Telkom`s revenue stream is under pressure, says Kaplan, and is expected to remain static. In addition, operating costs  ch as staff salaries - will be rising faster than revenue growth, making it difficult for Telkom to grow profit, says Kaplan.

Telkom, he says, will have to focus on trimming costs and increasing revenue.

During the results presentation, the telecoms company said it had embarked on a group-wide cost-cutting exercise to promote profits. However, Nelson said: "We can`t just save costs to claw our way out of the difficulty we are [in]."

Telkom saw a marginal rise of 3.3% in total fixed-line revenue and a decline in network traffic of 3.9%. While this was expected, the company also saw a dramatic drop in operating margins, from 36.3% to 25.8%. Kaplan says data was the company`s saviour, growing at over 12% for the year. However, data is not a big enough unit to compensate for the drop off in voice revenue, he says.

MOOTING MOBILE

Telkom has cited a move into mobile as one way of growing its SA market share, and growing revenue. Kaplan says the company has been successful at bundling, such as its PC bundle, which offers a PC, home line, internet and surfing minutes in one bundle. Telkom also offers phone and ADSL bundles.

Kaplan says Telkom could bundle mobile along a similar line, and offer this solution to corporates, which would assist it in defending its market share.

But its mobile offering is nowhere near ready. Telkom is expected to wrap up market research and trials for its entry into the mobile market by the end of the year. Reuben said in the results that the fixed-line company aims to exploit the opportunities that were created after it unbundled its Vodacom stake. In April, Telkom`s full mobile offering was expected to get off the ground in the last quarter of this year. However, Telkom says that because the other mobile operators are entrenched in the market, it will not commit any capital to rolling out the network until it has finished its market research.

Kaplan does not see Telkom taking on mobile giants MTN and Vodacom.

MTN, Africa`s largest mobile operator, had 17.4 million South African subscribers at the end of March. Vodacom, SA`s largest operator, had 26.5 million subscribers at the end of December, while Cell C - SA`s third operator - has more than five million subscribers.

Telkom says its final mobile version depends on wrapping up market research and roaming agreements. It aims to differentiate itself based on price, efficient IP-enabled technology and fixed-mobile converged products.

Telkom has 141 W-CDMA sites in major metropolitan areas throughout SA. It says the liberalisation of the licensing arena, advancements in convergence technology, as well as the unbundling of its Vodacom stake pave the way for it to enter the mobile market. Telkom aims to take advantage of its Next Generation Network and newer technologies. It believes that will "give us an advantage over the current mobile operators in terms of our ability to carry increased traffic, provide superior quality and to compete".

In its annual results for the year to March, the company says it believes an "integrated fixed-mobile operator" is well positioned to meet its customers` requirements. This is due to "mobile customers experiencing the effects of a highly congested network and poor quality of service".

Telkom`s initial sites have been focused in areas where there have been cable theft, breakages and "incident-prone" areas. It has also focused on areas where customers are waiting for service and greenfield areas where it has no copper infrastructure.

It says the W-CDMA technology allows it to "deploy fixed-line lookalike services with regional fixed numbering plans, instead of deploying copper, especially in high copper theft areas or areas where copper deployment is not feasible or too slow to roll out".

The deployment will be extended to rural areas and will also be used to replace maintenance-heavy legacy equipment.