Telkom is in deep trouble. Its fixed-line customers are leaving in droves, it has a serious reputation problem, and its debt burden has increased to worrying levels.

In its latest trading statement, Telkom warned that its earnings per share are expected to decrease by 30% to 40% compared to last year.

This decline in earnings, Telkom said, is due to a “significant increase in net finance charges and fair value movement of between 120% to 130% from R443 million reported in the prior year”.

The company added that the increase in finance charges largely relates to increased borrowing in support of the investment in its mobile business.

Telkom’s share price fell over 10% following the news. The latest decline means that Telkom’s share price has fallen from around R100 to R64 per share over the last five months.

This is a clear indication that the investors have lost trust in Telkom and expect things to get worse.

Investors concerned about debt

Many investors and analysts were taken by surprise by Telkom’s announcement, saying it was unexpected and did not contain enough information about the poor financial performance.

Stakeholders highlighted that Telkom’s debt is reaching worrying levels, questioning whether the company accurately assessed the finance charges related to this debt.

“The market is very disappointed with the result. We see debt up 28% year-on-year, which is a problem,” said Momentum Securities CEO Steven Schultz.

He explained that a lot of this debt is related to Telkom’s investment in its mobile network, and because the company borrowed lots of the money it needed, financing costs are ramping up.

Wayne McCurrie from FNB Wealth and Investments called Telkom’s trading update “very poor”, adding that the company is trying to compete in a saturated environment.

He said Telkom relies on its roaming agreement to offer a decent service, which means its only competitive advantage is price.

This “race to the bottom” is good news for consumers but puts tremendous pressure on Telkom’s bottom line.

Excelsia analyst Mark Narramore questioned Telkom’s strategy, saying it was spending money with cashflow which it does not have.

Narramore highlighted that Telkom’s share price has been declining over the last four months and that he anticipates the company to be downgraded.

Big decline in fixed-line subscribers

One of Telkom’s biggest challenges is the rapid decline of its fixed-line and DSL subscriber base.

Over the last five years, Telkom’s fixed-line subscribers declined from 3.5 million to 2.3 million, and this trend is accelerating.

In the last six months, the company lost a record 299,000 fixed-line subscribers, which means it is now losing around 50,000 subscribers each month.

What is even more concerning is the decline in ADSL, VDSL, and fibre customers. Telkom’s ADSL, VDSL, and fibre subscribers declined from 981,176 in March 2018 to 847,650 in March 2019.

This is by far the biggest decline in ADSL, VDSL, and fibre customers Telkom has ever seen, and equates to losing over 21,000 customers every month.

This decline comes at a time when there is a very strong demand for fibre-to-the-home services in South Africa.

Telkom once dominated the fixed-broadband market, but fibre network operators like Vumatel, Octotel, and Frogfoot have eroded its market share.

Telkom seems to have accepted its fate as a me-too player instead of dominating the fibre market by cutting its investment in this space.

The company decreased the capital expenditure on its fibre network from R2.112 billion in its 2017/2018 financial year to R1.216 billion in 2018/2019.

Poor reputation

Another big problem for Telkom is its poor reputation, which makes it difficult to attract new fixed-line subscribers.

Years of poor customer support making it difficult to cancel services, and billing customers who have cancelled services have alienated many of its former subscribers.

Telkom consistently ranks as the worst company and Internet service provider in MyBroadband’s consumer satisfaction polls. It is, therefore, no surprise that Telkom is losing customers.

The company often tries to downplay the impact of its poor reputation on subscriber numbers by shifting the blame to changing market conditions and increased competition.

Telkom’s competitors, however, are showing great growth in areas where Telkom should dominate. This shows that Telkom is failing where others succeed.

More competition than ever before

As a former monopoly, Telkom has been struggling to cope with competition in the fixed-line market, but this is not stopping. In fact, competition is increasing.

There has been a rapid increase in fibre network operators in South Africa, all of which are eating into Telkom’s fibre-to-the-home and fibre-to-the-business market share.

Fixed wireless products, including MTN and Vodacom’s fixed-LTE offerings and Rain’s new 5G service, are also putting pressure on Telkom’s fixed-broadband business.

And then there are Vodacom and MTN’s big data bundles, which offer exceptional value for high-end smartphone users.

Telkom will have to continue to offer aggressively-priced products to remain competitive, which in turn puts pressure on its business.

With Telkom betting big on mobile and relinquishing market share in the fixed-broadband and corporate market, it is facing an uncertain future.

It needs to avoid the situation Cell C finds itself in, but how it will grow without taking on more debt is not clear.

No comment from Telkom

Telkom said it could not comment on its share price decline, its debt levels, or the problems with its turnaround plan as it is in closed period.

“The full results will be available on 12 November 2019,” Telkom told MyBroadband.

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