Telkom Integrated Annual Report 2017

Our value-creation strategy |
Group chief executive officer's report

Enabling our strategy will create value and secure a prosperous future for our stakeholders.

Value creation is the central cog of our strategy, and ensures that our activities are aligned with the material needs of our stakeholders. As a result of this approach, our employees feel vested in the performance and the future of the company, and our customers find greater value in the solutions and products that we provide. The recognition of “most innovative network operator in the mobile market in the country” is a direct result of our focus on creating value and realising a positive socio-economic impact.

Key operational highlights

 

 

Performance of the group

The operating environment was characterised by uncertain political, economic and policy developments. A weak South African GDP, high levels of inflation and currency volatility added pressure to our operations. Regardless, we remain committed and hard-working, and responded to these challenges through persistent innovation and a value-driven focus.

We grew operating revenue by 9.8 percent to R41 billion, benefiting from consolidating 12 months of BCX compared to seven months in the prior year. Our underlying group EBITDA was flat at R11 billion in a 6 percent inflation environment. Our Mobile business also contributed positively with an EBITDA of R660 million compared to an EBITDA loss of R43 million in the prior year. Lastly, we returned cash to our shareholders, paying an annual dividend of 422 cents per share, which is in line with our dividend policy of 60 percent of annual headline earnings. This is 56.3 percent growth in annual dividend compared to last year’s annual dividend of 270 cents per share. I am pleased that we delivered total shareholder return (TSR) of 38 percent to our shareholders.

The operational performance for the year reflects our approach to business. We were returns driven in our allocation of resources, simplified our processes where possible, and recruited talented people with the right skills to help us in our next phase of growth.

Our Mobile business has been a star performer in the financial year, underpinned by increased capital investment, launch of innovative products such as FreeMe, extension of distribution channels and store footprint, and initiatives to improve customer experience. The Mobile business recorded a service revenue of 38.4 percent supported by a 47.7 percent increase in active subscribers to 4 million. Our mobile broadband-led strategy continued to pay off with mobile broadband revenue increasing 49.6 percent to R2.4 billion, driven by a 44.6 percent increase in mobile broadband subscribers.

The fixed-business has seen good growth in fibre customers which was a combination of both migration from asymmetrical digital subscriber line (ADSL) and new to franchise customers. Even though we are still experiencing churn in ADSL, this was offset by an increase in demand for higher speeds and larger uncapped data.

Openserve made significant inroads to modernise its network, having passed 2.2 million premises with fibre. This was underpinned by an increase in investment, improved operational superiority in network rollout and more streamlined processes. Openserve continues to lead in the fibre market, providing high-speed network generation broadband access with over 149 000 kilometres of fibre deployed. Openserve increased its focus to commercialise its network with connectivity rate for FTTH increasing from 10 percent in the prior year to 18 percent. The number of fibre end-point connections to the business and fibre links to the base stations increased to 52 755 and 5 928 respectively.

The integration of BCX is complete. The integrated entity now has a singular sales team and a unified go-to-market strategy to meet the end-to-end digital solutions needs of our corporate customers. The integrated business has the ability to deliver end-to-end digital solutions to its customers with unmatched data centre capabilities and a strong network offering. The integrated entity realised synergy benefits evident in key deals won in the public, banking, financial services and retail sectors against highly competitive and credible challengers. These deals would have necessitated striking partnerships with various entities. BCX strengthened its data centre capabilities to include Oracle, and launched Cisco Hosted Collaboration solutions and SAP HANA Enterprise Cloud services.

For detailed performance per business unit refer to page 71 under productive capital.

As we seek a sustainable growth framework for the group, we have embarked on an accelerated capital investment programme which focuses on key growth areas such as fibre and mobile.

Our strategic focus

Over the last four years, we focused on driving strategic initiatives to transform our business, dealt with our employee headcount challenges in a productive manner, stabilised our Mobile business, and managed our third-party spend effectively, while displaying improved discipline in our allocation of capital. Our business units are well positioned for growth and accelerated capital investment in the year under review.

As we seek a sustainable growth framework for the group, we have embarked on an accelerated capital investment program which focuses on key growth areas such as fibre and mobile, which are key to the sustainability of our business. Our accelerated investment programme commenced in the year under review with an investment of R8.6 billion. We are planning to invest between 17 percent and 20 percent of capex to revenue. Our investment programme will be strategic, success-based, measured and flexible throughout the cycle. We will only accelerate capex where we see acceptable return on investment.

