TSTT looks to future earnings | Local company

At the end of a two-hour interview late last month, TSTT CEO Lisa Agard is candid in her assessment of why the majority state-owned telecom provider had to cut costs from staff as part of a global restructuring of the company.

“It was restructure or die,” she said in an Express Business interview with the company’s chief financial officer, Shiva Ramnarine.

The company’s dire financial condition crystallized when its external auditors, EY, released the “material going concern uncertainty” section in TSTT’s financial statements for the year ended March 31. 2021.

Given its cumulative losses, debt of nearly $3 billion and the fact that its current liabilities exceeded its current assets by $153.2 million as of March 31, 2021, EY estimated that the situation TSTT’s financial position “could call into question the entity’s ability to continue for the foreseeable future as a going concern.

TSTT’s internal surveys of its financial health predict that the company should have “an insufficient cash position by January 2022, which will make it very difficult for the company to maintain operations”.

TSTT’s financial challenge is that it operates in an industry in which traditional sources of revenue have been in decline.

This includes revenue from voice calls, both landline and mobile. Annual market reports between 2009 and 2020 from the Trinidad and Tobago Telecommunications Authority (TATT) indicate that for this period, calls to landlines have decreased by 64%. Mobile calls for the industry between 2019 and 2020 decreased by 13.1%. And between March 2020 and March 2021, TSTT experienced a 53% drop in international incoming calls as well as a 40% drop in international outgoing calls.

The move away from using telecom provider networks to make calls has been driven by the growth of calling apps such as WhatsApp, Zoom, Teams and other services, which use Wi-Fi or landline networks broadband and are data driven. But the general trend in telecommunications is for a rapid decline in the price per gigabyte of data.

Following the 2021 audit, TSTT’s analysis of the root cause of its difficult financial situation was that it outperformed its two competitors (Flow and Digicel) on gross margin, but its performance on the earnings before interest, depreciation and amortization tax (EBITDA) relative to its competitors were low.

This led to a call to action to reduce non-staff and personnel costs to bring them more in line with revenue reduction. These costs were removed in three phases.

“In order to address the concerns raised, we needed to remove costs from the business. Here our revenue was down and the initial focus was on costs associated with non-staff related expenses,” Ramnarine said.

This led TSTT to cut $160 million in costs from its business by renegotiating and revising non-personal aspects of the business, including security, call center rates and licensing.

But eliminating non-personnel costs was not enough. The company also had to reduce its personnel costs.

“And that’s where we targeted approximately 455 FTEs (full-time equivalents) and 14 temporary employees, increasing the projected savings by $144 million. The sum of non-staff and personnel costs would represent approximately $308 million in overall and ambitious savings after the restructuring,” said TSTT’s CFO. The savings of $144 million in corporate payroll costs were funded by a bond of $476 million.

The company expects to take full advantage of the $308 million in operational cost savings in its current fiscal year, which ends March 31, 2023, and going forward.

Ramnarine said one of the important metrics in the telecommunications industry is personnel costs as a percentage of revenue. In March 2022, TSTT personnel costs as a percentage of revenue was 23%. The company’s competitors have a personnel cost to revenue of between 7% and 10%, according to TSTT’s analysis of rating agency and consultant reports. After the restructuring, TSTT personnel costs are expected to represent 11% of turnover.

“Removing the $308 million of non-staff and personnel costs and reducing it to 11% of revenue, EBITDA as a percentage of revenue increases to 37-39%. And that’s the most important thing for us as an organization,” Ramnarine said, adding that in March 2020, EBITDA as a percentage of revenue was 24%. He explained that EBITDA determines how much cash the company is able to generate “and cash being king, that’s how you operate.”

This generation of cash, through cost savings from the restructuring, puts TSTT on a “trajectory of profitability, which has been achieved without any injection of shareholders, government contributions or government guarantee”, said telecommunications manager.

For the fiscal year ended March 2022, TSTT had a pre-tax and restructuring profit of $128.2 million, but an after-tax loss of $246.2 million as the company expensed the $475.3 million dollars of restructuring costs. In the first quarter of its 2023 fiscal year, however, it made an unaudited after-tax profit and it expects to make an audited after-tax profit in the current fiscal year.

When asked if TSTT would likely need to restructure the business over the next four to five years, Agard said: “I think it’s very difficult for anyone in my position or that of CFO to say with certainty that it won’t be a restructuring in the next four to five years. That’s because, sitting here now, I can’t tell you what technologies we’re working on that might disrupt everything we do and talk.

She gave as an example the difficulty of projecting into the future, the possibility that satellite telephony could disrupt the very high mobile penetration that T&T is currently experiencing.

T&T has a broadband coverage of 99.5% and an actual national broadband penetration of 87.5%.

“TATT published in the very recent past that Starlink, the company owned by Elon Musk, applied for a concession to provide broadband communication via satellite. You should be wondering why in a country that has 99.5% network coverage of the places to live, work and play would we need a satellite provider.

“It’s a potential disruptor. You don’t know what technological disruptors are going to happen, which will force telecommunications companies to rethink their business models,” Agard said.