Telkom SA Reports 8.4% Revenue Increase to US$7.2 bil.

Telkom reportedan 8.4% increase in annual revenues to 51.6 billion rand (US$7.2 billion) in its annual report for the year ended 31 March 2007. Operating profit decreased slightly by 1.4% to 14.5 billion rand, and EBITDA (earnings before interest, tax, amortisation, and depreciation) decreased by 3.7% to 19.8 billion rand. The number of fixed-lines in service decreased again, by 1.4% to 4.642 million, a fixed line teledensity of 9.8%. However, with 37.568 million mobile subscribers as of 31 December 2006, the mobile penetration rate in South Africa has now reached 79.3% (see South Africa: 6 June 2007: Cell C Reports 3.3 mil. Subscribers at End-2006). Vodacom, in which Telkom holds a 50% stake, holds a 58% share of the market and reported 23 million subscribers by 31 March 2007.

These results show clearly a new strategic direction: concentrating on investing heavily in its next-generation network (NGN) and consolidating its share of the data-services market in South Africa, preparing to launch broadcast services with the liberalisation of that sector this year, and expanding abroad through the acquisition of Africa Online and Multi-Links so far this year. In its annual report, the operator says that "the telecommunication landscape is changing rapidly and requiring Telkom to invest in the future. Telkom is fully aware of the challenges and is responding innovatively to protect and grow its market while…[investing in]…its next-generation network, Telkom Media, and other parts of Africa".

In its domestic market, a key focus has been on the data-services segment. The focus on building a world-class NGN is already delivering benefits through the company's ability to provide innovative and value-adding voice and data solutions, particularly to the corporate market. Although fixed-line subscribers and voice revenues diminish, the data segment is the fastest growing area for the operator. Leased line and data-service revenue has increased by 10.2% to 5.8 billion rand. The number of ADSL subscribers increased by 78.1% to 255,633 by 31 March 2007, and Telkom says that it aims to achieve an ADSL penetration of 15–20% of fixed access lines over the next period, by 2010/11. In particular, Telkom says that its revenue from leasing transmission capacity to mobile operators has increased by 21.8% to 1.7 billion rand, driven by the increasing needs of mobile operators as they see uptake of 3G and HSDPA services.

As a result of this increase in demand for broadband services from fixed and mobile subscribers, Telkom has upgraded its national and international transmission capacity. The operator has increased the capacity of its local and national transport networks by 12% to 5.7 Tbps and 20% to 1.2 Tbps, respectively, over the last year. It has increased the capacity of its national and international IP networks by 53% to 28.9 Gbps and 60% to 2.4 Gbps, respectively. (Internet Solutions, one of five top-tier internet access providers, announced in March that it has increased its international bandwidth to 1.5 Gbps). Telkom also says that the capacity available on the Sat-3/WASC submarine cable has now been trebled from 40 Gbps to its maximum capacity of 120 Gbps.

Outlook and Implications

"Telkom now enters a challenging period with Neotel as its fixed-line competitor coupled with significant pressure on its product and services pricing," said Reuben September, Telkom's acting CEO. "However, Telkom believes that its commitment to invest and build the next-generation network will deliver the required benefits in terms of products and services at a reduced cost with increasing volumes. Telkom is also excited about the developing opportunities created by its Pan-African connectivity and convergence strategies through its recent African acquisitions as well as the incorporation of Telkom Media, a company created to deliver on Telkom's triple play strategy."

• Mobile—Vodacom: Vodafone, the multinational operator, is reportedly looking at the possibility of buying out the remaining 50% stake in subsidiary Vodacom as it looks for future growth in emerging markets (see South Africa: 30 May 2007: Vodafone Moots Vodacom Buy-Out). According to Dow Jones newswire, Vodafone's chief executive Arun Sarin said that Telkom was currently undertaking a strategic review, and that it would await the outcome of that before making any further steps, adding that Vodafone would be happy to stay in the existing 50:50 shareholding agreement if Telkom decides to keep hold of its assets. However, Telkom's 50% holding in Vodacom is a prize asset for the Telkom Group, contributing some 37% of the group's total revenue. Moreover, while the group's revenue grew at 8.4% to 51.6 billion rand, the mobile segment through Vodacom grew by 22.4% to 19.1 billion rand, while the fixed-line segment grew by just 1.6% to 32.5 billion rand. Vodacom is expected to continue growing, focused on maintaining its market share in South Africa and acquiring other mobile operations elsewhere in Africa. The operator has notably made an offer to acquire M-Tel, the fourth mobile operator in Nigeria.

• Broadcast—Telkom Media: In August last year Telkom announced the creation of Telkom Media as a subsidiary, which has applied to the regulator for a commercial satellite and cable subscription broadcast licence. Telkom Media's vision is to be Africa's "digital media provider of choice" and is seeking to develop a digital service portfolio delivering content and services in three core areas: over the internet (online content services and ISP services), over satellite (satellite TV and radio), and over a "quality of service" network (IP TV including broadcast and on-demand TV and interactive services).

• Expansion into Africa: In the face of mounting domestic competition, Telkom is actively seeking expansion into foreign markets. In its annual report last year, Telkom said that it was "exploring opportunities outside its borders where there is potential for growth, healthy returns, and long-term value creation for its stakeholders. The focus is on data acquisitions and fixed/mobile opportunities." In April 2006, CEO Papi Molotsane stated that Telkom had set a target to become the "ICT market leader in three countries outside South Africa" by 2010. In February this year Telkom completed the acquisition of the multinational ISP Africa Online, which has operations in nine African countries, and in March Telkom acquired a 75% stake in the Nigerian operator Multi-Links. Telkom said in this year's annual report that it will continue to expand into Africa and grow the Africa Online footprint into the continent. This strategy is aligned with the domestic fixed/mobile service provider model, and the focus is on further data acquisitions and fixed/mobile opportunities. A detailed evaluation process is followed on each opportunity to ensure it is a strategic fit, all risks and resource requirements are understood, and the potential returns exceed minimum requirements.