Telkom Integrated Annual Report 2017

How our leadership
supports value creation | Chairman’s report

Refer to the group chief executive officer’s report on page 56 for more information on our operational performance.

Operating environment

The difficult local and international environment added pressure to our operations and tested the mettle of our strategy. The international political climate is perpetuated by a sense of apathy and general distrust. Events such as the US elections and Brexit are examples of the polarisation in various parts of society. Such political events compound consumer views of anti-elitism and pro-nationalism.

Economic growth was severely hampered with an annual gross domestic product (GDP) growth of 0.3 percent in 2016 (2015: 1.3 percent), adding strain to the level of employment and growth aspired to in South Africa’s National Development Plan. This negatively impacted Telkom, affecting customer spend which led to intensified sales and marketing efforts to retain and grow our reach as the preferred service provider.

As we move towards the 2018 financial year we are facing a deteriorating economy following South Africa’s sovereign rating downgrades and the country has moved into a technical recession. The economic output of South Africa is shrinking rather than growing. In a country like ours, where unemployment levels are close to 28 percent and one out of every two young people will not find a job, a decline in economic activity deepens the socio-economic crisis we are facing. More than 17 million South Africans rely on social welfare grants to survive.

A recession has the potential to impact every South African, and presents significant risk to our businesses.

Our economy needs to grow for the government to be able to meet the needs of the people who find themselves at the very fringes of the economy. Telkom needs to balance these challenges with investment for future growth in our key areas such as fibre, mobile and new business ventures. The negative economic environment presents us with an opportunity to walk through this journey with our corporate customers by providing them with solutions which will make them more efficient. We have to keep improving and aim to be better than our competitors.

Our greatest differentiator will be the experience we offer our customers. The combination of innovative products, competitive pricing and unbeatable customer experience will set us apart in these trying times. We have to step up in every part of our business.

Transformation

We continue to further ingrain transformation into our activities and contribute positively to the socio-economic development of our country.

Late in the financial year, the ICT sector council together with the Department of Trade and Industry (DTI) introduced the amended broad-based black economic empowerment (B-BBEE) codes for implementation by the ICT sector. The amended codes have stringent requirements and higher targets compared to the old codes and the draft ICT codes. Had B-BBEE transformation not remained one of our key material issues from our turnaround phase to the new journey of independence, we could have dropped to a Level 8. We have recently completed the process verification and we are a Level 6 contributor. This Level 6 is discounted due to the changed requirement in reporting for skills development spend. Were it not for this new requirement, the scores on the scorecard would have yielded us a Level 5. We will focus on the reporting requirement for this element of the scorecard, and we are confident that the programmes that we continue to invest in and focus on with all the other pillars, will improve our level significantly in next financial year.

We are already transforming our group exco with the appointment of two black women, chief human resources officer, Melody Lekota, and chief risk and compliance officer, Tsholofelo Molefe.

We are making significant investments in the development of the skills of the future, and addressing the digital gap by supporting ICT-related learnership programmes and programmes like WeThinkCode. The FutureMakers programme continues to support and develop black entrepreneurs in the ICT sector and the Telkom Foundation is invested in socio-economic programmes.

The ICT sector is undergoing major changes which will impact the current market structure and competition dynamics.

Regulatory challenges

This is due to the introduction of the integrated ICT policy, which advocates an open-access dispensation in respect of future allocation and holding of spectrum, and the use of electronic communication facilities. In the short term, the industry awaits the resolution of the impasse between the regulator and the policy department on spectrum regulation. The industry further awaits the migration of broadcasters from the spectrum bands which have since been harmonised for international mobile telecommunications.

Telkom continues to evaluate the changing policy and regulatory landscape to ensure that it remains competitive; is able to mitigate any adversity; and take advantage of emerging opportunities.

Evolving stakeholder engagement

Sustainable business requires buy-in from various stakeholders, and Telkom engages with key stakeholders on an ongoing basis. Feedback is crucial to sustainable value creation and the concerns and needs of stakeholders influence our strategies.

Customers are becoming increasingly price sensitive. Considerations such as these reinforce our integrated thinking to consider stakeholder needs and concerns in all areas of our operations, and to respond to these through our innovative products and services. Our new operating model will look for internal and external stakeholder needs. It considers the government and its policies, shareholders and other providers of financial capital, and partners, among others. The model enables the execution of our strategy.

