Our value-creation strategy
Group chief executive officer's (GCEO's) report
Telkom ’s purpose is to connect our customers, enabling their lives to be better. Every day we connect people, businesses, and families. Our focus is to ensure that the speed, cost, experience and efficiency of providing that connectivity continually improves.
This financial year marked the end of my fifth year at the helm of Telkom , and the end of the first chapter which focused on the stabilisation of the group and business transformation. Telkom has a new leadership team and is now entering the second chapter; premised on growth.
My key focus areas this year have been on recruiting the right talent to ensure that Telkom remains relevant in the long-term, articulating the Telkom vision, creating and maintaining alignment within the business, BCX business review process and managing the allocation of resources to ensure the preservation of shareholder value.
The industry is changing faster than the regulatory environment can keep up. The changes implore us to look forward, yet, as regulations and policies tend to be developed based on past events, we are faced with protocols that we feel do not support an evolving industry. The industry needs to proactively engage with policy makers and regulators to ensure we consider what future technology will do to the market construct, how customers consume ICT services and review outdated approaches to infrastructure, spectrum sharing and the cost to communicate.
As technology evolves and innovates, so too does cybercrime, an ever-present priority risk. We apply the learnings from local and global cyber incidents and ensure our systems can identify and repel them. Our cybersecurity team was strengthened to respond to the emerging challenges in this sphere, and is managed by our chief risk and compliance officer. We provide cybersecurity services to a range of customers, particularly BCX corporate customers. Our learnings from our own defences enable us to provide trusted solutions to customers.
Strategy – ensuring long-term sustainability in an evolving industry
The telecommunication and technology industries are changing at an unprecedented rate. This requires us to remain focused on external trends, employ and develop the right skills and talent, and focus our sights on the future, not only to stay relevant, but also to be leaders in our industry. Ensuring our long-term sustainability requires us to understand the mega trends in technologies and customers’ expectations, and envision how consumers will use technology in future. Networks and platforms are becoming smarter, and customers expect services and solutions where they can do more for less. We are faced with the challenge of continuous investment to remain relevant and economically viable, while balancing customer expectations of lower prices.
Our capital allocation programme is structured to be scalable and flexible so we can invest in areas that will be material in the future. We are focusing on fibre, LTE, cloud, augmented reality, artificial intelligence and big data analytics. We appointed a chief digital officer, with an appropriately resourced team, to ensure we identify and leverage opportunities in this space.
Our operating model is designed to support our strategy execution. Through the process of decentralising our business units, we achieved transparency about individual business performance, contribution and the role the various business units play in the overall group performance.
We continue to decentralise our business units at a pace that is practical and appropriate to ensure we manage any emerging challenges that may adversely impact our performance.
BCX’s legal integration with the enterprise business was completed in the prior year, providing BCX with greater access to top South African blue-chip ICT customers in the public and private sectors.
We have actively pursued cross-selling opportunities as avenues for future revenue growth. We focused on the business portfolio review of the 34 legal entities in BCX and the reorganisation of senior management. This included a number of key appointments in the sales and operations area to improve focus on service delivery. The business portfolio review is on track – South African subsidiaries integration into “One-BCX” is progressing according to plan, and is driving efficiencies within BCX.
For further detail on our group strategy, refer to page 39.
The year was characterised by a tough economic environment, political uncertainty and intense competition as well as the consequent low business and consumer confidence. We felt the impact of the weak economic environment, as the private and public sectors deferred and lowered their ICT spend respectively. This impacted Telkom’s performance, particularly in BCX, which serves the business sectors.
Group revenue was flat at R41 billion, supported by a 47.2 percent increase in mobile service revenue. The growth in the mobile business was underpinned by capital investment, extension of distribution channels, increased store footprint and innovative data-led products which resonated well with customers. Our mobile business is now a key driver of growth in the group, offsetting the decline in BCX and Openserve.
The pricing transformation journey that Openserve embarked on two years ago is starting to bear fruit with the rate of decline in their revenue slowing down. Despite the price reductions and ongoing voice revenue pressures, Openserve’s overall revenue declined by only 2.9 percent while data traffic grew massively.
Voice is impacting our businesses across the group as a traditional technology – customers are migrating from circuit voice to voice over internet protocol (VoIP). We have implemented strategies to manage the decline in voice revenue while we migrate customers to VoIP and grow our new generation revenue streams. I am pleased that the new generation revenue streams, such as mobile and data, are now compensating for the decline in the traditional business.
Our focus going forward is to increase the contribution from the new generation revenue streams. Despite their lower margin compared to traditional revenue streams, the new generation revenue streams ensure Telkom’s long-term sustainability.
