Earnings call transcript: Telkom Q3 2024 sees revenue growth, debt reduction

Telkom (JO:TKGJ) (TKG) reported its third-quarter financial results for 2024, highlighting a modest increase in revenue and a significant improvement in EBITDA. The South African telecommunications company demonstrated resilience in a competitive market, focusing on strategic investments and debt reduction. Trading at $1.97, with a market capitalization of $973 million, InvestingPro analysis suggests the stock is currently undervalued, presenting a potential opportunity for value investors.

Key Takeaways

• Revenue for Q3 2024 increased by 0.9% to 11 billion rand.
• Group EBITDA rose by 28%, improving the EBITDA margin to 27.2%.
• The company reduced its interest-bearing debt by 2.7% to 12.6 billion rand.
• Telkom’s mobile data subscribers reached nearly 15 million.
• The company is targeting a mobile EBITDA of 25% by 2025.

Company Performance

Telkom’s performance in the third quarter of 2024 reflects a stable growth trajectory amidst challenging market conditions. The company reported a 1.6% increase in nine-month revenue to 32.4 billion rand, showcasing its ability to maintain momentum. This growth is driven by robust mobile service revenue, which surged by 9.6%, and a strategic focus on expanding its mobile data and fiber-related services.

Financial Highlights

• Revenue: 11 billion rand, up 0.9% year-over-year
• Group EBITDA: 3 billion rand, a 28% increase
• EBITDA Margin: Improved to 27.2%
• Debt: Reduced by 2.7% to 12.6 billion rand

Outlook & Guidance

Telkom is optimistic about its future, with a strategic focus on a data-led approach and infrastructure investment. The company aims to achieve a mobile EBITDA of 25% by 2025 and 27% by 2027, aligning with its long-term growth ambitions. The ongoing integration of mobile sites and the expansion of fiber connectivity are key components of this strategy. With the next earnings report scheduled for February 26, 2025, InvestingPro subscribers can access exclusive analysis and real-time updates to stay ahead of market movements.

Executive Commentary

CEO Serame Metaukobong emphasized the company’s strong operational results and strategic direction. "We are pleased to report strong operational results for the third quarter, reaffirming our position as the backbone of South Africa’s digital future," he stated. Metaukobong also highlighted Telkom’s commitment to delivering profitable growth and creating sustainable value for stakeholders.

Risks and Challenges

• Market Competition: The competitive landscape in South Africa’s mobile market could pressure pricing and margins.
• Economic Conditions: Macroeconomic factors, including inflation and currency fluctuations, may impact financial performance.
• Technological Changes: Rapid technological advancements require continuous investment in infrastructure and innovation.
• Regulatory Environment: Changes in regulations could affect operational and financial strategies.

Telkom’s Q3 2024 earnings call underscores its strategic focus on growth through innovation and operational efficiency. The company’s ability to navigate market challenges while maintaining competitive pricing positions it well for future success.

Full transcript - Tung Khanh Trading and (TKG) Q3 2025:

Irene, Conference Operator: Good day, ladies and gentlemen, and welcome to the Telkom Q3 FY ’20 ’20 ’5 Trading Update for the Quarter Ended thirty one December twenty twenty four. All participants will be in listen only mode. Please note that this call is being recorded. I would now like to turn the conference over to Nongebo Ngcouwana. Please go ahead.

Nongebo Ngcouwana, Head of Investor Relations, Telkom: Thank you, Irene. Good afternoon, everyone, and welcome to our third quarter FY twenty twenty five conference call. I am Nonje Bongkolwana, Head of Investor Relations at Telkom. Our CEO, Sera Metaukobong and Group CFO, Nonguru Lekosamini, will take you through the salient features of our performance for the third quarter and nine month period ended thirty one December twenty twenty four. Thereafter, we will take your questions.

We also have Priti Apleny on the call, our Chief of Staff Strategy, as well as the IR team. Just as a reminder, the commentary on this call is on continuing operations that is the Falcon Group excluding SwiftNet, our milestone powers business as it is disclosed as a discontinuing operation. All numbers and growth rates quoted are year on year and refer to the quarter ended thirty one December twenty twenty four and are compared to the quarter ended thirty one December twenty twenty three. When speaking to year to date numbers, growth rates are year on year, meaning that they are being compared to the nine months ended thirty one December twenty twenty four versus the nine months ended thirty one December twenty twenty three. Furthermore, year to date adjusted EBITDA and adjusted EBITDA margin excludes restructuring costs as well as the impact of the conversion of the telecom retirement fund.