Government remains a key stakeholder, as both a regulator and provider of our licence to operate, and we are proud that our relationship remains strong. A point of pride is our access to productive dialogue to address policies and decisions that may hinder the inclusive economic growth we seek.

Focused on the future

Digital is the future, and leveraging the expertise of our vibrant and committed employees will enable us to grow in a decisive manner.

Board focus areas for FY2017

The board is aware that the group needs to be positively positioned to meet any future challenges and commitments, be fit for purpose and responsive to customers’ needs.

The board’s focus was driving the Telkom strategy and ensuring that the appropriate business model and resources are in place to meet current and future business requirements. Refer to page 34 for matters discussed at board level.

The Telkom of the future requires the correct mix of skills and expertise, and we are constantly training and upskilling our employees to face operational challenges and meet our strategic objectives.

By actively competing in the communications sector, we are developing the backbone of information industries and a modern economy, and giving the people of South Africa a conduit for making their voices heard. The first-place rating by a recent Tariffic survey proves that products such as the popular data-driven FreeMe meet people’s needs.

We know where we want to be in the future, and our strategy will focus on converged ICT solutions to help us develop data-led value propositions for the market and our 4 million active mobile subscribers and 1 million fixed broadband subscribers. The contribution by our mobile offering is becoming more significant after being a loss-maker in the past, and actively competes with larger, longer-established competitors. We will support its organic growth to ensure that it becomes a competitive corporate player while improving its scale to a more appropriate size.

As we review our capital structure for the future, we will continue to invest in the network. This will ensure that the competitive approach to business, developed through our evolution will be backed by the infrastructure needed to deliver value.

The BCX business was acquired in September 2015 and integrated into the group. Matters around governance, leadership, systems and controls are being addressed to better position the entity for strong business-to-business sales and to add value to Telkom going forward. Although the teething problems were largely resolved, the business will continuously seek to leverage opportunities to obtain positive results and further growth.

Corporate governance in Telkom remains forward looking and ethical, with a core focus on respect and compliance. The clear delineation between our board and management responsibilities supports our value-creation process and accountability. Succession planning remains clear, with an identified pipeline of effective and skilled employees to steer our path forward. In addition, we consider development and diversity to ensure balance, as reflected in our gender diversity policy.

Governance

During the year there were two changes to our board. On 19 October 2016, we welcomed Dr Hamadoun Touré, former secretary-general of the International Telecommunication Union (ITU). ITU is the specialised agency of the United Nations (UN) dedicated to ICT. Dr Touré, a satellite communications expert, will provide additional depth to our team, strengthening our expertise and skills as a board to take Telkom forward. Nunu Ntshingila (Njeke) resigned effective 3 November 2016. We thank her for her commitment and invaluable contribution during her tenure and wish her well in her future endeavours.On 10 May 2017, Thembisa Skweyiya (Dingaan) resigned as a non-executive director from Telkom. We extend our gratitude for her vital contribution during her time on the board and wish her well for the future.

Board focus areas for FY2018

Our focus in the 2018 financial year will be on ensuring that customers receive the best “Telkom experience” and to create value for our stakeholders.

We will focus on the following areas:

• improving customer experience
• capex investment and monitoring returns
• continuing to improve Telkom’s performance in the Mobile business and up-scaling it
• continuously seeking new opportunities through technology, partnering and customer-centric service to remain competitive
• weathering and appropriately adapting to disruptive business models and products
• running the group effectively using the new operating model
• implementing the King Code of Corporate Governance for South Africa, 2016 (King IV)

Appreciation

My sincere thanks goes to our management team and board, who provided consistent and effective guidance during these turbulent economic times. Our board effectively considered our path, enablers and challenges to provide direction to a management team who effectively executed our strategic objectives.

This success is attributed to our processes and vision, and our employees, who are the true enablers of our performance. Thus, my appreciation extends to them for powering our success. To our shareholders and our loyal customers, thank you for trusting us to deliver effective communication solutions and to innovate for the betterment of our society, especially in a highly competitive sector. We look forward to moving into the future, together.

Jabu Mabuza
Chairman