Good day, ladies and gentlemen, and welcome to the Telkom Interim Results International Analyst 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. Serame Taukobong. Please go ahead, sir.
Thank you kindly, madam. Good afternoon, everyone, and good morning to those in the U.S. With me, I have our Group CFO, Dirk Reyneke, and our new Head of Investor Relations, Nondyebo Mqulwana, and Kamohelo Selepe from the Investor Relations team. I would like to unpack our interim results performance as follows. Firstly, I will start by unpacking the drivers behind the business performance that we witnessed in the first six months. Dirk will then unpack the group financial performance.
I will come back to conclude with our strategy and operational outlook. This period was characterized by strained economic conditions, placing consumers under pressure and an intensely competitive landscape. Group performance suffered under a sluggish economy, the increasing electricity and fuel prices, rising interest rate cycle, and high employment, which constrained and impacted levels of consumer spending.
Accelerated load shedding during this period also impacted our performance and our costs. As competition intensified in the mobile sector, we continued to innovate to protect Telkom's value proposition in the market. We saw good growth in our mobile subscriber base, sustained the growth trajectory in fiber market, and corporate reviewed spending on the IT information infrastructure.
We continue to pursue our migration strategy and continue to manage the transition from old to new technologies. This migration impacted on our revenue growth and overall profitability. Just looking at some group salient features at a high level. Group revenue was stable at ZAR 21.2 billion. We have seen good revenue growth from newer technologies, and today, the majority of our revenue comes from our NGN, next generation networks. NGN revenues, however, are at lower margins and have impacted overall profitability.
Our EBITDA reduced by 17.3% to ZAR 4.9 billion. Load shedding put further pressure on margins as our diesel cost alone increased by 154% over the period. This has impacted our cost base over the period. Dirk will provide more details on our thinking around the management of these costs. Turning our attention to the business performance, I'll now unpack how new technologies are driving growth. In Telkom Consumer, we've seen very good growth in broadband at both wholesale and retail level. Our data-led strategy is delivering in the mobile business.
The mobile customer base grew by 10.9% to over 18 million subscribers with a blended ARPU of ZAR 88, supported by growth of both postpaid and prepaid subscribers. Mobile broadband subscribers now represent 61.2% of our total base. This growth has also been supported by high data growth traffic of 14.1% to 550 petabytes. A bit later, Dirk will talk about how we're working to change the mix between prepaid and postpaid subscribers to drive higher levels of annuity revenue from mobile broadband subscribers.
At Openserve, we see the same trends proceeding. We are expanding our Fiber to the home footprint while focusing on connecting premises simultaneously. Homes passed have increased by 35.8% to 961,000, while homes connected have increased by 33.7%. This has ensured that we lead with the highest connectivity rate in the country at 46.2% versus a national average ranging between 33% and 36%. Today, 73% of our fixed line broadband customers are on next-generation technologies in fiber access.
Our hosting and provisioning of landing facilities and the ownership of a fiber pair in the Google Equiano cable system supports our ambition by increasing our capacity by more than 10 times. From an IT perspective, we're encouraged under BCX by the improvement in the IT market. Progress on strategic programs has resulted in healthy growth in our total IT business.
Our agreement with Alibaba Cloud is pathfinder over the past couple of months and is part of our plan to boost our IT business. In our mast and towers business for Swiftnet, we have increased our productive capital to 3,935 towers, with 26 new towers and 5 in both solutions over the period. We have a healthy pipeline of permitting over 2,000 sites. I will now hand over to Dirk to take you through the group numbers in more detail.
Thank you, Serame, and hello, everybody. If you look at the group salient numbers, the group service revenue under pressure with the group revenue declining marginally by 0.7%. EBITDA impacted by our high handset costs and operational expenses. EBITDA was lower at ZAR 4.9 billion, with EBITDA margin contracting by 4.7 percentage points to 23.4%. That all culminates into earnings declining significantly. Headline earnings as well as basic earnings per share down 51.9% and 52.5% respectively. We continue to invest in CapEx. CapEx allocation still in the favor of growth areas, with CapEx increasing 2.2%.
All the above had an effect of increasing the net debt to EBITDA level as we had to fund strategic capital requirements with free cash flow under pressure and a negative free cash flow of ZAR 1.9 billion, due mainly to the impact of prepaid, postpaid mix and operating free cash flow. If I go into all of these independently, the Group service revenue declined, I've referred to the 0.7%. Excuse me. Driven by a decrease in legacy fixed voice and data as customers migrate to new technologies such as fiber and LTE. The marginal growth was supported by an increase in NGN offerings in mobile and our IT business, which recorded growth of 2.3% and 16.5% respectively.