Sirame will now take you through the key highlights of our performance.

Serame Metaukobong, CEO, Telkom: Thank you, kindly, Smedan. Good afternoon, all, and thank you for joining us on the call. We are pleased to report strong operational results for the third quarter, reaffirming our position as the backbone of South Africa’s digital future. Our data led strategy continues to deliver impressive performance across key metrics, underscoring our competitive advantage in our diverse businesses, working together to realize the results as one telecom. With strong momentum across our business units, we remain confident in achieving our medium term objectives as we continue to invest in our infrastructure, network and digital services, delivering profitable growth.

We have maintained our momentum in the third quarter with year on year group revenue growing in line with our medium term guidance, while adjusted group EBITDA growth exceeded expectations at 21.4% and increased the adjusted group EBITDA margin by 4.3 percentage points to reach 26.5 for the nine months. Turning now to the quarter’s key highlights. The 28% growth in group EBITDA for the quarter reflects operational excellence achieved across the group, driven by a commitment to enhancing efficiencies and scaling our strategic initiatives. Our mobile business continues to deliver robust growth, while Open Served fiber data revenue also saw growth. BCX IT services revenue demonstrated positive growth for the quarter.

The disposal of SwiftNet has progressed as planned. The bulk of transfers for property sales were completed during the quarter ahead of time. I will now turn to operational results for each of our business units, starting with the mobile business, which sits under consumer. Mobile service revenue increased by 9.6% and continues to grow ahead of the South African market as demand for our reliable connectivity increases. Prepaid subscribers grew strongly, driven by the optimization of our proposition called, of affordable four gs devices in the past quarter.

The prepaid ARPU at R61 was within our optimal range. The prepaid ARPU decrease is attributable to the non metro regions that whilst they attract a lower ARPU, do drive increased volumes. The postpaid segment has started to show signs of recovery, and the ARPU of this base has improved to R185. Turning to OpenServ. OpenServ grew fiber service revenue by R121 million dollars reflecting the strength of our infrastructure investments.

External revenue driven by fiber connections increased by 9.2%. OpenServ will continue the growth in fiber revenue, passing and connecting homes. On VCX, VCX IT services revenue increased by 6.8%, highlighting the success of our telest solutions in meeting evolving customer needs in a highly competitive environment. The low margin hardware and software sales were deliberately moderated, which supported the EBITDA margin for this business. The focus is to continue to grow the high IT margin services for BCX.

Overall, the data layer strategy supported by a smart CapEx deployment continues to yield results. Mobile data revenue increased by 10.8%, benefiting from mobile subscriber and traffic expansion. Mobile data subscribers are now almost 15,000,000 subscribers. Fiber related data revenue was up by 14.7% across the group. Data services grew by 5.9%, driven by growth in fiber and uplifted revenue from the converged communication business as BCX continued to manage the transition to fiber related services.

Mobile and fixed data traffic grew by 22.223.7%, respectively. In the past year to date, we have invested $3,600,000,000 in CapEx, and our smart CapEx deployment has resulted in the following: 142 mobile sites integrated year on year 155,000 additional homes passed in the past year with a matching 100,000 homes connected and a high connectivity rate maintained at 49.8%. We still expect our CapEx intensity at the end of the financial year to be closer to the midpoint of our guidance. That is the 12% to 15% range. Additional CapEx has been allocated to mobile for capacity expansion given their growth and further to invest in power resilience, specifically within our network.

Our execution of cost optimization initiatives resulted in solid EBITDA growth. Morehouse optimally managed to mix the late devices and improved. Open source network simplification and energy transformation programs delivered cost savings. BCX has started to see cost savings from the staff restructuring and managed debt recoveries with the work also underway for facilities consolidation, which will add to cost savings. The team in Jaro transferred 22 properties ahead of time, realizing cash of ZAR $417,000,000.

