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Group chief financial officer's (GCFO's) report

It is my pleasure to provide perspective to Telkom ’s performance for the financial year ended 31 March 2018. It has been a complex year, with many moving parts. The new world that we operate in continuously changes, with many challenges and learnings.

These challenges included a competitive environment combined with a challenging operating and economic landscape leading to severe pressure on revenue growth. This was further impacted by low consumer and business confidence. Notwithstanding these challenges, we experienced flat revenue growth. Additional cost initiatives were implemented early in the year to manage our margins. This also enabled us to make additional investments to support the impressive growth in mobile, as well as investing for the future. Overall, we had reasonable success for the year and as such, our results are credible under these circumstances.

Key indicators show:

  • impressive growth in the mobile business;
  • Telkom Consumer fixed business and Openserve revenue is starting to improve;
  • BCX revenue is significantly under pressure;
  • good cost control and focused capital investment; and
  • improved cash flow and a strong balance sheet.

Salient features

  • Group operating revenue was flat at R41 018 million
  • Mobile service revenue up 47.2 percent to R5 150 million
  • Group EBITDA down 3.6 percent to R10 544 million with an EBITDA margin of 25.7 percent
  • HEPS down 18.4 percent to 597.0 cents per share
  • Free cash flow up 465.7 percent to R501 million
  • Capex down 8.6 percent to R7 909 million
  • Annual dividend down 16.3 percent to 355 cents per share
Restructured and refocused business gaining traction

After a successful turnaround phase, the focus of the group has turned to long-term sustainability and future growth. Aligned to this, we have managed our business on a federated model promoting a commercial mindset.

Each division focuses on its market segments and resources are allocated based on our capital allocation framework. We intend optimising our real estate portfolio through Gyro.

We deploy capital investment according to our growth areas, for example fibre and mobile. We are pleased with the result of our mobile business, with a 47.2 percent growth in service revenue contributing to a R1 742 million EBITDA. We will continue our focus on our mobile service offerings.

Our fibre investment also saw a significant increase in homes passed with fibre of 62.3 percent and an increased connectivity rate from 18.5 percent to 30.7 percent. Our fibre investment remains a key focus as we equip ourselves for the Fourth Industrial Revolution.

BCX faced significant challenges as the weak economy led to deferred corporate ICT spend and reduced public sector spend, which hampered their performance.

Successfully grew new generation revenue streams

As the industry moves into the digital age, we face the challenge that the traditional voice revenue stream continues to be under pressure. The demand from our customers has shifted to newer technologies with lowermargin products, services and solutions. Our customers continuously require more value-add for less cost.

Under these challenging circumstances we have performed well. We managed to curb the deterioration in the traditional business. Our focused capital deployment in fibre and mobile has seen revenue growth in mobile and new data products offsetting the decline in the traditional business. This is in line with Telkom ’s long-term sustainability plan.

Our divisions have had mixed success as our focused Capital Investment programme gains traction, offsetting weaker business performance. This was brought about by the migration of our customers to newer, lower margin products as well as challenging economic and market conditions. This was supported by good volume growth.


Managing decline in fixed revenue streams

  FY2018   FY2017

Managing decline


Strict operating cost discipline

Strict cost discipline saw a cost reduction of 1.2 percent in operating cost despite an average 6 percent increase in salaries. The result was an EBITDA of R10 544 million and an EBITDA margin of 25.7 percent. Going forward, our investment in newer technologies as well as OSS/BSS will continue as we address revenue growth and process cost efficiencies.

Free cash flow focus

The cost of access to financial capital has increased in line with macro-economic conditions and credit rating concerns. Our focus was therefore to maximise our internally generated free cash flow through the efficient allocation of capital, targeting our growth areas with a clear focus on working capital optimisation.

This focus was imperative given our increased capital intensity to 19.3 percent of revenue. We are pleased to report an improvement of adjusted free cash flow to R501 million year on year.

A continuous focus on free cash flow generation and working capital is a discipline driven through all divisions, as we aim to reduce our weighted cost of capital.

Maintaining a strong balance sheet

Our focus on internally generated free cash flow has paid-off, as we remain lowly geared at a net debt to EBITDA ratio of 0.6 times. This is despite a high capital intensity environment, a dividend of R2 190 million, a R760 million share repurchase and higher tax and interest payments of R731 million. For FY2018, we had cash and discretionary investments totaling R4 367 million.


Outlook

Our strong balance sheet and cash generating ability, and access to debt capital markets, creates a solid platform from which to execute our strategy.

In line with this strategy, we invest to ensure medium- to long-term returns for our shareholders. As our business is capital intensive, we have made significant investment in the past few years to position ourselves to capture the growth enabled by new technologies as well as to create sufficient capacity in our network for the expected surge in data.

This investment has also assisted with the migration and acceleration from traditional streams as the new generation revenue streams gain traction. As the business continues to stabilise, the operating enviroment improves and the return on our capital investment to the next generation network technologies bears fruit, we are now comfortable to provide medium-term guidance.

We will continue our accelerated capital investment programme embarked on in FY2018, with a focus on the growth areas of our business, mobile and fibre. We also intend on monetising our real estate portfolio. We will continue to deploy capital in a measured and responsible manner as guided by our capital allocation framework. The rapidly changing environment presents challenges and opportunities as we embrace the digital age. We believe that we are ideally positioned to take advantage of this opportunity.

We plan to grow revenue over this period at current margins with high capital intensity, to ensure we build on the early successes achieved in FY2018.

Our high capital intensity is expected to result in an increase in our net debt to EBITDA ratio as we gear up our balance sheet for the future, however our net debt to EBITDA ratio guidance remains at ≤1.

  Guidance
FY2018
  Actual
FY2018
  Guidance
FY2019 – FY2021
 
Operating revenue Flat   0.1%   Mid-single digit  
EBITDA margin 23 - 25%   25.7%   24% - 27%  
Capex to revenue 17 - 20%   19.3%   16% - 20%  
Net debt to EBITDA ≤1   0.6   ≤1  

Note: Financial guidance excludes corporate actions.


In closing

The future will remain not only uncertain but full of challenges to navigate in pursuit of stakeholder wealth creation. We have transformed and restructured our business and have proven our ability to execute on our strategy. This ability will be bolstered by our federated model, strong balance sheet, capital investments and a competent and visionary leadership team, guided by the experienced leadership of our board.

Deon Fredericks
Group chief financial officer