Good day, ladies and gentlemen, welcome to the Telkom Q3 FY 2023 trading update Conference Call. All participants will be in listen-only mode. There will be an opportunity to ask questions later during the conference. If you should need assistance during the call, please signal for an operator by pressing star and then zero. Please note that this call is being recorded. I'd now like to turn the conference over to Mr. Dirk Reyneke. Please go ahead, sir.
Thank you, Claudia. Good afternoon all. Good morning to those in the U.S. I think up front, just apologies on behalf of Serame Taukobong, our CEO. He will be joining shortly. He is still on a flight that was slightly delayed, but he will join in shortly. He's asked that we proceed, so I'm gonna continue on that basis, and Serame will join us as soon as he's available. Earlier today, we published our third quarter trading update for the current financial year. I assume you've all gone through it in detail, and we'll touch on the key aspects of it to allow for more time to questions. You only might have noted a further update around 2:00 on some restructuring progress that was published on SENS.
In terms of unpacking the trading update for the third quarter, we'll begin by taking the business performance for the quarter under review. Thereafter, I'll touch on the key financial messages and the cost savings program, and we will then return to give you an update on value unlock and conclude with an outlook. We navigated challenging trading and economic conditions in the quarter, but grew group revenue driven by continued growth in new generation technologies and increased data consumption. Our mobile and broadband strategies continued bearing fruit, and we saw good growth in broadband as our data led and connect-led strategies continued to drive growth in mobile and fiber subscriptions along with the data usage.
Despite this top-line growth and the ongoing optimization of roaming costs, the migration of legacy projects to NGN continued our investment in postpaid to drive an higher annuity revenue from this space, and the impact of sustainable nationwide load shedding put pressure on our costs, therefore our EBITDA and our cash flows. If we look at the different business units, I'll start with Openserve. Openserve sustained the new generation network growth to direct trajectory. It grew fixed data revenue by 12.5%, driven by broadband, which was up 23.9%, carrier services up 9.4%, and enterprise services up 1.4%, contributing to Openserve's leadership in providing open access connectivity across South Africa.
Overall revenue have either declined by 3.8% as Openserve continued to experience the pressure of legacy-based products across all three segments of enterprise, consumer and small to medium business. Which resulted in a 27.9% decline in fixed voice revenue. As demand for connectivity and consumption increased, Openserve saw a sustained increase in its overall broadband base over the last four quarters, which now grew to more than 567,000 connections, while fixed data traffic increased by 15% to 492 petabytes. Our homes passed grew by 27.6% year-on-year, with more than 1 million homes passed now.
We continue to focus on execution coupled with a connect-led strategy, enabled the business unit to increase the number of home connected with fiber by 33% to almost 470,000, maintaining its leading connectivity rate of 45.9%. Despite the increased challenge of load shedding, Openserve continued providing the best customer experience by maintaining its core and aggregation network availability at 99.9% and connected its fiber broadband customers within an average of less than three days. If we look at revenue in mobile, value compelling propositions advanced revenue for mobile. Telkom Consumer revenue increased by 1.7% in the quarter, with traditional copper-based voice revenue continued their downward trajectory and declined by 27.5%. These legacy services that now only account for 5.3% of total operating revenue will continue to decrease.
Mobile revenue increased by 7%, spurred by the continued provision of its value compelling propositions, which continued to drive data consumption. Mobile traffic grew by 25.6% to 309 Pb, while fiber subscribers and revenue improved by 22.1% and 34.3% respectively. Service revenue increased by 4.5%, strengthened by a 12.9% year-on-year growth in active subscribers to now 18.6 million at a blended ARPU of ZAR 87. Our prepaid ARPU was ZAR 204, having declined 5.5% year-on-year. We are now leveling towards our pre-COVID-19 levels, with subscribers for this base growing by 13.1%. The prepaid ARPU at ZAR 64 is holding within our target range, and this base saw subscriber growth of 12.9%.
