What's next for Telkom?

Having survived a three-year turnaround process, the operator everyone used to love to hate is now targeting growth.

20 February 2017
Brought to you by
Sipho Maseko, Telkom

Telkom’s three-year turnaround strategy is apparently paying off as its previously less than shining operations – like mobile – are starting to make some money. Its next move is to grow through fibre, mobile and in the enterprise space as companies around the globe gear up for the 4th industrial revolution.

Yet, the company still has some way to go, despite its recent results showing a vastly improved bottom line.

So far, the market likes what it sees, as its share price hit an almost five-year high after the results. Yet, cautions ICT commentator Andile Masuku, it's problematic to focus on the short term when it comes to assessing the health of any business. “While there is no way that the results of decades of lacklustre leadership can be sorted out in a single financial year, it is heartening to observe a strategic shift towards correcting fundamental legacy issues like reckless spending, an inflated payroll and a lack of investment in key mobile and web-enabling infrastructure projects. That said, it is by no means out of the woods yet.”

Telkom was for long SA’s only option if you wanted to make a phone call, but it has been through the wringer in recent years.

Its fixed-line penetration plummeted, it came late to the mobile party, as well as to the fibre landgrab, and went through a tough time while it tried to right-size itself. It also made some very questionable investments, such as the mess that was MultiLinks.

Cutting its staff almost in half to become a leaner, meaner, more responsive company – from close on 20 000 a few years ago to just more than 12 000 now – resulted in a lot of flak, mostly from unions.

Now, it has seemingly turned the corner.

In the six months to September, the telecoms giant – almost 40% indirectly and directly owned by government – reported operating revenue up 21% to R20 billion, while net operating revenue gained three percent to R14 billion. Earnings before interest, tax, depreciation and amortisation – seen as a key indicator of how the operations are doing – grew five percent to R5 billion, with a 26% margin.

A year ago, Telkom managed a profit of just R606 million. This has about tripled now, to R1.8 billion.

It seems that three years after it started implementing CEO Sipho Maseko’s vision, the company is finally reaping the results of its turnaround.

World Wide Worx MD Arthur Goldstuck notes that Telkom has been transforming itself operationally ever since Brian Armstrong arrived with a 'no-nonsense business approach to what was until then a typical monopoly incumbent'.

“Sipho Maseko then arrived, with the right leadership philosophy and style to push the company forward.”

However, echoing other analysts, Africa Analysis director of enterprise research Richard Hurst notes that the war is far from over, although the company has gained some victories in some battles, boosting morale and giving impetus to go forward.

Winning ideas
The key winners leading to this were its acquisition of Business Connexion – which it bought in 2015 for R2.6 billion – and its mobile arm finally turning positive at an operational level, six years after launch, after a 42% increase in active subscribers.

Says Hurst: “There is some positive news (in the results) as the mobile division moves into profit and the revenues driven from BCX have buoyed the company; these investments were vital for the future of the company.”

Anyone who says Telkom is no longer relevant is not paying attention. It's like the geeks who dismiss Microsoft because they drink the Apple Kool-Aid.

Arthur Goldstuck

Maseko says the 'splendid' performance in its mobile division was “assisted by the complete overhaul of our mobile product offering in the form of FreeMe, the launch of new stores and sales channels, as well as competitive products and pricing such as Deal of the Month campaigns”.

FreeMe products offer customers a data bundle with voice, WhatsApp calls, text for free and free WiFi. Recent analysis by Tariffic found the FreeMe packages are the top choice for high data and voice users in South Africa.

In the six-month period, Telkom sold about 170 000 prepaid FreeMe bundles, with more than 70% of sales coming through its channels.

However, the late starter has much work to do as its 3.2 million mobile subscribers lag behind giants such as Vodacom – which has about 50% of the market – and MTN. Even Cell C has substantially more subscribers than Telkom.

BCX, which Telkom acquired to boost its ICT offerings so it can offer an end-to-end converged solution, has also aided Group growth. By the end of November, Telkom had integrated its enterprise offerings into BCX, under Isaac Mophatlane’s leadership.

Maseko notes synergies have already been realised through cross-selling, and leveraging the combined units’ abilities for end-to-end solutions.

However, the positive contribution by the mobile and BCX divisions was partly offset by the decline in fixed-line voice revenue, which dropped four percent to R7 billion as fixed-line access dropped to just above three million, down from 3.3 million a year ago – continuing a long-running trend as people move to mobile.

Goldstuck notes its success stories are tempered by the poor retail processes in Telkom stores, 'which have probably impeded growth, and the timid approach to fibre-to-the-home that resulted in Telkom being caught flat-footed by the tiniest of companies like fibre player Vumatel'.

Maseko, however, is upbeat: “Despite the increased competition in the market, we are in a good position to execute on our strategy.” Yet, he admits the economic environment, which is plaguing all sectors as gross domestic product growth is expected to be flat this year, is tough. He says the environment is especially affecting its enterprise division.

Spending to grow
During the interim period, Telkom spent 56% more on capital, which was at R1.8 billion, as it pushed further into the highly competitive fibre space. It also ended the period with a healthy R1.8 billion in the bank, up from R700 million a year ago.

“We will continue to deploy capital to the growth areas of the business, which will ultimately grow our revenue. Our capital investment has given priority to fibre to the premises and the mobile business as we see these areas as growth platforms for our businesses,” notes Maseko.

Jacqui O'Sullivan, group executive of group communication and brand, notes Telkom has different focus areas for each of its business units. When it comes to consumer and retail, it wants to grow its high-speed broadband offering, including long-term evolution and fibre, boost mobile products and offer digital services, she says.