Important to note that these NGN sales have lower margins, and therefore, to replace the business lost as a result of our legacy exit remains a challenge. Our strategy of repositioning the prepaid, postpaid mix in the mobile business impacted revenue and free cash flow negatively. This was intentional, as this is offset by reduced acquisition costs and higher lifetime value of customers.
I think, in short, people are aware of IFRS 15 impact where you sell contract debtors, and you have to defer the revenue over the period of the contract while you recognize the costs up front. EBITDA impacted by higher handset costs. Group EBITDA lower and EBITDA margin contracted by 4.7 percentage points. That's attributable to a 31.4% increase in cost of handsets, equipment, software and directories, following the strategy to move from prepaid to postpaid.
OpEx increased by 5% year-on-year, despite an average group-wide salary increase of 6%. Therefore, we believe that the 5% increase well below inflation or CPI of 7.8% is actually a good story. Included in this OpEx, there are specific out of our control expenses such as diesel as a result of the current electricity shutdowns. The additional cost for half one was 150% more than our diesel cost for half one in the previous year. We've optimized our roaming costs further, which contributed to an improved cost to serve in the mobile space, as we maintain stringent roaming traffic thresholds and migrate traffic to our own network where possible. I think important to say what are the cost initiatives that we are currently driving.
We will certainly further reduce costs in the direct cost space. We think of the roaming cost, further full year benefit of the second roaming agreement with MTN for the first time. We look at channel optimization, we need to move our bricks and mortar channel ownership model to a more franchise model and a more automated virtual channel model. We will address the legacy cost base on all lines. As we move from legacy technology to next generation technology, clearly it should have an impact on all lines, including staff, maintenance, et cetera.
I think cost remains a topic very high on our agenda, we'll certainly prioritize that to get our total cost to revenue ratio back to the acceptable levels of 74%-75%, rather than the 78.7% where we ended this off. If you look at capital allocation, as I said, in favor of growth areas, we continue to invest in the growth areas, namely fiber and mobile. Capital investments for the period increased by 2.2%, and representing a CapEx to revenue ratio of 17.4%. You will note the swing in CapEx between fiber and mobile. By and large, that was caused by the spectrum costs, where we bought spectrum in March, and that was only capitalized in the first quarter of the current year.
Secondly, it's driven by our fiber to the home rollout, where we've increased fiber to the home to just at reporting date, just below 1 million homes passed. As we speak, we're probably over 1 million, increased by 35%. We've increased the homes connected ratio by 34%, and we maintained an active fiber connectivity ratio of 46.2%, which in any benchmark, I think is a really good number. If we move across to the balance sheet, we saw the net debt to EBITDA moving up to 1.7x from the 1.2x . I think in recent history, that's probably the highest it's been for a while. We still believe that that's within acceptable limits.
It is by and large to fund the ZAR 1 billion operating profit shortfall, as well as the ZAR 700-ZAR 800 investment in working capital. We believe that will improve by year-end. We will probably not get back to the 1.2x , but we certainly have the opinion that the 1.7x should improve before year-end. Lastly, in terms of free cash flow, we generated negative free cash flow of ZAR 1.9 billion. It's way below the comparative period. Cash generated from operations decreased by ZAR 1.7 billion, primarily due to the ZAR 1 billion decline in profit and the ZAR 860 million deterioration in cash collections. The cash collections refers to the investment in working capital that I've just mentioned.
It relates to the deferment of revenue on both handsets and vectors over 24-36 months as a result of IFRS 15. The free cash flow was partly offset by an increase in handset sales, where we have taken ZAR 750 million of handset sales off balance sheet. We expect to invest in our business with CapEx to revenue ratio of between 16%-18% for the year. Returning to shareholders remains a key element of our capital allocation framework. As you know, we have suspended our dividend policy three years ago. We will reintroduce a dividend policy when we announce our results at year-end, March 2023.
We aim to continue to create value and generate positive free cash flow to reward the shareholders in the medium term once our working capital cycle stabilizes in line with the new demand patterns and evolving customer requirements. I thank you and will hand back to Serame to give an update on our strategy and a bit of our look forward. Thank you, Serame.
Thank you, Dirk. Looking forward, our key theme is to accelerate NGN growth and manage costs. We do expect similar macroeconomic and market conditions in the second half of the financial year. We will drive growth in our fundamentals. All business units are focused on driving revenue growth, cost reduction, and also managing our cost base. On the consumer side, it's about driving a continued mobile broadband growth, optimizing the pre-postpaid mix, cost-saving initiatives to manage our cost base.