While we continue to invest in multiple technologies. We believe a robust, reliable and, more importantly, flexible fibre-enabled network will ensure we are ready for the exponential data growth we are seeing across mobile and fixed network. Underpinning this investment lies the ability to offer pricing flexibility through our wholesale arm which will bring high-speed broadband with reliable quality to consumers and enterprises at affordable prices. Our Mobile business has shown significant growth and has become a formidable player in the market. We are building an IP core network to support our strategic ambition of becoming a leader in fixed-line and mobile broadband. Our current growth demonstrates the appetite for our data-led products in the market. Our capex investment in mobile business will be returns-driven and focus on coverage and density of our network to support the anticipated growth.

Relationships and leveraging human capital

Our employees

We aim to have the right people, with the appropriate skills in the right positions to take us forward after a challenging but critical review of our employees and headcount over the last few years. During the year, Telkom appointed a new head of human resources (HR), Melody Lekota. Her perspective and experience in a wealth of customer-facing business environments will further align our workforce to grow our business. New HR department heads were appointed for Openserve and Telkom Consumer.

We continuously measure our effectiveness and use the feedback from customers to measure employee performance and prioritise areas of improvement. Our management of succession and talent continues to improve, and we implemented quarterly talent and succession events to directly engage with employees on future prospects, career paths and performance. The fair, clear guidance and interaction provided by our management to employees provides a reference point for them to assess their performance and improve.

Our business leaders are intrinsically tied to the performance of their teams through new remuneration procedures, fostering a teamwork mentality to support Telkom’s evolving culture. We introduced an incentive system based on performance, called Performance Pays. This was implemented toward additional employee efforts by up to 12 percent of their base salary every month. Refer to page 109 for information on our remuneration policy.

Our succession planning for critical roles and leadership succession combines skills development and remuneration approaches to ensure stability. Our employees are exposed to leadership development programmes across various roles to allow interaction in different parts of the business, and reskilling and upskilling are used to retain and redeploy capable people in line with changes in the business environment and our business needs.

Labour relations

Our transparent and clear interactions with unions fostered a significant level of goodwill in an environment that is traditionally characterised by difficult interfaces. The result was the signing of a two-year agreement starting 1 March 2016, which provides clear commitments and guidance for both parties.

Compliance FY2017

I can confirm that Telkom has complied with the terms of the settlement agreement with the Competition Commission during 2017, as well as the behavioural conditions that were agreed to as part of the BCX and Telkom merger agreement.

Government interaction

Our interaction with government remains positive. The most material interaction point was the ICT policy. In essence, the policy looks at the sector from an integrated basis, bringing a level of coherence. That said, there are elements of the policy that we agree with and elements of concern. Our channels of engagement with various levels of government remain open and clear to address these aspects.

Outlook

Looking forward, we intend to invest in a manner that enhances our financial stability and provides a platform for growth. This is a primary reason that investment in fibre and mobile is being pursued; to diversify our revenue base while creating a platform for growth.

Customer experience is an ongoing journey for us. The fundamental reason for our system improvements is to enable us to be better at what we do to create an improved customer experience. We continue to rationalise our legacy systems to be fit for purpose, replacing archaic systems with simpler, more efficient systems where possible to enable us to become a more effective Telkom of the future. Driving this approach reduces costs and the integration of systems, and enables us to get a more complete view of our customers’ needs while catering for them more efficiently.

In addition, we have embarked on a programme to simplify, standardise and optimise all our end-to-end processes to ensure a step change in our performance and grow sustainability. We intend to improve our organisational culture and foster increased initiative and individual accountability. These aspects, coupled with persistent customer focus, our strategy, our new operating model, and synergy improvements in our business units, are expected to yield another year of positive growth, financial prosperity and stakeholder value creation.

Appreciation

I wish to acknowledge my executive team for its commitment and execution of our strategy. My thanks extend to the board for providing the right level of counsel given the complexity and size of our business. My core team remains dependable and focused, and gives its best to our agenda daily; thank you all. To our employees who remain hard-working and live a mantra of unified progression, thank you for walking this journey of value creation with us. To our customers, your continued support and interaction are appreciated.

Sipho Maseko
Group chief executive officer