O'Sullivan adds its wholesale business unit, Openserve, is targeting modernising and commercialising the network, boosting broadband penetration, while Telkom Business Connexion is targeting cloud computing, unified communications, converged connectivity and mobility, as well as other currently popular buzzwords such as the Internet of Things and big data analytics.

IDC analyst Jon Tullett says that although Telkom’s turnaround strategy is paying off, “there is still some way to go before I’d call it an unqualified success, but the signs are good. At an operational level, there is a lot of work to be done; you don’t merge two entities like BCX and Telkom without a few bumps along the way, and that’s just one of the operational changes on the board.”

Brian Neilson, BMI-Techknowledge director, concurs, noting: “Telkom is certainly doing a lot of the right things, although it is a journey.”

Says the DA’s Telecommunications and Postal Services spokesperson, Marian Shinn: “It takes a long time to breathe life into a company that for so long was an arrogant, bureaucratic monopoly. It has turned the corner and as long as it strives to be dynamic, soundly managed and service-focused, it will be a force to be reckoned with.”

Fibre push
Although Telkom came late to the fibre play – with smaller players such as Vumatel beating it to the punch – it has a clear advantage: a vast network and an ADSL database it can capitalise on, says Masuku. As a result, he doesn’t anticipate consumers caring whether Vumatel was first, saying this is a 'non-issue' for the person in the street.

Nielson says the residential market has been dynamic and is a land-grab, especially in cherry-picked, wealthier suburbs. “Telkom has fought back by rolling out its own infrastructure in similar suburbs, and can retain many of these higher-value residential customers in this way.”

O'Sullivan says Telkom’s key differentiator is the scale, and the high quality of its open access network. She notes its Openserve unit is the largest fibre provider in the country, having passed more than two million premises with high-speed broadband fibre, and Telkom has deployed more than 147 000km of fibre across the country.

Says Nielson: “Openserve is a key to retaining a high share of the last-mile infrastructure component as homes migrate from DSL to fibre, while allowing them to still choose their favourite internet service provider.”

Tullett notes fibre is the right place to be investing in when it comes to connectivity, and even though Telkom was late to the party, it is investing heavily, which is paying off. “We’ll hit saturation of core areas fairly rapidly, though. But that’s just the last mile; there’s still connectivity and value-added services, and Telkom is well positioned in that space.”

However, Telkom will pick its battles carefully and will not shy away from partnering with entities that, in the past, may have appeared as competitive to their interests, adds Hurst.

Yet, says Goldstuck, fibre in itself is not a viable growth plan, and is rather `the very ticket to the game’, as is a robust 4G network. “These will not be differentiators, but essentials. Telkom should be looking for a further edge where they already have an advantage, such as bolting G.Fast onto their ADSL network. That would extend its life and utility, as opposed to the current strategy that will lead to fibre cannibalising DSL.”

Telkom anticipates its BCX unit allowing it to offer its corporate customers services beyond connectivity.

Integrating enterprise with BCX will enable the company to grow its offering through cloud computing, data analytics and the Internet of Things, says O’Sullivan.

Goldstuck notes BCX gives Telkom skills and capacity in systems integration, cloud services and a wide range of value adds. “The opportunity needs to be explored and exploited aggressively.”

Fly in the ointment
A stumbling block that Telkom may face is government’s mooted open network scenario when it comes to licencing high-demand spectrum. When asked about government’s open network plan/ broadband network, Telkom referred all queries to the Department of Telecommunications and Postal Services, while the department sent all queries back to Telkom.

Says Masuku: “There's no doubt that if winning 4G customers came down to a market-driven battle of the brands, as recommended by the ICT whitepaper, brands with perception issues like Telkom would struggle. But if we're talking about the national broadband project, I battle to see a scenario where Telkom wouldn't be offered a significant role to play through political means.”

Shinn says, however, that it seems the SA Connect tender has collapsed. “Government will have to re-think its tender specifications to be less technology prescriptive and amenable to smaller network service providers. I am sure Telkom would be willing, along with other suppliers, to contribute to delivering SA Connect.”

When it comes to the wireless open-access network concept, Shinn says Telkom has expressed its reservations. “It has no mobile infrastructure that could be incorporated into the network, but would need to surrender its spectrum, which no one is prepared to do.”

Says Tullett: “Telkom has a lot of momentum; that really matters when you get to the end of a runway.” But he points out it’s not a journey with an end. “There are new generations of telecom services already in the pipeline, and Telkom (and its competitors in each line of business) will have to continue to evolve faster than ever. Right now, a lot of the work they’re doing is groundwork for future evolutions; they’re not blind to the pace of change.”

Goldstuck adds: “Anyone who says Telkom is no longer relevant is not paying attention. It's like the geeks who dismiss Microsoft because they drink the Apple Kool-Aid.”

Telkom's aims in its turnaround strategy
•    Strengthening its core business
•    De-risking the mobile business
•    Managing the decline in traditional revenues
•    Achieving operational and capital efficiencies
•    Improving customer experience
•    Developing a more flexible and agile operating model
•    Strengthening its customer service delivery


Telkom by the numbers

                                             H12016                             2015                                  H12015
Revenue                               R20.2bn                          R37.3bn                           R16.8bn
Net profit                              R1.8bn                           R2.5bn                             R606m
Internet subscribers*            3.3m                              1m                                    2.6m
Mobile subscribers                  3.2m                              2.7m                                 2.6m
Fixed-line subscribers             3m                                3.2m                                 3.3m

*Fixed and mobile, which skews 2015 due to the lack of comparable data.