As the rollout of fiber and Openserve continues, we expect to see continued growth in broadband, stronger demand for backhaul, especially in the carrier and enterprise segments, equally driving cost-based management and cost savings initiatives, including the decommissioning of legacy assets, rollout of alternative power sources to mitigate the impact of load shedding on our sites.
We are also looking to optimize in reducing the reliance on diesel and enable smart building capabilities at our properties to reduce cost of utilities. BCX is expected to see sustained growth in the IT business. Product sales will be a key driver, with a focus on improving mix to drive both revenue and margin growth, and equally, a continued focus on cost management in BCX. In Swiftnet, we'll see the performance in H2 similar to H1.
The decommissioning of sites and terminations by customers, particularly one MNO, will result in growth decline from these customers. We continue with our new towers and in-building solutions in order to have a competitive pipeline ahead of H2. As operators modify their network and network equipment, lease renewals and increased tenancies will drive revenue growth. Margins remain steady in this business.
At group level, we are fortifying our organizational structure to drive focus on execution and the delivery of our strategy. We have geared ourselves up for 5G. We really believe that we are ready for 5G, and each business unit will be focusing on their 5G initiatives. On the 27th of October 2022, Telkom Mobile switched on its 5G network with 136 active 5G sites across four provinces. We are now over 160 of these active sites. Our 5G rollout is based on locations with high data demands as well as other criteria such as affordability, using our current LTE ecosystem as an indicator. Telkom Mobile's immediate focus is on providing fixed wireless access solutions. Openserve is best placed to support 5G network rollouts by all MNOs and other customers.
While other means are available to facilitate 5G connectivity, in order to fully enjoy the full experience 5G promises, fiber backhaul is the backbone that connects 5G sites and thereby deliver high-speed connectivity with low latencies. We feel that Openserve is strongly geared for this. BCX is co-investing with Mobile in rolling out 5G sites to deliver its converged communications and IT businesses in the future.
BCX will be focused on developing smart solutions for enterprise customer, including sector-focused solutions for localized private use. BCX will also invest in R&D to bring its own IP and skill sets into the market, as well as also introducing its own 5G products. In pursuit of the group's 5G strategy, Swiftnet successfully launched its first 5G outdoor distribution antenna system in small sites. These sites form the basis for future site development in support of MNO's 5G rollout plans.
Just to close, our strategic priorities. We remain focused on driving growth on our core business and capitalizing our strengths. We remain steady and making good progress in our broadband leadership ambitions. Our revenue is still challenged as we manage the migration from the legacy to next-generation technologies. In order to deliver sustainable future growth, we will use adjacency to support growth. I will now share a bit more color in terms of these strategic initiatives in the pursuit of unlocking our Value Unlock strategy. We do believe that the share price does not reflect the intrinsic value. However, we are starting these journeys in ensuring that we execute the realization of this value. In Openserve, on the first of September, we completed the structural separation of Openserve.
As part of our broadband strategy, Openserve is using capacity and scale to drive growth by expanding on existing opportunities such as commercialization and monetization of dark fiber, and also taking opportunities in emerging niche markets such as supplying backhaul to smaller fiber providers. In consumer, we believe that investment in an ISP will support the legacy migration process, helping us to reduce the costs associated with the management of the legacy business.
In BCX, we are continuing opportunities in IT high-growth areas such as cybersecurity advisory services. In Swiftnet, we are continuing to review ideal partnership options for this business that will enable us to realize value. Lastly, Gyro is important to drive efficiencies for the group, and here we are looking at property development partners to help us realize value in legacy assets.
In summary, therefore, as we conclude, we are confident that our strategy and we will continue to invest in future data-led technologies. We will continuously look at offsetting the negative impacts of legacy revenues by replacing them with NGN. We are keeping a very close eye on our cost base and have plans in place to draw back some margin. We are utilizing our network ecosystem to build capabilities. We are pushing and driving Value Unlock to gain momentum. We are looking at ways to affirm and realize value in the masts and towers business.
The separation of Openserve serves to open up opportunities to affirm the value of Telkom. We continue to support and accelerate core businesses with partnerships. Furthermore, we are fortifying our organizational structure to drive focus on execution and the delivery of our strategy by reorganizing ourselves with our products, services, and a passion for execution. I will now hand over to the operator for any questions. Thank you.