We have concluded the sale of high value properties and any future property sales will be dependent on the optimization of our property portfolio. In terms of the SwiftNet transaction, that is our towers transaction, Icosa approved the SwiftNet disposal in December, and we are on track to close the transaction and receive the cash by the end of this financial year or soon thereafter. This transaction marks a key milestone in our portfolio optimization efforts. Nonggu will now take you through the financial performance, and I’ll come back to conclude.

Nonguru Lekosamini, Group CFO, Telkom: Thank you, Serame, and good afternoon to everyone in the call. Our revenue increased by 0.9% in the third quarter to R11 billion and 1.6% to R32.4 billion for the nine months. For the third quarter ended thirty one December twenty twenty four, Telkom consumer revenue increased by 4% to ZAR7.2 billion. Mobile revenue was up 6.5% to ZAR6.3 billion. This was driven by a steady mobile service revenue growth.

Open serve revenue declined marginally by 0.4 to ZAR3.1 billion. However, fiber data revenue increased by 5.4%. Although BCX revenue declined overall, IT service revenue grew by 6.8% and converged communication revenue increased by 1.7% to R1.4 billion. Group EBITDA was up 28% in the third quarter to R3 billion. And the group EBITDA margin improved to 27.2%.

Excluding property sales, group EBITDA margin was 25.1%. The main contributors to the improved profitability are the following: Telkom consumer EBITDA increased by 51.4%, supported by the robust mobile service revenue mobile service revenue growth and cost optimization initiatives, leading to a 6.5 percentage points uplift in its EBITDA margin to 20.8%. Mobile EBITDA grew by 46.9% to ZAR1.8 billion, resulting in an EBITDA margin of 27.6%. The reduced cost of handsets and equipment and the decline in the impairment of receivables, amongst others, contributed to the improved mobile EBITDA margin. Open serve EBITDA increased by 5.4% to ZAR1.1 billion and the EBITDA margin improved to 34.4.

This was driven by the efficiencies emanating from the network simplification and energy transformation program. BCX grew EBITDA by 36% in the quarter to ZAR438 million and EBITDA margin was at 15% of this third quarter. As a result of the strategic focus on higher margin IT services and the proactive management of receivables with a shift of the product mix towards IT service supporting the margin. However, BCX EBITDA year to date remains lower by 6.1% at ZAR991 million with the EBITDA margin stable at 11% compared to the prior nine months in the prior year. Adjusted group EBITDA year to date amounted to R6.8 billion with the adjusted group EBITDA margin at 26.5%.

The group financial position remains resilient and we further reduced interest bearing debt by 2.7% to ZAR12.6 billion. We repaid maturing bonds amounting to ZAR400 million in November without the need to refinance in the bond market. As a result, our net debt to adjusted EBITDA improved from what we had reported at the half year level. On the free cash flow front, although we don’t report on this on the quarterly, we are pleased that it remains positive and it is on track in line with our expectations. We concluded another handset sales during the quarter, bringing the total cash flow received from handsets to over ZAR750 million for the nine months to December 2024.

I now hand back to Serame to conclude.

Serame Metaukobong, CEO, Telkom: Thank you, Nuncou. In closing, Telkom’s strong financial results reflect our relentless commitment to executing our infra co strategy as One Telkom. These results provide clear evidence that we are on track, delivering profitable growth, while reinforcing our role as the backbone of South Africa’s future. By leveraging our unique capabilities, we continue to meet the growing demand for data lake services, while driving improved operational efficiencies across all our businesses. We remain confident in our strategic direction and our ability to create sustainable value for our stakeholders.

Thank you for your time and continued support. I will now hand over to the operator for Q and A.

Irene, Conference Operator: Thank The first question we have is from Prashayran Odeyar of three sixty one Asset Management. Please go ahead.

Prashayran Odeyar, Analyst, 360 Asset Management: Hi, everyone. Congratulations on another consistent set of good results. I’ve got three questions, if I can. The first one is on the mobile side, what percentage of your mobile recharges actually comes from Airtime Advanced? I know you mentioned it grew by 35%, but I just want to know overall what percentage is actually coming through the Advanced book as opposed to the cash book?