We continue to invest in our network for future growth and invested R7.9 billion in capex, which is 19.3 percent of revenue, in line with our guidance. Mobile and fibre remain key capex focus areas, and we have good returns – mobile service revenue grew by 47.2 percent and our active fibre to the home connectivity rate increased to 30.7 percent (FY2017: 18.0 percent) within three years of deployment, which is in line with international trends.
We have been focusing on modernising the core and backhaul networks and, more recently, the access network. Our investment in packet optical transport network (POTN) establishes an IPenabled optical transmission capability that can scale to meet the demands of the Fourth Industrial Revolution, catering for higher speeds, increased capacity requirements, lower latency requirements and digitalisation of the network fabric. Our core and backhaul networks are largely modernised, and we are completing the upgrade of our access network with multiple technologies as customers are becoming technology agnostic. It is imperative for us to continue to modernise our network and invest in key growth areas in line with our strategy.
Our people are our number one asset and having the right talent in the right place will determine Telkom’s ability to execute our strategy sustainably.
Human capital and relationships
The group employs 18 286 people. We need to ensure we have the right people in the right positions to be responsive to our dynamic industry, provide seamless customer service and grow the business. Our talent management approach has become more disciplined, holistically looking at our people, their future and potential development. Our executive team annually reviews succession planning for critical roles, and 94 percent of all senior roles have succession plans.
We are driving an extensive external recruitment programme to employ young, talented individuals who embody the type of thinking, behaviours and values to drive the group forward. Refer to page 70 for some of our key talent and skills attraction initiatives, such as Future Minds, the Explore Data Science Academy and WeThinkCode. The group spent R342 million on employee training and development (FY2017: R232 million).
I have been actively focused on our transformation journey with our chief of human resources, engaging with our employees and potential candidates in different forums, articulating the Telkom vision and understanding the employee value proposition. We are focused on bringing in new talent and refreshing skills. We made a number of external appointments to the group’s and BCX’s excos. These individuals have a wealth of experience and the skills that will take Telkom forward. For further details on our group exco refer to page 88.
The nature of our work requires our employees to often travel by road. While we promote the highest levels of road safety awareness, I regret that we had four road-related fatalities, of which two fatalities were third-party related. I extend my condolences to the families and friends of our employees, Mr Human and Ms Banyana, as well as to the families and friends of the third-party fatalities.
To address the challenges that were experienced with motor vehicle-related safety incidents, the following mitigation measures were implemented:
- instituted defensive driving for all high exposure drivers (technicians);
- enforced consequence management for driver compliance to safety standards – using data from the vehicle tracking monitoring system to identify drivers who are non-compliant; and
- instituted leadership visibility and accountability at all levels (holding managers accountable for improving safety performance).
Organised labour represents its various constituencies with vigour. We maintain a robust relationship and communicate transparently on Telkom’s performance and the anticipated future company as well as the industry challenges.
The collaborative partnership agreement that was signed between Telkom company, Solidarity and SACU two years ago has come to an end.
Telkom has a beyond-compliance approach to B-BBEE certification, focusing on what is right for our business, and what will have the best impact on our suppliers, local industry and the economy. We select suppliers that are locally based to protect South African jobs and support economic growth. We strive to improve our workforce diversity and have various training and skills development initiatives in place.
The amended B-BBEE codes have changed the landscape with increased standards expected from us by our customers. As our B-BBEE certification level impacts the group’s ability to attract business, especially for BCX, we have initiated strategies to improve the group’s status:
- We drafted a transformational and compliance plan to address the three priority elements.
- We implemented aggressive Skills Development and Enterprise Supplier Development programmes.
- We cascaded the B-BBEE plan and targets down to an individual team level to incentivise performance.
Through these efforts, our rating has improved from B-BBEE certification level 6 to level 4. BCX was rated level 3. This will improve BCX’s ability to acquire and maintain business.
Corporate social responsibility
Telkom has, over the years, invested in youth development through a myriad of programmes. These range from educational support for high school learners, bursary programmes for further education and training, to learnerships, internships and supporting youth to start businesses. Our skills development includes the CoE Postgraduate programme, the internship programme and the Learnership for People with Disabilities programme.
The Telkom Foundation invests in education to deliver sustainable change. ICT is integral to the foundation’s education strategy, and it empowers teachers and improves their capabilities. Post-matric, the Foundation works with our human resources department and other industry players to pool potential ICT learners for further development.
Telkom through its Foundation, invested just over R200 million over the past five years, to improve the quality of teaching and learning. This programme seeks to bridge the existing digital divide through the deployment of technology in partner schools.