Thank you very much, sir. Ladies and gentlemen, if you would like to ask a question, please press star and then one on your touchtone 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. We will pause to see if we have questions. The first question comes from Vikhyat Sharma from RMB Morgan Stanley. Please proceed with your question, Vik.
Hi, guys. Thanks for the opportunity to ask questions. I think my question more relates to, you know, you kind of, obviously talk about building a data enabled network, and yet, you know, the mobile data obviously didn't do it as well. T here was a bit of a decline there. I mean, just to kind of pretty much figure out the reason. I think was it the competitors who kind of declined the price, so the price premium was out of that? W here is that price discount relative to the competitors right now?
Going forward, do you think, you know, your pricing rationalization is enough? B ecause I saw the data growth in the mobile broadband side was also quite. Was positive and yet, you know, the revenue declined. I think going forward, is there further rationalization that needs to happen on that pricing of data? I mean, do you feel comfortable in terms of, you know, a level has been reached that possibly, from here you won't be declining or kind of competing with the other competitors going forward?
Let me try that, and then Serame can help me. I think if you're referring to the revenue, I think two things. First of all, when you look at overall revenue and we look at data combined, you will note that the legacy, the traditional fixed data volumes is where it's gone down by 11%. Your new fixed data products have gone up by 5%. If you then say: Where's the legacy that's gone down?
It's mostly on the managed data network services, and that's in the SMB space as well as the BCX space. We think in terms of the MGM, in other words, your data connectivity, that will continue to grow. We are comfortable that as long as we monetize our fiber rollout, in other words, keep to the 46%-50% penetration of inventory that we've built, the data growth should continue.
I think just to add further, I mean, if we look at the mobile revenue, it was a tale of two quarters. We've managed to claw back in quarter two from a negative 3.6% to remaining flat for the entire H1. I think the trajectory is on the right way. With pricing, I think we've seen now where the other operators have landed on their pricing. We still believe that we have enough headroom to ensure that we remain competitive. We've seen this and how it responded with our post-paid tariff plans, having seen what the market activity was doing, and it's reflected in the growth of our post-paid base. We do feel that from a pricing perspective, mobile can still remain competitive in the market. I hope that covers you, Vik.
Thanks, sir. Thank you.
Vik, do you have any further questions?
No, thank you.
Thank you so much, sir. The next question comes from Wessel Joubert from Oysterc atcher Investments. Please proceed with your question, Wessel.
Hi, guys. Thank you for the opportunity. I've got two questions or three questions actually. Just on the collection, on handsets. Do you guys expect to see any deterioration in handsets and or how well do you expect that collection to go? That's the first question. The second one is you guys are talking about getting back to the dividend policy. Looking at free cash flow and your expectations of it, how do you kind of line those two up? Or what would you expect to put forward to just not be overly generous with the dividend? If, if possible, what % of the costs relate to the legacy businesses that you guys are now closing down? Thank you.
Yeah, Wessel, let me try that. First of all, in terms of collections of the handsets, if you look at... We've done a detailed exercise, I justify that on three bases. First of all, we are selling off the matured handset, the contract debtors book. Once it's over six months in terms of tenure, we try and sell it off to the banks. We've done tranches last year, we've done on ZAR 600 million-ZAR 700 million this year. The banks are comfortable that the credit experience that they're getting from that end of the book is outperforming their expectation. That's why there's appetite to buy further. As the books mature, we will probably do another tranche of ZAR 500 million-ZAR 600 million before year-end. That's the one thing.
The second thing, if you look at our data outstanding, if I look at zero to 90 days and even up to 120 days, it ranges 63%, 64%, 65% if I look at the last four halves. We don't see a significant deterioration in terms of data outstanding at the top end. Third, I think this is important, the scientific forward-looking IFRS 9 modeling that's done. We do our modeling, our external auditors do their own modeling. They don't audit my model. They take our data, they put it in their models. They calculate a number in a forward-looking, expected loss. Suffice to say that the variance between my and their model are very close, well within their materiality levels. I think from a debtors credit quality perspective, there's no reason to be concerned.
If I understand your second question right, it is to say free cash flow versus dividend. Let's start with free cash flow. A ZAR 1.9 billion negative free cash flow for the year. I think I said it this morning. We will certainly, we anticipate that that should improve. Will we get to positive free cash flow in the current year? Probably not. Okay? I cannot see us while we're investing in fiber and while we're investing in working capital to fund the post-paid, prepaid mix change that we will get into positive free cash flow territory in the current year, although the half year numbers should improve. That then links to dividends. We've been consistent in our message that we suspended our dividend policy three years ago.