And then two for Nonkoo, I know you mentioned that your gearing level has improved. Are you able to share with us what it is at the end of this quarter? And then the second one for Nonco as well is the I’m just trying to work on what is your expected net cash that you will receive from the SwiftNet sale? Because I remember that there’s a loan balance of around $200,000,000 there. There’s also some taxes.

So I just want to know what would be the amount that you’d see

Nadeem Mohammed, Analyst, SPG Securities: in your bank account when

Prashayran Odeyar, Analyst, 360 Asset Management: you get that SMS when the money flows in?

Serame Metaukobong, CEO, Telkom: Thanks, Graesh. To your first, it’s has given me a multiple decimals here. It’s to the accurate last decimal, 31.59%.

Jonathan Kinedig, Analyst, Bresson Securities: Did you get that?

Prashayran Odeyar, Analyst, 360 Asset Management: Yes, perfect. Thanks, Rami.

Nonguru Lekosamini, Group CFO, Telkom: All right. Thank you. So on your first question on the gearing, yes, we’ve seen an improvement. And at this point in time, you would recall it at H1, we had reported around 1.5 times and we are trending at about 1.3 times at this point in time on net debt to EBITDA. Then on the cash that we expect from the Sysnet sale, you would recall, we have indicated that the price is ZAR6.75 billion.

And the minor adjustments would really relate to little things like where the working capital is at the point of closing the transaction. So, we’re not necessarily expecting very significantly different set of numbers from the price on the table. But obviously, it will be determined by at that point in time minor movement in some of the working capital amongst others.

Serame Metaukobong, CEO, Telkom: You covered, Rachael?

Prashayran Odeyar, Analyst, 360 Asset Management: Yes, thank you very much. Rami, happy with the answers from both you and from Onco.

Irene, Conference Operator: The next question we have is from Nadeem Mohammed of SPG Securities. Please go ahead.

Nadeem Mohammed, Analyst, SPG Securities: Good afternoon, Nadeem and team. Fresh out to do all my questions. I just took it from my side. Just on the fee pay, the net adds of another 1,200,000 I mean, that’s really impressive and no sign of churn from the strong quarter in the last quarter. I just want to understand, I mean, what should we expect?

Beyond? Should we expect some deceleration in growth? I mean, that you could now pass the 20,000,000 mark. Just want to understand what kind of strategy you’re leveraging to keep that momentum growing? And if secondly, could you speak to us, Mikaela, on what you’re seeing on the ground in the December?

We’re obviously seeing the Red team push higher prepaid data growth and higher data volumes. But it seems like telecom has been quite the capture of volumes versus revenue has been quite good, like in 22% versus 11%. So I think you have a sense of what kind of promotional and other activities you’re seeing on the ground and where you can see gaining or losing share? I would appreciate that. Thank you.

Serame Metaukobong, CEO, Telkom: Thanks, Nadeem. I think not everybody has obviously released their results. But I think on the market activity, if I look at and this is my personal push with the team. I think overall, the market was far more responsible for lack of a better word in the prepaid drive. I mean, if you look at December, I think everybody went quite crazy in prepaid acquisition.

I think the total gross acquisitions across all three networks, the big ones, were almost over $5,000,000 It looked far more tempered this year in terms of gross acquisitions. I think everybody went for more responsible acquisition, which is good in the market. So yes, you are right. The Red Bay came back fighting, but we had also quite solid propositions in the market. The big focus area is in that two gs acquisition where both customers are migrating to data.

The propositions that the team have put in place really talk to our strength. So, amongst other things, making sure that some of the packages that have built in have, for instance, WhatsApp and Facebook (NASDAQ:META) built into some of the devices, which is quite attractive for the customer base moving in. The balance in terms of your third question is with the guys having now crossed $20,000,000 It is a key focus on maintaining acquisition with retention. So we’re not going for a spray and cork. We have to make sure that it is a cost effective acquisition because if you’re going into washing machine, you really are just putting money down the drain.

So Lung and his teams have a big focus on ensuring that as they bring the base in, they move them quickly into a recharging mode, which is why they’re focusing quite a high attention on the amount of recharges and the recharge activity. And they’ve seen that continuing quite good. So it’s a strong balance between acquisition with more and more focus on retention to hold that base as you bring them in. I hope I’ve covered you there, Nadine.