Feeding from the strategy of growing data, supported by a 9.9% growth in mobile broadband subscribers to 11.5 million. If you look at BCX maintained top line supported by hardware and software sales. The revenue was flat for the quarter, mainly due to an increase in hardware and software sales, slightly offset by the decline in the converged communication business. The IT business grew by 7.4%, largely attributable to growth in the hardware and software business of 30.2%. The IT hardware and software business leveraged off its partner ecosystem and a more reliable global supply chain to improve the fulfillment of backlog and new orders. Performance was, however, negatively impacted by a 2.5% decline in the total IT service revenue due to a once-off project in the prior year.
The converged communication business revenue declined by 7.4%. The business continued to see a decline in fixed voice revenue, with ongoing migrations to more cost-effective next-generation solutions. It also experienced lower-than-expected uptake of the next-generation technologies due to customers still seeing value in the legacy services, especially in the public sector. This brings us to SwiftNet, the MTN tower business. We continue to commercialize the portfolio with healthy margins. SwiftNet focused on commercializing the MTN tower portfolio that amounted to 396 towers. These are productive towers at the end of the quarter and included 14 towers and three in-built solution site new builds. Revenue was flat for the quarter. New site applications received from various tenants as their 5G rollout plans are implemented will further augment growth. This concludes on the different business operating unit results.
I will take you through the key financial messages and the cost-saving programs we'll be implementing to improve the medium-term group profitability. As mentioned above, the group revenue grew by 2.3% to ZAR 11 billion, largely driven by growth in active subscribers, both in mobile and fiber, increased data traffic, higher handset and equipment sales to retail, as well as increased IT solutions to enterprise customers. Group EBITDA, however, declined by 13.5%, with contracting the EBITDA margin by 4.1 percentage points to 22.6%, largely affected by the decline in legacy revenues, higher direct costs, and higher operating costs exacerbated by load shedding. If we unpack the detail of the group revenue, the growth of 2.7%, largely driven by growth in active subscribers, increased IT solutions.
Group top-line performance was resilient, considering ongoing load shedding, pressure on consumers due to ongoing interest rate hikes, high energy and fuel prices, and other inflationary pressures on the cost of living. You look at the business performance revenue drivers, revenue in Openserve declined by 3.8% to ZAR 3.2 billion. Openserve grew fixed data revenue by 12.5%, driven by broadband, which was up 23.9%, carrier services up 9.4%, and enterprise services up 1.4%. Revenue from external channels increased by 5%, contributing to Openserve's total revenue, the above was still offset by as a result of the legacy decline across the three segments, as mentioned earlier on. Telkom Consumer revenue increased by 1.7% to ZAR 6.7 billion despite trading in an adverse economic climate.
Mr. Mountain, apologies. Apologies to interrupt, but we have been joined by Mr. Taukobong.
Thank you, Claudia. Welcome, Serame. Serame, I'm just going through the financial results, and then I'll hand back to you for the value unlock and the outlook statement.
Look, please proceed. I am in the car. I'll listen. I'll be available for Q&A.
Thanks. Telkom Consumer revenue increased 7.7% despite trading in an adverse economic climate and the accelerated migration of legacy to next-generation technologies. The mobile revenue increased by 7% to ZAR 5.7 billion. As mentioned earlier on, this was spurred by the continued provision of value-compelling propositions, which drove data consumption. Mobile service revenue increased 4.5% quarter-on-quarter, strengthened by a 12.9% year-on-year growth in active subscribers. The growth in mobile data traffic, supported by growth in broadband subscribers, led to mobile data revenue growing by 5.8%. BCX, when we look at BCX, the revenue was flat at ZAR 3.5 billion for the quarter.
The IT business grew revenue by 7.4% to ZAR 1.9 billion, conversely, converged communications revenue declined by 7.6% to ZAR 1.6 billion. Revenue for Swiftnet amounted to ZAR 380 million, which was flat. As indicated before, the revenue growth was underpinned by escalations, new tenancies and existing tenant installation upgrades, which was however offset by terminations from one of the mobile network operator customers, as well as the continued Openserve consolidation and optimization of legacy-based sites. The legacy revenue declines, which is topical, higher direct and operating costs plus accelerated load shedding impacted EBITDA. The group EBITDA declined by 13.5% to ZAR 2.5 billion for the quarter as a result, contracting the EBITDA margin by 4.1 percentage points to 22.6%.