We will reintroduce a dividend policy when we announce our year-end results, our March 2023 results. Given that you're a negative cash flow forecast for the year, although you reinstitute a dividend policy, doesn't automatically end into a dividend declaration. The one outstanding or the one thing there that can change the game is any proceeds from Value Unlock. Is currently excluded from my cash flow forecast that I'm giving you. I hate to say that a Value Unlock proceed will not trigger a special dividend. When we get that money in, the market doesn't expect a special dividend. We will use that money to, first of all, change the gearing of the balance sheet.
Secondly, continue to invest in CapEx in the strategic growth areas, and the residual will fall into the free cash flow bucket, will then be considered when you look at the dividend declaration. I think the last point is the percentage of cost relating to revenue. It's probably the most difficult of all the answers is on the revenue side, it's very clear that we've between fixed voice and line rental and traditional fixed data products, roughly ZAR 4 billion of revenue. If you say to me, what is the cost directly related to that? I'm guessing a number, but it's below ZAR 1 billion. Why do I say that? Is that those are high margin products.
The infrastructure that drives that cost is repurposed. If you take the ducting as an example, we are now running fiber through the copper ducting. When we stop copper, the ducting will not be trenched out of the ground, and that cost will not go away. We've got in the man in the van servicing copper customers. He's currently also servicing fiber customers.
We retraining, reskilling, and repurposing a lot of the legacy costs. One mustn't think it's a one-on-one level. I think bear with us, we've said by year-end, we will let you have ROIC pro formas based on technology. That will show you clearly what the average income versus average asset investment is for the different technologies, being NGN, mobile, IT, and legacy. I've seen those numbers for half-year. We will present them at year-end, and then it will become more clear. To split the costs directly attributable to legacy is probably the single most complicated exercise on our income statement.
Thank you very much. That helps a lot. Thank you very much.
Thank you. Ladies and gentlemen, just another reminder. If you'd like to ask a question, please press star and then one. The next question comes from Madhvendra Singh from HSBC. Please proceed with your question, Madhvendra.
Yes. Hi, thanks for taking my question. Just one question actually. On your mobile network, if you could share what percentage of traffic is currently on roaming on the other mobile operators, and what percentage is carried on your own network? Thank you.
Okay. I think given the nature of those contracts, we generally don't disclose those numbers.
Okay. Thank you. Okay. I was just wondering, how much of the traffic actually is carried on your own network in a sense that, you know, if you are growing your revenues and if more traffic is carried on your own network, then there would be a link, let's say to, you margin improvement or scope to improve margins that way, if more traffic is...
Yes. Let me try and answer that differently without going into contractual details. If you look at when we did the first roaming agreement, I think it was in 2018 when I joined. Roaming costs as a percentage of revenue was sitting at 19%. If we look at where we are right now, that cost is down to less than 10%. I think it's about 9.1%. That gives you a flavor that more and more of our traffic we are keeping on our network. Dirk Reyneke highlighted the continued expense, continuous investment in mobile to mitigate the increasing cost of roaming, both from the load shedding as well as ensuring that we drive more efficiencies. Roaming is one of our big cost initiatives.
Okay.
Madhvendra? Telecom tech. For regular...
No, Serame, we lost you. Can you just repeat it?
Sorry. What I was saying to you is that if you look at Openserve, the biggest driver of Openserve's traffic is actually the traffic that they provide for backhaul for the MNOs, their customers being Vodacom, Telkom, Vodacom, MTN, and Telkom Mobile. The key thing for us is making sure that our share of this market increases to provide longer tenure, higher value propositions.
Okay. All right. Thank you.
Thank you.
Thank you, Mr. Taukobong. At this time, we have no further questions in the queue. If I may hand over to you for closing remarks.
Thank you very much, Rabia, and thank you very much everybody for listening. I think in essence, we are confident that our strategy of investing in future data-led technologies, we will bear fruit. We are continuously managing the impact of the decline in legacy revenue by offsetting this with NGN. As I said, we are also speeding up our Value Unlock propositions to make sure that we can execute these and we'll make an announcement certainly by the year-end of certain high roads that we've made in this regard. Furthermore, as I said, we are fortifying our organizational structure to drive focus on execution and delivery of our strategy by reorganizing ourselves with our products and services and a strong passion and focus on execution. I thank you kindly.
Thank you very much, sir. Ladies and gentlemen, that does conclude today's teleconference. Thank you for joining us, and you may now disconnect your lines.