The programme offers teacher development and support towards the integration of ICTs in the classroom, school leadership development targeted at principals of the partner schools and learner support in maths, science, technology and English to benefit over 3 000 learners from grades 8 to 12. This programme was rolled out in five Gauteng and two Eastern Cape schools. Each school has received an integrated ICT solution which includes teacher and learner devices, fast and reliable Telkom connectivity and education software with learner management capabilities. All teachers in these schools are provided with training and in-classroom support on the use of technology. Learners are also provided with supplementary tuition throughout the year. Over and above this, the programme also offers psycho-social support to learners and exposure to basic ICT skills. Telkom plans to inspire learners to consider careers in ICT especially given the demand supply skills gap in this sector.
I can confirm that Telkom complied with the terms of the 2013 Competition Commission Settlement Agreement during 2018, as well as the behavioural conditions that were agreed to as part of the BCX and Telkom merger agreement.
Looking forward, we will continue focusing on our sustainable growth framework. We will continue to review our business portfolio and prioritise strategic initiatives accordingly. This includes reviewing our traditional network and IT systems, non-core assets and product portfolio.
Openserve will continue to review its network technology. We continue optimising our network footprint by analysing our current deployed network and upgrading or decommissioning components, and using alternative technology where deemed optimal.
BCX’s business portfolio review will improve its quality of earnings and revenue mix. BCX will continue focusing on leading application and infrastructure service capabilities and investing in future growth areas, which include driving solutions and business outcomes for our customers.
Telkom Consumer will accelerate migration from traditional products. This product rationalisation will see our suite of Unlimited, FreeMe and Smart broadband products become the bedrock of our sales and marketing advances going forward.
Gyro will focus on commercialising the property portfolio, optimise and grow the masts and towers portfolio and enhance building efficiencies. These will diversify income streams through property development, masts and towers, and property management services.
We are redesigning our IT systems to drive and enable a lean business operating model and provide an automated business process. This IT redesign is premised on nimble architecture supporting an omni-channel service model. This will also incorporate a full digital channel element enabling e-commerce and self-service capabilities.
We intend to invest in a manner that enhances our longterm financial sustainability to continue building a platform for future growth. We allocate capital diligently, including measuring returns.
It is imperative to continue investing in key growth areas in line with our strategy to ensure that we do not compromise our medium-term prospects. Over the next three years to FY2021, our capital investment will be 16 to 20 percent of revenue focusing on key revenue growth areas such as mobile and fibre. The capex investment to date is already bearing fruit with the growth in our new generation revenue streams, such as mobile service revenue and fixed data revenue, offsetting the decline in traditional revenue, such as voice revenue. We expect our operating revenue to grow mid-single digit over the next three years as we continue to grow our mobile business, fixed data and other future revenue streams such as cloud computing, IoT, cybersecurity and big data analytics. We manage the decline in traditional revenue by proactively integrating customers from traditional to new generation revenue and partnering with OTT players to provide data-led solutions to our customers. It is imperative to migrate customers to new technologies to ensure the sustainability of our business. However, the migration is at lower margins. In some products and services, we need to grow volumes by 2 to 2.5 times to compensate for the variance in pricing. Despite the impact of the change in product mix, we expect our earnings before interest, tax, depreciation and amortisation (EBITDA) margin to be between 24 and 27 percent over the next three years, as we grow new generation revenue streams and continue to be cost efficient.
We continue driving the new operating model that provides greater business unit accountability for operational delivery and value contribution for the group as a whole, while ensuring strategic control from the Corporate centre. We are exploring the benefits of divisionalisation of our subsidiaries, such as a better commercialisation positioning of the group, to ensure better strategic alignment between the independent businesses, and to improve efficiencies across the group and preserve scale benefits. We have started the review process with the BCX group entities. The structure and timing of the possible divisionalisation is yet to be determined.
My sincere thanks to everyone that has contributed to the group over what has been a trying year. I thank exco for its commitment and energy. A special thanks to Deon Fredericks who has been our GCFO for the past four years. He will now assume the role of chief investment officer to focus on the execution of our investment strategy. I would like to express my heartfelt gratitude to Attila Vitai, Len de Villiers and Ian Russell who served in my leadership team over the past few years and contributed immensely in the turnaround of Telkom.
My appreciation extends to the board for providing clarity on areas of prioritisation and focus, and for their support.
To our employees, thank you for your contribution and dedication, without you we would not be able to deliver on our purpose.
I would also like to thank organised labour for all the constructive engagements that we had during the year.
To our customers, shareholders and other stakeholders, thank you for your continued support.
Sipho Maseko Group chief executive officer