Largely affected, as I said, by legacy revenues, higher direct costs due to the commitment to sustainably evolve and position our mobile subscriber base to a bigger postpaid representation. Load shedding exacerbated the cost pressure. Just in terms of load shedding, this resulted in a year-on-year increase of more than ZAR 150 million additional costs for the quarter. Similarly to revenue, let me now take you through the performance of the EBITDA of the business units. Openserve's EBITDA declined by 13.4% to circa ZAR 950 million, with a margin of 29.4%. The ongoing economic pressures and load shedding negatively impacted cost with a significant year-on-year increase of ZAR 108 million in diesel costs, which resulted in a lower EBITDA margin.
Telkom Consumer EBITDA declined by 28.1% to ZAR 840 million, with approximately 28.3% of this decline, circa ZAR 92 million attributable to load shedding impact, while the balance is due to growth in the network footprint and an increased investment in postpaid base. The EBITDA for BCX declined by 19.1% to ZAR 441 million due to limited revenue growth, as well as the impact of product mix. The BCX EBITDA margin shrunk by 2.9 percentage points in the quarter, resulting in a margin of 12.6%. Swiftnet EBITDA at ZAR 221 million at a healthy 69.5% margin. The margin declined by 9 percentage point year-on-year due to the implementation of the refined property operating cost towards the last quarter in the prior financial year.
I think given the above, if we look at revenue and cost, you'll all agree with me that the cost initiatives are of ultimate importance. Cost savings program to uplift the medium-term profitability are top of the agenda. The impact of ongoing load shedding for the quarter and the increased mobile network footprint resulted in a higher cost base for the group. This coupled with the required investment in working capital to optimize the mobile subscriber base mix negatively impacted Telkom's profitability for the current financial year to date. In response to this, we've embarked on various cost-cutting initiatives targeting a reduction of costs over the next 6-18 months to reduce and optimize the group cost structure on a sustainable basis and return to a blended group EBITDA margin of more than 25%.
A number of initiatives are already in progress to address the group cost base and include, amongst others, the alignment of operating costs to be in line with evolving technology capabilities. As we manage the delicate balance of revenue from old and new technologies, we are challenged to manage the cost associated with the different technologies as newer technologies comes at lower margins.
For Telkom to navigate the migration to new technologies as well as economic headwinds effectively, we have decided to start a consultative process aimed at restructuring the organization to meet future demands. A Section 189 notice was issued earlier today advising organized labor of contemplated retrenchments and inviting organized labor to attend consultation meetings as required by South African labor law. This process impacts all businesses units as well as subsidiaries, and is intended to materially contribute towards rebasing our costs.
Up to 15% of our total workforce across the group may be impacted as a result of this initiative. In addition to this, the management teams of all the business units are also working on other initiatives. These include renegotiating key contracts to reduce direct and operating costs. A close management of the working capital associated with growing the postpaid base, et cetera. I think the result of this, the benefits of all initiatives are expected to be visible in the medium term from 2024 onwards. We will be required to invest in exiting and reducing certain direct and operating costs in the coming 6-18 months. A substantial portion of these costs will be accrued for in the full year 2023, which is in 6 weeks' time.
To mitigate the impact of the front-loaded investment and cost in working capital, we plan to raise a further circa ZAR 1 billion through the sale of qualifying device receivables to external financial institutions before the March 2023 year end. Serami, are you comfortable or in a position where you can talk to value unlock?
Dirk, I'm happy for you to proceed. I think the feedback from me might be quite disturbing unless my sound, my line is clear.
Okay, I'll proceed on that basis, and Sir Serami will come in on the question A, Q&A session.
Thank you, Dirk.
The value unlock strategy adopted to realize the intrinsic value of the underlying business remains underway. Following the board's in principle approval to affirm and realize the value of Swiftnet, the mast and tower business, through a full or partial disposal of the mast and towers, a multi-party sales process commenced in late 2022, and offers are expected to be received during the course of March 2023.
Telkom will then evaluate the offers received, and a further update will be provided in due course. Following the legal separation of Openserve on 1st September 2022, various initiatives are underway within the goal of realizing value through the sale of a minority stake. We have to date received a number of unsolicited approaches for Openserve and are currently undertaking a market-sounding exercise to test the breadth of interest in this deemed to be core business of Telkom.