Nadeem Mohammed, Analyst, SPG Securities: Thank you. Thank you so much. And just quickly, if you could give me a sense of how significant those smartphones and sales are that you mentioned, are they in terms of the push to four gs smartphones?

Serame Metaukobong, CEO, Telkom: Abe, in terms of it’s not extremely massive volumes, not the quantum of our peers, because it really is very focused and targeted. The guys were trialing some new devices in the market. It’s four gs devices below R1000. They were piloting a specific device, which they did through PEP. So it’s early days and once again, it is cost effective as opposed to just going quite crazy in that market.

So we’re not talking millions here in AD.

Irene, Conference Operator: The next question we have is from Jonathan Kinedig Goode of Bresson Securities. Please go ahead.

Jonathan Kinedig, Analyst, Bresson Securities: Good afternoon and congrats on the results. I just want to know, I’ve been dropped off the call a few times, sorry, but if I’m covering old ground here. But just wanted to ask you on the mobile margin expansion was quite strong. And I think you mentioned that this is partially due to lower handset pricing and I think it was lower impairments as well. Should we expect a retracement in the margin?

Is this how should we think about mobile margin going into next year, fourth quarter next year? If you could help with that, that would be great. Thank you.

Serame Metaukobong, CEO, Telkom: Thanks, Jonathan. We can certainly send the team from Open Served to deal with that connectivity for you. On the mobile, so it’s a mix of two things in this corner. You’re absolutely right. The mix of devices, it was looking at a lower range of devices that was the one contributor.

The second part, obviously, the roaming agreements have also kicked in. So we’ve seen the roaming costs also come down to match that. Obviously, we pushed Husnain on a mobile EBITDA to get to 25 by ’25. I think in terms of where they’re heading in the year end, they will get there. I think what’s key for us is we did have that Hollibos Gate on the January 31 where load shedding came in.

Now that does have an impact in many senses, both from recharges and also the impact of roaming. So we’re not sure how that is going to go on in the remainder of the quarter. So I think for a year end perspective, there will be most probably on the other side of ’25. We are still pushing the guys in terms of the long term ambitions that their next milestone is ’27 by ’27, as I indicated. And I think that the team is pretty much holding steady towards that.

I hope that covers you, Jordan.

Jonathan Kinedig, Analyst, Bresson Securities: Yes, great. And if I just may follow-up on Madem’s question regarding your strategy on the two gs customers. I presume you’re targeting two gs customers from the other networks with these offers, given my understanding was that your two gs base would be quite small? And if so, is it really a price driven strategy? Or is it do you find that the handset strategy is the driver of what you how you’re trying to take market share there?

Serame Metaukobong, CEO, Telkom: So definitely not our two gs base. You’re right. We just have to that. It is a combination of both. So if you look at what is attractive to those customers, it is the price proposition and the strong offer predominantly of WhatsApp and Facebook, which is built into that specific device, which is quite attractive then for these customers as they’re moving from two gs to your four gs.

So it is a holistic proposition. And because those packages are standards to us, we’ve not had to significantly drop pricing. I think all of you have seen Louise’s latest price report. We remain quite confident in there. We’ve not had to significantly drop pricing.

It’s really been making sure that those devices are affordable and available. As I had indicated to Nadim, the guys were also pricing devices at below 1,000 and doing specific pilots with PEP on a unique specifically designed proposition for Telkom, where the guys did put a bit of a subsidy and it’s I think at about $299 to get it to a price point closer to $799 for those customers. But we feel that the base introduction proposition is at the right spot for those customers.

Jonathan Kinedig, Analyst, Bresson Securities: Wonderful. Thanks so much for the

Irene, Conference Operator: It seems that we have no further questions at this time. And I would like to hand back to Surame for any closing remarks.

Serame Metaukobong, CEO, Telkom: Thank you very much. I’m sure we’ll be engaging with you more details in the next few days. Once again, thank you for joining the call and your continued interest in Telkom. As we mentioned, we are pleasantly and solidly on the path of executing our IntraCo strategy as One Telkom. And we wish you a stunning afternoon for that.

Thank you.

Irene, Conference Operator: Ladies and gentlemen, that concludes today’s conference. Thank you for joining us. You may now disconnect your lines.

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