With adequate interest, a formal process will be launched by the end of the 2023 financial year. To complement the partnership with Alibaba, which gives BCX exclusivity to sell cloud service in South Africa and the rest of the continent, BCX acquired DotCom, a cloud consulting service company, to further facilitate the growth of its cloud capabilities. BCX will continue to pursue partnerships to drive scale and capabilities to grow amongst others, its cybersecurity segment. If we look at what we expect for full year, while the group saw an uplift in quarter three of the full year 2023 revenue, the trend of declining profitability is expected to continue into the fourth quarter, driven by ongoing upfront investment in working capital, inflationary cost pressures, and continuing accelerated load shedding.
The upfront costs relating to cost-cutting initiatives will further put pressure on the group profitability and free cash flow for quarter four and in turn for the full year 2023. I will conclude with that and will now hand over to the operator for questions and answers. Thanks, Claudia.
Thank you very much, sir. Ladies and gentlemen, if you would like to ask a question, please press star and then one on your touch tone phone or on the keypad on your screen. If you decide to withdraw the question, please press star and then two to remove yourself from the list. Again, if you would like to ask a question, please press star and then one. The first question comes from Prashandran Odiah from Nedbank. Please proceed with your question, sir.
Everyone, thanks for giving us the opportunity to ask some questions. I've got just two from my side. Can you tell us what is the network uptime on your towers? I know you mentioned on the core it's about 99.99%, but what's the uptime on your towers on the various stages of load shedding, so say stage two stage four and stage six? The second question is, you mentioned that you're expecting to generate ZAR 1 billion of cash flow in this last quarter four that probably is from the sale of your handset receivable book. Just wanna know what your progress was year-to-date so far, because we have seen an acceleration in handset or should I say contract sales so that affects the handset receivable book.
I just wanna know what you've done so far in the last three quarters, you know, so we can judge against the ZAR 1 billion that you're projecting for the last quarter. Thanks.
Okay, thanks. Thanks for the question. Let me deal with the upside of the mobile network first. In stages one and two, the network availability ranges between 90% and 95%. In stages three to four, it ranges between 85% and 89%. At stage five to six, it's between 70% and 85%. I think that must be seen on top of the accelerated costs, both in terms of emergency power, and then the flow through to the roaming cost as our customers then start roaming on the networks of MTN and Vodacom.
I think in terms of, the free cash flow at half year, we have concluded, if I recall, just around ZAR 700 million, I think the number was ZAR 750, of contract sales to date at half year. As I say, I, I'm very confident that I'll conclude another ZAR 1 billion before year-end. I hope that helps.
Yes. Thanks. Thanks, Dirk.
Prashandran, you don't have any further questions?
No, that's it. Thanks very much, Claudia.
Thank you so much. The next question comes from Nadeem Mohamed from SBG Securities. Please proceed with your question, Nadeem.
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Just on the Section 189A process. I mean, if I understand it correctly, it's focused on the separation of legacy and newer technologies. I mean, would it be reasonable to see this as a first step towards eventually, you know, migrating network and potentially even, you know, completely shutting that down? Secondly, just in terms of the huge investment we see in network resilience by MTN and Vodacom, I was just wondering, do you see any potential, you know, in the fees for your roaming contract increasing as a result of that, you know, passing some of those costs on to roaming partners? That's all from me. Thank you.
Nadeem, I think it's premature for me to talk details around the Section 189 process as consultation has just started. I'm not going to comment on how and where exactly it will affect individuals or business units. I think in terms of network stability, both in the fixed and the mobile side, we do not believe it should have a significant impact. I think it is driven by the change in technology, and I'm always using the example, you know, where you've got 1 field force man in the van in a small town, you'll probably continue to have that. Where you've got 10 in a Sandton, as an example, with your fault rates moving from copper fault rates to fiber fault rates and mobile fault rates, you would expect the 10 to come down to whatever number.
I think in the network space, the moving technology actually informs the efficiencies that can be gained. That will be driving it. I think in the IT space, it's largely moving from a, I think Serame normally call it the bums on seats sales to more services, where also you're not selling people, you're selling services. That informs it. We do not believe that that's, that should have any impact or any significant impact on our networks, on our customer service or on our overall services going forward.
Nadeem, do you have any further questions?
Maybe just one more on, just on your, you know, improved momentum in your postpaid business. If you could give us some color into what's working there in terms of how you position your post offerings. Just on some color into what's working and what's driving some of the growth there.
I wanna delegate up to, with, to Serame, if he's happy. He's more knowledgeable around the mobile business than me. Serame?
Sure. I can attempt, and I hope, Nadeem, you can hear me. One of the key things with what's driving the postpaid offering, in fact, if you look at the ongoing Tarifica report on pricing for the past 12 months, both our prepaid and postpaid price points have been the most favorable in terms of value. It's really enhancing the FreeMe proposition, which is what really changed the positioning of Telkom Mobile four or five years ago, with more additional on-net and off-net minutes, and also making sure that our data bundles remain competitive. The unique thing with the mobile postpaid proposition is that you get more in one. You get your minutes, you get your data, and we've also enhanced our data offering.
In the past, you know, that we used to separate between on-net and off-net. We've now included all nets data tariffs in those price propositions. I hope that covers the question, Nadeem.
Excellent. Thank you very much. I appreciate it.
Thank you. Ladies and gentlemen, just another reminder. If you'd like to ask a question, please press star and then one. If you'd like to ask a question, please press star and then one. We'll pause to see if there are any further questions before we conclude. The next question comes from Vikhyat Sharma from RMB Morgan Stanley. Please proceed with your question, Vikhyat.
Hi, guys. Thanks for the opportunity to ask questions. I wanted to ask more about. I think there has been a talk of, you know, another round of spectrum auction that is possibly going to happen. I think your views around it. I mean, would you be willing to participate? I think, just to kind of take back in terms of, you know, you kind of took, you know, kind of out of court settlement with ICASA, and there was, you know, potential for more spectrum to come Telkom's way. Where is that, kind of, pretty much sitting? Just, an update on those two things, please. Thank you.
Yeah. Let me take that. I think on the spectrum auction, the authority initially intended to conclude the second auction by March 2023. However, this seems unlikely as, you know, a final information memorandum containing all the necessary auction-related information has not yet been published that we're aware of. I've only published a draft information memorandum, we had requested commentary on the potential frequency bands to be included in the second auction. We haven't received any revised timelines relating to the proposed second auction. We do not believe that that will happen by the end of March. I think that linked with the Analogue Switch-Off, you know, again, the minister proposed 31st of March 2023 as the final date for the switch off.
Comments by the industry on the proposed deadline were due on 28th of January. We haven't heard any further feedback on the outcome of the consultation process. No further communication. We think, we do not believe that the end of March is a reasonable timing that it will happen.
Sure. Thank you.
Sorry, Dirk, I dropped off. I'm not sure where I lost you, but I think also, if I may add further to that, we are having ongoing engagements with ICASA. As part of the statement, they were also meant to complete, two studies. One that is a market study on what we call the third layer of spectrum trading because they haven't triggered that action yet.
Secondly, they were supposed to also do a study on market dominance, which they haven't triggered at that. I think at the rate we're growing, I certainly do not see the auction taking place in this financial calendar.
Thanks.
Thank you. At this time, there are no further questions in the queue. I'd just like to check firstly if Serame, if I can hand over to you for closing remarks. If not, then we can hand over to Dirk. Thank you.
Thank you. Thank you, Dirk, for running the call, and appreciate all your patience. I just got off the plane, so I'm in the car. Dirk, maybe as you started it, let me let you close it. Thank you, sir.
Yeah. Thanks, Serami. Thank you to everybody who's joined. I know that we've got more closer sessions scheduled during the rest of the week with the different analysts and shareholders. We look forward to talking to you tomorrow and Thursday, by and large. If there's any other questions from anybody, please be in contact with Nongabo or Kamelo in our investor relations division. I think all of you have got the contact numbers. Otherwise, you can contact me direct, and we'll reply to any further comments. Thanks all for your time. Thanks for attending, and we look forward to talking to you soon. Claudia, thanks for facilitating.
It's only a pleasure. Thank you very much, gentlemen. Ladies and gentlemen, that does conclude today's conference. Thank you very much for joining us. You may now disconnect your lines.